Air Products and Chemicals, Inc. (APD) Q1 2014 Earnings Report, Transcript and Summary

Simon R. Moore - Director of Investor Relations John E. McGlade - Chairman, Chief Executive Officer, President and Chairman of Executive Committee M. Scott Crocco - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Laurence Alexander - Jefferies LLC, Research Division Donald Carson - Susquehanna Financial Group, LLLP, Research Division Robert A. Koort - Goldman Sachs Group Inc., Research Division Michael J. Sison - KeyBanc Capital Markets Inc., Research Division David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division James Sheehan - SunTrust Robinson Humphrey, Inc., Research Division David L. Begleiter - Deutsche Bank AG, Research Division P. J. Juvekar - Citigroup Inc, Research Division Kevin W. McCarthy - BofA Merrill Lynch, Research Division Duffy Fischer - Barclays Capital, Research Division Mark R. Gulley - BGC Partners, Inc., Research Division Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division Vincent Andrews - Morgan Stanley, Research Division

Good morning, and welcome to the Air Products and Chemicals' First 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.

Thank you, Whitney. Good morning, everyone, and welcome to Air Products' First Quarter Results Teleconference. This is Simon Moore, Director of Investor Relations. I'm pleased to be joined today by John McGlade, our Chairman, President and CEO; and Scott Crocco, our CFO. John will make a few opening remarks, Scott will review our results and update our outlook, and I will provide a perspective on each of our operating segments. After our remarks, we'll be pleased to take your questions. [Operator Instructions] We issued our earnings release this morning. It's available on our website along with the slides for this teleconference. Please go to airproducts.com to access the materials. Please turn to Slide 2. As always, today's teleconference will contain forward-looking statements based on current expectations and assumptions. Please review the information on this slide, and at the end of today's earnings release, the explaining factors that may affect these expectations. Now I'll turn the call over to John.

Thank you, Simon, and let me also wish everyone a good morning. We appreciate you joining us on the call today. Please turn to Slide 3. We delivered on our commitments during the first quarter of fiscal year '14. We continued to execute on our strong backlog, including bringing onstream 2 new projects in China; execute on our asset loading plans, with strong volume growth in Merchant and Electronics and Performance Materials; deliver on our cost reduction programs. We are on track and seeing the savings from the program we announced last quarter and we remain focused on winning profitable new projects. Together, these factors enabled us to deliver the Q1 earnings results you see today, which are at the top of our guidance range. Our focus has not changed, and we remain committed to delivering on our priorities for 2014. The investments we have made over the past several years, the position of our portfolio and our ability to execute going forward are key drivers for Air Products' future. We believe shareholders will realize increasingly stronger returns as earnings growth from the profitable projects in our backlog contribute in 2014 and accelerate in 2015 and 2016. Now let me turn over the call to Scott to review our results.

Thanks, John. Turning to Slide 4, let me now take you through our fiscal Q1 results. For the quarter, sales of $2.5 billion were flat excluding the PUI business. Overall, sales were 1% lower than prior year on slightly lower volumes and stable pricing, partially offset by higher energy passthrough. Volumes were higher in all segments except for Tonnage Gases. Last quarter, we told you that a significant number of our customers would have scheduled outages in 2014. The reduced volume you see in Tonnage is largely a result of this and was expected. Sequentially, overall sales decreased 2% on 3% weaker volumes. This was mainly due to seasonality in our Merchant Gases and Electronics and Performance Materials businesses and the outages in Tonnage. Operating income of $386 million increased 4% versus prior year on strong results in our Electronics and Performance Materials and Equipment and Energy business segments. Our operating margin of 15.1% was up 60 basis points versus prior year, primarily due to a more favorable business mix as higher volumes across most businesses were partially offset by Tonnage outages. Sequentially, operating income was down 8% and margin declined 120 basis points, primarily due to volume seasonality and higher costs driven by Tonnage maintenance outages. Net income and diluted earnings per share were up 4% and 3%, respectively, versus last year. Sequentially, net income and EPS were both down 9%. Our return on capital employed declined by 130 basis points to 9.9% as a result of our higher capital employed and the Indura acquisition. This remains well above our 8% cost of capital. As a reminder, we are developing, executing and operating good projects that will be accretive to ROCE over the next few years. Turning to Slide 5, you can see an overview of the factors that affected this quarter's performance in terms of earnings per share. Our continuing operations EPS of $1.34 increased by $0.04 versus last year. Volumes increased EPS by $0.12, driven by Merchant Gases, Electronics and Performance Materials and Equipment. The positive impact on profits was partially driven by mix, primarily the positive impact of more higher-margin sales of equipment business. Pricing, energy and raw materials taken together decreased EPS by $0.05, due primarily to higher variable cost in Merchant and Electronics and Performance Materials. Net cost performance was $0.01 unfavorable, primarily due to tonnage maintenance outages offsetting the benefit of our 2012 and 2013 cost reduction programs. Currency translation and foreign exchange was $0.01 unfavorable. Equity affiliate income was also $0.01 unfavorable. And lower interest expense was offset by higher shares outstanding. Overall, we delivered a good quarter, with earnings at the top end of our guidance range, based on strong execution and a more profitable business mix. Now for a review of our business segment results, I'll turn the call over to Simon.

Thanks, Scott. Please turn to Slide 6. Overall, the Merchant Gases segment had a strong quarter with stable pricing and strong volume growth resulting in increased utilization rates in both U.S., Canada and Europe. Merchant Gases sales of over $1 billion were up 4% versus last year on 4% higher volumes. Liquid oxygen, nitrogen and argon volumes were again up in all regions, partially offset by packaged gas demand weakness in Europe and lower helium volumes globally due to supply challenges. Sales were down 1% sequentially on lower volumes, primarily due to weaker seasonal volumes in U.S./Canada and lower helium availability. We continue to see challenges with reduced availability from our helium feedstock suppliers. In one case, the large supplier moved an outage into Q1, negatively impacting available volumes during this past quarter. But this won't impact overall FY '14 availability as the unplanned outage was used to address maintenance that had been planned for later in the fiscal year. Let me now spend a minute updating you on how our helium projects are progressing and what we are doing to help improve the situation. Our Wyoming plant is ready. Our supplier's plant has been in operation and so we expect to receive our crude helium feedstock very soon, which will enable us to begin to provide product to the market as we move through the quarter. The Colorado facility we announced last quarter is on schedule for FY '15 startup. And we have worked with another of our existing U.S. suppliers to expand our natural gas pipeline collection system to increase available helium molecules. We expect to see this increase next quarter. With this new capacity, we are optimistic we will see increased helium supply volumes over the next year. But it is important to remember that the U.S. government supply, about a third of the world's helium supply today, is declining each year as the reserves are depleted. To frame this, our new Wyoming plant, when fully ramped, will offset about 1 year of decline in Air Products share of available helium from the U.S. government. In the Liquid Bulk area, contract signings were very strong, up significantly over last year, with Asia and U.S./Canada showing the most growth. We are seeing the positive impact of last year's strong contract signings on our current volumes and are pleased about future growth from the more recent signings. Merchant Gases operating income of $169 million was down 1% versus prior year and down 4% sequentially. Segment operating margin of 16.1% was down 80 basis points compared to last year and down 60 basis points sequentially. Versus last year, the higher volumes improved operating income, but this was more than offset by the impact of price versus variable costs, primarily power and fuel. Overall, pricing was flat, but this includes a positive price contribution from helium. LOX/LIN pricing was not able to fully recover increased variable costs. Sequentially, operating income was down primarily on the lower volumes, and margins were impacted by the under recovery of increased variable costs. Now let's take a look at the Merchant business by region. Please turn to Slide 7. In U.S./Canada, sales were up 4% on 2% higher volumes and 2% higher pricing. Liquid oxygen and liquid nitrogen volumes were up 4% on strength in the Oilfield Services, chemicals, food and metals markets. We saw a positive volume contribution from the EPCO acquisition, but helium volumes were down due to supply limitations. After 3 quarters of solid LOX/LIN volume growth, we have seen capacity utilization move up to the upper 70s. There's still capacity to sell in our system, but it's great to see the increased loadings. Overall, pricing was positive from both helium and LOX/LIN, but we did not fully recover higher LOX/LIN variable costs. We announced 2 new production facilities for our North America CO2 business in Wisconsin and Iowa, strengthening our position in the Midwest to support growth at existing and new customers. We are pleased with the EPCO acquisition, both in terms of the base CO2 business and the opportunities to provide a full product solution to customers who need CO2 and other gases. In Europe, sales were up 3% versus last year due to currency, as both volumes and prices were flat. We did see positive LOX/LIN and LAR volumes, but this was offset by lower helium and lower cylinder volumes. LOX/LIN volume growth was strong in Central Europe and Southern Europe, recognizing the growth is from the weak base last year. Cylinder volumes were down across the continent as construction remains weak. Overall pricing was flat, with positive helium pricing offsetting negative LOX/LIN and LAR pricing. While LOX/LIN variable costs were flat, the lower pricing did impact margins. And LOX/LIN plant loadings have increased to the high 70s on the stronger volumes. In Asia, sales were up 6% versus last year on 8% higher volumes and 2% lower price. LOX/LIN volumes were again up double digits across the whole region and in China. Liquid argon volumes and our micro bulk product line continue to show significant improvements while helium was down on supply limitations. Plant loadings remain in the mid-70s with capacity additions roughly matching the volume increase. Pricing was down in the LOX/LIN and LAR business, particularly in China, driven in part by the wholesale market. The lower prices and higher variable costs impacted margins. The Latin America results in the segment include our wholly-owned business in Brazil and our majority-owned business Indura. While our equity affiliate joint venture in Mexico is not in the segment results, our Mexico business did see strong LOX/LIN volume growth of mid to high single digits, primarily driven by nitrogen for enhanced oil recovery. Underlying sales were up 2% on 1% higher volumes and 1% higher prices, and there was a negative 7% impact from currency. Brazil LOX/LIN volumes were up as our new liquid plant in São Paulo enhances our ability to serve customers despite economic weakness. Cylinder volumes were down as we looked to optimize our customer mix. Indura volumes were up slightly, with modest economic growth moderated by delays in new mining and power projects in Chile and economic weakness in Colombia and Argentina. We were pleased to sign a new small on-site nitrogen plant, likely an opportunity that neither Indura nor Air Products could have won alone. LOX/LIN plant capacity utilization is in the mid-70s. And overall pricing was stable, with strength in helium and weakness in LOX/LIN under recovering variable costs including inflationary pressures. Please turn to Slide 8. As Scott mentioned and as we expected, the Tonnage Gases segment was impacted by higher level of outages. We take the opportunity to do maintenance work on our plants during our customers planned outages, and this impacts both maintenance costs and sales. Tonnage Gases sales of $808 million were down 10% versus last year. Gases volumes were down 10% as strong demand on the U.S. Gulf Coast hydrogen system continued but was more than offset by planned outages and lower Latin America volumes. Lower PUI volumes impacted sales by 3% while higher energy passthrough added 2% and currency added 1%. We have now fully exited the PUI business as of the end of Q1. For Q1, PUI sales were down about $30 million and operating income was about flat versus last year. PUI will be a negative year-on-year comparison for the rest of FY '14 as we had positive earnings from PUI in FY '13. For the full year, we still expect PUI sales down about $140 million and about a $0.10 negative EPS impact. For the segment, sequential sales were down 3% on 4% lower volumes due to the outages, partially offset by 1% from currency. Operating income of $118 million was down 15% versus prior year and down 13% sequentially, primarily due to maintenance costs and lower volumes associated with these outages. Operating margin of 14.6% was down 80 basis points versus prior year on 150 basis points on the lower operating income. During the quarter, we brought the XLX project onstream in China and bidding activity remains strong. We would not be surprised if we had additional project announcement soon. Please turn to Slide 9. We'd strong performance in the Electronics and Performance Materials segment this quarter with solid volume growth and positive contribution from our cost actions. Segment sales of $579 million were up 5% versus last year on 6% higher volumes and 1% lower price. Sequentially, sales were flat, with currency offsetting lower volumes. Versus prior year, Electronics sales were up 4%, primarily driven by higher equipment and on-site sales while growth in our ongoing Materials business offset the impact of product exits. Electronics sales were up 3% sequentially on higher equipment activity. Performance Materials sales were up 8% versus last year as we saw positive growth across all product lines in all major regions. Autos, coatings and North America residential housing were strong while nonresidential construction continued to be weak. Sequentially, PMD sales were down 4%, which is less than the typical seasonal reduction. Operating income of $84 million was up 36% versus prior year on the higher volumes and solid cost performance. We are on track in delivering on our business restructuring and cost reduction programs. Compared to last year, we had good news from a specific equipment sale that was roughly offset with a negative impact from inventory revaluation. Operating margin was up 320 basis points to 14.4% on a higher operating income. Sequentially, operating income was down 13% and operating margin was down 210 basis points, primarily due to inventory revaluation. The first portion of our supply to Samsung in Xi'an, China came onstream during the quarter. We announced this project in 2012 and will continue to bring on additional facets throughout the rest of FY '14 to support the ramp up of Samsung Electronics' largest ever overseas investment. Now please turn to Slide 10. Equipment and Energy segment delivered strong profits this quarter as project activity remained robust. Sales of $111 million were up 4% versus prior year and down 6% sequentially. Operating income of $21 million was up 144% over a slow prior-year quarter and flat sequentially. Versus last year, more higher margin LNG projects and less lower margin ASU activity drove the profit increase. The backlog of $343 million is down 12% from last year and down 15% versus last quarter. In general, we continue to see a high level of project development activity, but a few projects have delayed their final decisions. However, just last week, we were pleased to announce an order to supply our leading technology and equipment to Technip and JGC to build Russia's largest LNG production and export facility. We will supply 3 exchangers supporting the overall 16.5 million tonne per year project on the Yamal Peninsula. And earlier in January, we dedicated our new LNG manufacturing facility in Florida that will enable us to support strong LNG market growth for many years to come. As we said last quarter, our Tees Valley energy-from-waste projects are on budget, on schedule and meeting our safety goals. We expect Tees Valley 1 to begin commissioning in late FY '14 and be fully onstream in early FY '15. Tees Valley 2 is expected to start up in early 2016. Now I'll turn the call back over to Scott.

Thanks, Simon. Now please turn to Slide 11, and let me provide you a brief summary of our outlook. Economic activity in the first quarter of 2014 was about as we expected in most regions. Given current economic conditions, we continue to be cautious with regard to economic growth in 2014, expecting modest growth throughout the year. Globally, for the regions we operate in, we are maintaining a manufacturing growth forecast of 2% to 4% for our fiscal year. In the U.S., while some policy uncertainty is reduced, important issues remain, including a congressional debt ceiling debate and potential changes to the speed of tapering and interest rate adjustments by the Federal Reserve. Any mistakes in fiscal or monetary policy could dampen growth. In Europe, weak growth conditions remain due to the continuation of austerity programs, restricted access to credit and high unemployment. While there is positive manufacturing growth in most European countries, we expect improvement to be moderate. In Asia, manufacturing growth in China and Japan has stabilized since recovering from a trough in the second half of FY '13. Other Asian markets, including Korea and Taiwan, continued underperforming. We expect a gradual acceleration of manufacturing growth to continue, led by China. In South America, manufacturing activity has been below expectations. As the larger markets of the global economy improve, especially China, we expect modest but improving conditions through increasing global trade. We expect electronics growth will begin to rebound in 2014 after 2 years of weakness. However, electronics on-site bidding activity remains slow. Outside electronics, our project development activity and contract signings continue to be strong, and we would not be surprised if we had new project announcements soon. Our FY '14 capital spending guidance remains unchanged at approximately $2 billion, similar to last year's CapEx spending level. Also, our backlog for the quarter remain unchanged at approximately $3.5 billion. You can see an updated list of our major projects in the Appendix, Slide 14. We are maintaining our EPS guidance range of $5.70 to $5.90 per share for the year. Our guidance for Q2 is for earnings per share of $1.32 to $1.37, based on the following factors: on the positive side, volume improvement in both Merchant and Performance Materials. We expect to see higher volumes in North America and Europe, partially offset by some softness in volumes in Asia due to the Lunar New Year and in South America due to the summer vacation season. No inventory revaluation and further progress on our cost reduction initiatives. Offsetting this sequential improvement in Tonnage Gases, profits are expected to decline due to higher maintenance spending as more of our refining customers begin taking their annual outages. Another sequential headwind impacting our Tonnage results will be our exit from the PUI business. And in Equipment and Energy, we expect lower profits in the second quarter based on project timing. Now let me turn the call back to John to wrap up.

Thank you, Scott. Please turn to Slide 12. In conclusion, our performance this quarter was driven by our ability to execute effectively on the strategic priorities we set out at the beginning of this year. We continue to stay focused on executing against our backlog, winning profitable new projects, loading our existing assets and driving productivity and cost improvements. Let me now take a moment to briefly update you on our progress in the search for the next CEO. As you know, the board has retained an executive search firm and is looking at candidates who have the right skills and experience to take our company forward. I can't give much more insight than that, but I want you to know that the process is well underway and the board and I are confident that we will find the right leader for Air Products. Finally, as I said at our annual shareholder meeting last week, having spent 38 years with Air Products, I can say with the utmost confidence that while individuals may come and go, the values that drive our organization remain deeply rooted. These values define who we are and distinguish us from other organizations. I cannot speak highly enough to the employees at our company and I am immensely proud to be a part of this great group of people. With that, thank you. And now we are ready to take your questions.

[Operator Instructions] We'll take our next question from Laurence Alexander with Jefferies.

Two quick questions. First, can you help a little bit as you think about the next quarter bridge on a year-over-year basis, how much of a headwind you have on PUI and how much of a tailwind from cost productivity that you've achieved? And secondly, on the sort of customer negotiations, are you seeing sort of any sort of pushback on projected project timing as customers reevaluate project costs? Or can you give us some sense of how that is being balanced currently?

Sure, Laurence. This is Scott. So first the question regarding the PUI. We look forward to next quarter. I think if I got your question right, looking at Q2 versus prior year, what do we think the headwind would be for PUI? I would put that at about $0.03 or so. I think that's also in line with what we would expect to see from the cost saving actions, both for the provision that we took here in the last quarter as well as the full year impact that we saw from the provision back in 2012. And just a comment on that, I just want to reemphasize that we are on budget and on track to deliver the benefits from those provisions. The second question I think you had was in terms of the customer negotiation. Let me just make a quick comment and I'll turn it over to John. I think from a -- first of all, in terms of projects, they're underway. There's been no project stoppage. Big projects sometimes get delayed, but there's no shutdown or anything like that. Maybe I'll turn it over to John for additional comments.

Sure, Laurence. It's John McGlade. Yes, on -- in the current bidding activity, these are large projects, large projects that the front end take some time to work their way through feed typically. Bottom line though is when we look at our CapEx forecast for this year and when we look at the bidding activity as we go out, I don't think there's anything abnormal in the context of what we've seen in prior years.

We'll take our next question from Don Carson.

Question on Merchant. You had an uptick in operating rates. And I guess the question is, you'd talked in the past of 35% incremental margins on Merchant. So why wouldn't that additional business have helped you more than offset some of the increases in variable costs and lead to a margin improvement there?

Right. So, Don, this is Scott. So absolutely, when we look at the incremental loading impact, we'd still put it at 35% incremental margin or so. It's just a matter of the timing from the raw material increases, principally from power and fuel. We recognize -- we're trying to work the pricing environment as always, balancing it with volume. Sometimes, there's a lag when we see the cost step up from the time when we take the pricing action. But we've seen the capacity utilization increase and we're getting those incremental margins we expected.

Okay. And then on the project backlog. You had 2 projects come off, startups in China. So can you quantify in dollar terms where the backlog -- where you started the quarter and where you ended the quarter, and how you expect that to unfold as the year progresses?

So I would say there's always going to be lumpiness as things come on and come off. And so we're trying to look at this on a total basis. We would expect it to be bouncing around a little bit, but roughly I would say 3.5 or so, maybe down a little bit just on the timing of when these things come onstream.

Okay. And then just finally, you -- all of your earnings growth this year is back-end loaded. So what changes in the second half of the year? Is it acceleration in contribution from your productivity programs? Is it project startups? What -- if you can just go through some of those dynamics?

Sure. So let's think about it. Again, this is Scott. And let's think about it in terms of the things we've been talking about: loading the assets, bringing the projects on, and delivering on our productivity. So from an asset loading perspective, we continue to maintain our outlook from the economy, coupled with good signings that we've had. And so the combination of those 2 will see the asset loading continue. We continue to work to bring the projects on in the backlog. And as we said in the past, there'll be bigger impact in the back half of the year. And we're executing to the cost reduction program that we announced last quarter. So all of those things combined will translate into a robust second half of the year.

We'll take our next question from Robert Koort with Goldman Sachs.

John, I'm just curious if you might give us some sense, maybe on a bigger picture question. Curious if you think the gases demand to GDP multiplier, could you tell me how it compares around the world and how you particularly see it changing, if any, in Asia?

So yes. Typically, you know that the demand, the GDP, we actually like to track it closer to the sort of an industrial output or manufacturing type of number. Varies almost on an S-curve as a function of the maturity of the particular geography you're talking about. Having said that, there have been -- and that typically is 1 to 2, somewhere in that -- in a very sort of middle part of the S-curve, it could be a little higher than 2. What's changed that, I think, to the positive in terms of demand for all gases if you want to speak to within that context, is the phenomena that's happened in hydrogen and the phenomena that's happened in gasification in particular in China in driving hydrogen for refining globally, if you will, as clean fuel standards translate around the globe and then oxygen specifically for gasification in China. So I think that those rules of thumb are good over a long period of time in any given year, obviously given in particular my comments around these larger tonnage type of volumes. As Scott used the word, they could be a little lumpy based on the timing on when those projects come in to the P&L. But if you think about, one last point, if you think about what ultimately drives the demand for industrial gases and try to sort of track that towards the macro trends in the world, I firmly and strongly believe the drive for energy efficiency, the drive for increased throughput or productivity in the manufacturing process, the drive for an improving quality of end products, whatever they may be and sort of the over arching environmental regulations and policies bode well for this type -- this industry as we go into the future.

And if I might ask a quick follow-up, can you discuss what the philosophy or basis for the -- those recent retention agreements were?

Sure. I mean, to me, they're normal course of business. We look at that all the time. And what we wanted to do was not tie any new CEO's hands, but really ensure that we have a smooth transition with the next management team here.

And we'll take our next question from Mike Sison with KeyBanc.

The improvement in electronics you noted, are you seeing that now and -- or is that going to be a little bit more maybe June, September driven?

I'm sorry. I missed the second part.

Is it going to be more second half loaded in terms of the improvement there, or are you seeing the improvement in electronics now?

So some of the improvement that we've seen in electronics is driven by our delivery systems. And we also typically see a seasonal first half being a little bit weaker, second half being a little bit stronger. But I think we've focused our portfolio on the right products, materials and -- process materials and advanced materials. And in addition to the focus on volume growth, we're also taking the cost actions to get our portfolio where it needs to be long term.

Okay. And then, John, I think you've mentioned that signings of new projects continue to be pretty healthy here. Are the returns still pretty good in those areas? And then, when you think about the second half of the year, can you give us a feel for how much of those projects coming onstream will contribute?

Sure. First, on -- I think, Mike, you know, you can never fall in love with an on-site project because you're locking in the return on the day that you sign that project. And so we've been through in many of these other calls. We got a fairly robust process to decide how we're going to price a particular project. And if we can achieve the returns that we want from that project, we're going to walk from it. And that is at least how I view tonnage projects. And I'm very comfortable that the quality of the returns of the projects that we've been signing over the last number of years that are both in the backlog and the new bidding activities meet that criteria. At the beginning of the year, and Scott may want to add a little more comment to this, at the beginning of the year, we didn't really lay out quarter by quarter the impact of new projects. But I believe we said, it'd be $0.20 to $0.25 in earnings this year. And as we noted in this release, we started up 2 smaller of those projects. Scott, you might want to add a couple more comments.

Right, sure. So as John mentioned, I think I mentioned earlier, the second half is going to be a bigger impact from new projects coming onstream. Here in the first quarter, maybe we saw a few cents. However, we expect that to increase sequentially going forward.

And we'll take our next question from David Manthey with Robert W. Baird. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: My question is on Tonnage. If I look back to the mid-2009 period, Tonnage was down 6% or 7%. And given the fact that it's down 10% in volume this quarter and based on your EPS walk on Slide 11, might be implying it gets worse from here. I'm just trying to get my head around why that would be given the current situation. It seems that, that decline is pretty severe for just some customer shutdowns.

So, David, this is Scott. So first of all, I just want to make sure as you're looking at it that you recognize there's the PUI divestiture. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Right.

And then once you adjust for that, I mean, the big impact has been the outages of our customers, and then we take our maintenance when they go down. And then going forward, we would actually expect to see a little bit of a step up in the second quarter as well from outages. And they had, as I think I mentioned in the call last quarter, we had a contract termination in Latin America as well. All those things contributing to volumes being down. That said, we are well positioned to grow in this part of the portfolio going forward. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then as a follow-up. On Merchant volumes in Europe, it seems like eurozone industrial production just started picking up maybe November, I don't want to say that one point makes a trend. But as you're looking at that, the outlook for Merchant gas volumes in Europe in 2014, are you more encouraged given the economic data that you're seeing lately?

There's always things that are bumping around in terms of headliners and so forth. I think as we said at the beginning of the fiscal year guidance was kind of manufacturing output for the eurozone to be in the 0 to 2%. And seeing sequential improvement, adjusting for seasonalities as we go forward, I think we've seen that, recognizing there's ebbs and flows and there's different strengths and weaknesses across the geographies. As well as acknowledging that from a LOX/LIN perspective, we've seen an increase, recognizing that we've seen more softness from the cylinder side as well, driven by construction.

We'll take our next question from James Sheehan with SunTrust.

I was just wondering if you could comment on the Merchant Gases business a little bit. I think you referenced some wins that you had versus the prior year. Just what is the tone of your net of what you're seeing overall wins versus losses and what's the trend there?

Right. So this is Scott again, Jim. It's a good question. When we look across the portfolio, each of the different regions in the Merchant business, we've got solid signings, well up year-on-year. Team's done a very good job. If we all look at the different elements of the volume growth, and I'll take some broad brushes, largely applies to each of the different regions. We've seen the base volume growth in line with the economic environment that we're operating in. We've seen the impact from these signings. As we recall, we've seen improved signings now for some time and we're seen those volumes come onstream. And as we look at in a loss business, lost for any reason, including spot or seasonal activity, that's been in line with historical trends. And so overall, we feel good about the volumes that we've been able to deliver and we're focused on continuing to deliver profitable growth going forward.

And just on LOX/LIN pricing, it's not moving up yet. I'm just wondering what level of utilization you think needs to be achieved before you get some leverage on price.

Well, so -- and you saw I think we moved up both to the high 70s in both U.S., Canada and Europe. Recognize, these businesses are very, very local. We're looking in managing the situation in each of those different sub-geographies, and making sure we're striking a balance between price and volume and focus on long-term profitable growth going forward. So as those utilizations move up into the 80s, that will improve the pricing environment. Again, recognizing that this is a very, very local business and we're managing appropriately based off of all the sub-geographies.

We'll take our next question from David Begleiter with Deutsche Bank.

Scott and John, you mentioned the strong signings in Merchant. Are you gaining share do you think in merchant and if so from whom?

I don't think we're necessarily gaining share. I'd take you back to Scott's point, which is you really have to look at the sub-geographies to understand the specific loading in those particular areas. What we are doing though is getting the benefit from or the benefits from added commercial resources in the marketplace. So broader coverage and a stronger focus on applications in those geographies where we have product to sell. And so we've talked about this in the past. But over the last 18 months or so, we really have added in the U.S. market and target areas in Asia both sales and technology resources to really drive additions to unloaded assets.

Fair enough. And, John, just on the benefit from new plant startups $0.20, $0.25 this year. What will be for next year, given the high number of plant startups in the back half of this year?

So as I said in the script and I'm not sure we're giving you guidance to that at this point, but you can expect a lot more than that in both of those years as the full benefit of this backlog really starts hitting in '15 and '16.

We'll take our next question from P.J. Juvekar with Citibank.

My the first question on Merchants. You mentioned you're building 2 new CO2 plants. What kind of return on investment do you expect from these 2 plants?

Again, we don't typically disclose specific project returns, but these projects fit right into the core of the strategy for acquiring the EPCO facility to give us broader market coverage and broader -- and better distribution supply chain advantages. And as Simon commented in our script, we're very pleased with how the EPCO acquisition has started up both in terms of EPCO performing at its own businesses is exceeding expectations, but also the complementary nature of having CO2 for the food businesses and having a CO2 offering for Oilfield Services has really further helped in the terms of this business and the Merchant business.

Okay. And then on on-site, you talked about weaker tonnage business spend in Latin America. I'm wondering if you can talk about that in any particular end market where you're seeing that weakness.

No, obviously, this is really -- this is Scott. We had mentioned in the call last quarter that we had contract terminations. So that's where we're seeing impact to volumes there.

Okay. So that's all there is, it's all from the contract terminations?

Right. That's correct.

Correct.

And then, you talked about increasing the geographic density of your assets. As the portfolio evolves, what can you comment on your asset density and how you can increase it?

So -- I mean, any good industrial gas business looks to continue to increase your density around a given set of assets. You have to have both the market opportunity to do that and that market opportunity means what are the other asset of competitors in that area and their particular applications. We're looking at that at a very local level, so Scott used the subregion area. But we're looking, if you will, at every concentration within a tight geography of a couple of hundred miles as to where can we enhance our position. So those CO2 assets that we were talking about are examples. Or building out a micro-bulk offering in China or in Korea or in North America are other examples of it. So sometimes you're looking at adding a LOX/LIN/LAR plant as we do in the Oilfield Services area. Sometimes you're looking at adding a complementary product line. Frankly, sometimes you're looking at adding those resources I talked from a technology sales point. Each and everyone varies greatly by the dynamics of the market and your position in that market at a very local level. And that's what the team is constantly looking at and doing.

And we'll take our next question from Kevin McCarthy with Bank of America Merrill Lynch.

Just to follow-up on Tonnage volumes. As the outages come back on line and you anniversaried the contract expiration, would you expect volumes to turn positive in that segment by the end of the fiscal year?

So when we look at the outage profile here going through the year, we'd expect the second quarter to increase as folks take additional outages. And then in the back half of the year, we'd expect to see volumes increase, especially during the summer season, which is traditionally the high operating level for the industry.

Okay. And then second question is for Scott on foreign exchange. We've seen a lot of volatility in the U.S. dollar versus emerging market currencies in particular. Wondering if you have made any changes in your assumptions in that regard in terms of your $5.70 to $5.90 EPS range for the year or whether there are other factors offsetting, how are you thinking about the dollar?

Yes. So obviously we're not in the business -- I'm not in the business of forecasting currencies. We're certainly not in the business of speculating on them. As we saw in our results this quarter, we saw the euro strengthening. We saw weaknesses in the Chilean peso, the Brazilian real, and I don't know where that's going to move going forward. Frankly, we're talking about just translation. And so it's going to be what it's going to be. What we are focused on is making sure in each of those different market, those local market that we understand the current business environment and we're driving profitable improvement.

Okay. And then last question, if I may. Can you comment on helium pricing and, I guess more broadly, as you increase your available supply over the next, say, 1 to 2 years, how should we be thinking about the translation into your earnings stream?

Simon?

Yes. Thanks, Kevin. I think just first of all was we talked helium prices have been increasing over the last few years while volumes have been declining. The team's done a tremendous job of, quite frankly, there hasn't been a factor we've talked about at the earnings line, it has impacted topline volumes. So as we look to the future and we're optimistic we'll see some increased volumes. I think the rate of the helium price increase probably moderates. But I think that will continue to be relatively neutral at the profit line going forward.

We'll take our next question from Duffy Fischer with Barclays.

A couple of questions. First on the down 10% volume in Tonnage x PUI, how much of that was outages and how much of that was the contract rolling over?

The biggest impact -- Duffy, this is Scott. The biggest impact was the outages, with the smaller impact being the contract termination.

Okay. And then, so this was an extraordinarily large turnaround season for your customers, is that the way to think about it?

I think if we look back at the last few years, last several years, just the timing of when customers are taking the outage, this year's a little bit above average. And again as I mentioned before, we saw outages this quarter, we'd expect to see a little bit of a step up in the number of outages in the impact next quarter and then trailing off in both Q3 and Q4.

Okay. But then year-over-year into next year, that should be a nice tailwind, maybe 5% to 6%. So we should think about maybe the base to grow from next year was $100 million or $850 million as opposed to the $808 million because of the onetime large turnaround season?

Yes. I mean, there's always different turnarounds. But I think at this point in time, as we look forward to where our customers are telling us they're going to take outages, we would be at a tailwind next year versus this year. Recognize, too, we've done a nice job growing this business over many decades and so as we get more hydrogen, more hydrogen plants, we're going to have more outages, right, as just we -- as we are bigger in this part of the portfolio.

Fair enough. And then, if we jump to the Equipment and Energy business, you guys were fairly, I don't want to say negative on the last quarter, but certainly you were guiding down that segment quarter-over-quarter. Seemed to come in a lot stronger. I would think equipment has a decent lead time to it, but why was that, that it ended up being so much stronger than you guys would have expected a quarter ago?

Duffy, this is Scott again. This is just timing as we work through various projects. And so nothing major, it's just that the processing of the projects that are in backlog.

We still have the same full year outlook for the segment.

That's right. It's just timing brought forward a little bit.

And then just the last one on the nice number of signings that you've got recently in Merchant. How should we think about those as far as the effect on pricing? Is it fair to assume that they have a little bit of a negative influence on pricing?

In general -- so just to be clear, we're always managing the price volume trade-off, right. In general, when we look at new opportunities, the price, depending on the subregions, might be a little lower than average and then you are able to work the price up over time. But let's just be clear. We're making sure that we are managing that combination, we're not dropping price simply to be able to load the facility.

We'll take our next question from Mark Gulley with BGC Financial.

I want to dig a little bit deeper with respect to the margin pressure in Merchant, which is your largest business so clearly that's maybe a source of concern. You've talked about the lag effect of formulaic passthrough of input cost. Is that going to persist for a while or should we anticipate a catching up effect where you can get genuine margin improvement because of the incremental leverage you've already addressed?

So we need to obviously drive the margin up in Merchant. That's our #1 priority. And that's going to be a combination of loading, as you noted. And as Scott mentioned earlier, as we would see pricing, I'm sorry, loading in the market begin to cross the 80% at a local level, you have an opportunity I think to get more real pricing increases. And frankly, to your point, there is a lag effect. That lag effect is more pronounced when you have a big step function change in those inputs. And over the last several months, I think we could see where natural gas has gone, where diesel has gone and we've got to work that. But the team understands that they've got to work that and we're out doing that day in and day out.

Secondly, I wanted to dig a little bit deeper on the Tonnage thing. You talked about customer outages particularly, as Scott referenced, the larger pipeline network of hydrogen. Is it possible that as the crudes slate get lighter and sweeter, customers have less need for hydrogen so they might call it an outage, that they've taken a unit down for HDS or whatever but in fact, just because they've changed their crude slate?

No, these are -- I appreciate the point, but these are really truly outages that turn around. This is very common part of the year where you go from home heating oils to transportation fuels in calendar quarter 1 and part of calendar quarter 2 as you start for the summer driving season, so to speak. The other point I'd make is on the whole light sweet crude thing, we've looked at that. And we've looked at that so many different ways, and we don't really see a material impact to our business. The other thing that you got to keep in mind is the refineries in the Gulf Coast that can use the heaviest, sturdiest crudes, they're going to tend to run those with a lot of that lighter, sweeter crude predominantly going into those refineries that haven't made the investment to be able to use the more challenged crudes. The other point that I think we got to keep in mind is when refining the amount of power and steam and hydrogen that goes in to refine a barrel of oil in the United States comes from a very advantaged natural gas price versus sort of the rest of the globe where you've got to create that energy and that hydrogen and that theme from $100 a barrel of oil or $90 a barrel of oil. And so there's an implicit invested or capital advantage already, further leveraged by a nice operating cost advantage on the spread between natural gas and oil.

I appreciate that, John. If I could just wrap up. I know you listen to all your shareholders, but I'm thinking you listen maybe a little bit more carefully to your largest holder. Can you kind of update us on the kind of input you received from that shareholder and how you're kind of thinking about some of the things you've talked about?

So you hit the nail on the head. We do listen to the best of our ability to all of our shareholders. And to be quite honest, I would never disclose what one shareholder says to me versus another. I just don't think it'd be appropriate. However, those dialogues with any particular shareholder are all within the context of Reg FD. And each one of them has a little bit different view of how the business should be run, where we should invest, what we shouldn't do. But I think everybody has an aligned view of we need to improve our earnings, we need to improve our returns and I'm totally aligned with that as you've heard in this call and as you've heard from many of our calls and we're very focused on that.

We'll take our next question from Jeffrey Zekauskas with JPMorgan. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: So in thinking about your returns for the quarter, they're puzzling in that I think in response to Don's question you said, "Well, you know our Merchant incremental returns are 35%." And so absent the cost inflation you should have been up $13.5 million, but you were down a couple of million. So in Tonnage, you had these difficulties with contract terminations and turnarounds. Is the first half cost structure just tremendously, unusually high and that is the way that you can make your earnings guidance in the second half? Or can you quantify how unusually high the first and second quarter cost structure is?

Jeff, this is Scott. So maybe -- first of all, I wouldn't call the cost structure unusually high. But if we step back and think about the impact from the Tonnage outages, maybe in broad brush, kind of $0.05 or $0.06 from both the combination of higher maintenance expense that we saw as well as the impact from the volume. So the combination of those 2 are going to reduce the return. And again going forward, we expect to see continued outages and would see a step up from maintenance cost of another $0.03 or so going forward. And again, I'd reemphasize the other things going on in the portfolio, including PUI, which, accounting rules preclude us from putting in discontinued operations. But it's a wind down and, as Simon mentioned, we exited that business in December, but it's going to be a headwind both from a sales and from an earnings perspective. And so I think as we mentioned at the beginning of the year, PUI, I think we said about $0.10 headwind, really driven by the earnings that we saw last year and then having the full year impact in '14. Recognize we did have one quarter's worth of results here in this year. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Well, I guess what I'm trying to say is it looks like you're going to earn $2.70 in the first half and the low point of your guidance is $5.70, so you've got to earn $1.50 a quarter in the second half and going -- up $0.15 a quarter is about $45 million or $43 million in operating income. So how do you do that? How do you get such a big change in the second half?

So as I mentioned, so we've got the impact from our signings. We recognize the economy is going to be a factor, but what we've seen so far this year is consistent with our original guidance. You couple that economic environment with the signings and bringing those signings onstream. And I think you can see in the Merchant results from the loading perspective. We've seen those impacts. We also then, through the year, we're going to see the impact from the provision actions that we announced last quarter. And again that's broad brush across the Merchant business as well as restructuring actions we're taking inside of the Electronics business, as well as some corporate functions and then focus on bringing onstream the projects that are in backlog, good, profitable projects that when they come on will be accretive to earnings, return on capital, cash flow.

We'll take one more question.

We'll take our last question from Vincent Andrews with Morgan Stanley.

Most of my questions have been answered. I guess this is just a follow-up. In the last quarter, you gave some very specific bridge guidance from last year to this year. It sounds like you're still expecting the $0.20 to $0.25 from new plants and you're not going to make a call on FX rates, but is everything else the same, principally the base business $0.05 to $0.15 and the cost being plus 15 and any of those other items, has anything changed?

No, Vincent. This is Scott. No change from the -- for both from the guidance as well as the walk that we gave for you this day.

Okay. And then quickly, just do you have -- do you know offhand what your ROCE would be x Indura sort of on the same-store sales basis?

Roughly, the impact from Indura would maybe be 50, 70 basis points, something on that nature.

Let me just wrap up by saying our focus on increasing shareholder value remains unwavering and our future prospects are strong given our record project backlog and the significant leverage we have on our existing assets. I, and the whole team, thank you for joining us today. And have a great and safe day. Thank you, Whitney.

This now concludes the presentation. Thank you for your participation.