Air Products and Chemicals, Inc. (APD) Q1 2015 Earnings Report, Transcript and Summary

Good morning and welcome to Air Products and Chemicals First Quarter Earnings Release Conference Call. [Operator Instructions] Also, this teleconference 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 expressed or 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 now begin.

Thank you, Jennifer. Good morning, everyone, and welcome to Air Products’ First Quarter 2015 Earnings Results Teleconference. This is Simon Moore, Director of Investor Relations. I’m pleased to be joined today by Seifi Ghasemi, our Chairman, President and CEO; Scott Crocco, our CFO; and our senior business leaders. After our comments, we’ll be pleased to take your questions. Please limit yourself to one question and a follow-up. 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. As a reminder, we are discussing our results today under our new segment reporting structure which was in place as of October 1, 2014. On January 5, we provided two years of historical results under this new segment structure that information is also available on our website. 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, explaining factors that may affect these expectations. Now, I’m pleased to turn the call over to Seifi.

Thank you, Simon. And good morning to everyone. Thanks for taking time from your very busy schedule to be on our call today. We do appreciate your interest in our company. Before we get into the details, let me introduce our team who will be on the call today. In addition to Simon, I have Mr. Scott Crocco, our Senior Vice President and Chief Financial Officer; Mr. Corning Painter, Air Products’ Executive Vice President responsible for Industrial Gases. And Mr. Guillermo Novo, Air Products’ Executive Vice President in charge of Material Technologies. All of us will be participating in the call and in answering your questions. I am pleased to report that thanks to the hard work and significant contributions of Air Products’ more than 20,000 employees we delivered a strong performance in the first quarter of fiscal year 2015. As you will note, we have materially improved our safety record and increased our earnings per share for the quarter by 16% versus last year. We increased our EBITDA margin by 240 basis points and we are on our way to once again become the safest and most profitable industrial gas company in the world, providing excellent service to our customers. We do appreciate that we still have a long day to go to fulfill our stated goals, but the fact is we have started on our journey to get there. Air Products is moving forward with the full force and support of all of our people. I am very proud of our entire team and their positive response to the most significant organizational and cultural change in our 75 year history. I am optimistic and excited about our future. Now please turn to Slide #3. Our safety performance for the first quarter is encouraging. We improved our lost-time injury rate by 42% and our recordable case rate by 52%. This is a clear indication that our people are actively involved in improving the discipline of operations and distribution and they are fully engaged in implementing our culture of safety, simplicity, speed and self-confidence. When it comes to safety performance we do need to do better and we can do better. But the results indicate that we are moving in the right direction. Once again I would like to thank all of our people for their focus and contribution. Now please turn to Slide #4. I want to remind everyone, once again, that our goal is and will continue to be a constant and persistent effort to become the safest and most profitable industrial gas company in the world, providing excellent service to our customers. Now please turn to Slide #5. We have talked about our management principles before, but I want to emphasize our total focus on creating value for our shareholders, cash generation, capital allocation and moving toward a decentralized organization. Now, please turn to Slide #6. In September of 2014, we laid out a detailed strategic plan to move forward. Let me give you a brief overview and update on where we are today on the five key points. On point number one, it is now very clear to everyone that our core business is Industrial Gases and we are totally focused on improving and growing that business. On point number two, I am very pleased to report that we have restructured the company and are operating under the new structure. As I said, this has been a significant amount of change in a short period of time designed to create a simple, empowered and accountable organization. We are now also reporting our results in accordance with the new structure and have also provided you with appropriate historical data. On point number three, we are we are making progress in implementing our company culture of total focus on safety, simplicity, speed of execution, and collective self-confidence that we can be the best Industrial Gas company in the world. This will be a continuous effort in the months and years to come, but I can confidently report that our people are driving the change. On point number four, we have put in place a very robust and vigorous process to review and allocate capital. We examine all projects over $3 million on a weekly basis with the full participation of our relevant executives. On point number five, we have made significant changes to our compensation plans. The details are in our proxy statement. The key driver is to reward our people based on performance of their relevant area of responsibility, create differentiation in pay and encourage focus on EBITDA and cash generation. Now please turn to Slide #7, our quarterly results. The numbers are self-explanatory and Scott will go through the details, but I want to make a few comments. First, that despite the significant organizational changes, our team has stayed focused on controlling costs, pushing productivity, and have delivered a 240 basis point improvement in our EBITDA margin. Second, we did deliver a 16% improvement in earnings per share despite a $0.05 headwind due to currency. Now, I would like to turn the call over to Mr. Scott Crocco, our Senior Vice President and Chief Financial Officer, to go through the details and then I will come back after comments from Corning, Guillermo and Simon to make some closing remarks and answer your questions. Scott?

Thank you, Seifi. Now, please turn to Slide 8 for a more detailed review of our Q1 results. After ending FY 2014 with solid performance in Q4, we again delivered improved results to begin FY 2015 on a strong note. Sales of $2.6 billion increased 1%, a strong underlying growth of 5% was partially offset by an unfavorable currency impact of 3%, and a 1% impact from our decision to exit the PUI business. Volumes increased 4%, primarily from strength in three areas. In North America Gases we delivered broadly higher volumes across most businesses. This included strong hydrogen demand, particularly from our US Gulf Coast customers. In Gases Asia, volume growth was driven primarily by new plant startups in China. And in Materials Technologies we again saw solid growth across all businesses. Pricing was 1% higher, driven by broad-based price increases across Gases Americas. We delivered operating leverage again this quarter as EBITDA improved by 10% and operating income improved by 15% on the 1% sales growth. EBITDA margin improved to 28.2% while our operating margin improved to 17.4%, both up more than 200 basis points versus prior year. Sequentially, our profits and margins were down slightly as we saw lower seasonal sales in North America Gases and Materials Technologies. Overall, costs were flat with operational improvements offset by higher incentive comp. As a reminder, in Q4, we had lower incentive compensation costs across all the segments as a result of our final 2014 year-end payout. Versus prior year, net income increased 17% and earnings per share grew by 16%. Our fourth quarter trailing return on capital employed increased by 20 basis points to 10.1%. This is the first year-over-year improvement in some time. Our Q1 ROCE of 10.6% improved 140 basis points over last year. You can see this in the appendix slide. Both improvements are a result of better operating performance and costs focus. You’ve heard us talk quite a bit about our focus on cash. And we have said that we don’t want to be in a position to be borrowing money to pay dividends. This is consistent with the way we are focusing and running the business. Driven by a strong fourth quarter we were breakeven on this free cash flow metric in fiscal year 2014, a significant improvement over fiscal year 2013. As you can see in our first quarter 2015, we generated higher EBITDA, but this improvement was more than offset by increases in capital expenditures, cash taxes and dividends. It is not unusual for these items to move around quarter-to-quarter. For the remainder of fiscal 2015, we expect to continue delivering higher EBITDA due to our cost reduction efforts and our capital expenditures should decline in the second half of the year as we bring on-stream more projects from our backlog. We are certainly working towards being free cash flow positive for fiscal year 2015. Turning to Slide 10, you can see an overview of the factors that drove this quarter’s performance in terms of earnings per share. Before I comment on our Q1 operating performance I’d like to spend a moment reviewing two non-GAAP items that total $0.05. First, our restructuring charges totaling $32 million or $0.10 per share as a result of our decision to realign the organization. As I mentioned on last quarter’s call, we expect to see restructuring costs and pension settlement costs in FY 2015 as we continue to simplify the organization and reduce costs. Also we acquired our partner’s share of a small industrial gas production joint venture. The transaction was accounted for as a business combination. And as a result of revaluating our previously held equity interest to fair value, the quarter includes a gain of $18 million pre-tax or $0.05 per share. Excluding these items our Q1 continuing operations EPS of $0.55 increased $0.21 or 16% versus last year. Higher volumes increased EPS by $0.18. Pricing, energy and raw materials, taken together, contributed $0.04. Net cost performance was $0.08 favorable, as we are seeing the benefits of our focus on costs more than offsetting fixed costs inflation. The impact of the PUI business exit was $0.04. Unfavorable currency translations were $0.05 as almost all currencies weakened against the dollar. Equity affiliate income was $0.02 higher on better costs performance and higher volumes in Asia. Interest expense was lower but offset by higher non-controlling interests. Our tax rate of 24% remained unchanged versus prior year. And finally, higher shares outstanding reduced earnings per share by $0.02. Now to begin the review of our business segment results, I’ll turn the call over to Corning.

Thanks, Scott. Before I review our regional results, I want to make a few overall comments on industrial gases. We’ve restructured and simplified our business along three principles. First, combining all of our gases businesses; second, consolidating key activities such as operations and distribution within the business; and third, running the business regionally. In doing so we’ve driven true P&L ownership meaning decision making regarding customers, plans, distribution, all of that, is now with our local managers making us more agile, responsive, and cost competitive. As you can imagine, adopting a simpler and less matrixed organization with greater empowerment and accountability is popular. It is something that many employees have been looking forward to. I would like to thank our people, for staying focused on safety, our customers, and delivering today’s results during these exciting times at Air Products. During the same timeframe, since the beginning of our fiscal year the price of oil has dropped essentially in half, obviously that’s a huge change. But it had no discernible impact on our industrial gas business in Q1. Our hydrogen volumes remain strong as did our US Oil Field Services business. Being agile and focused on cost is always important and even more or so in times like this. Our restructuring advances both of those traits and it is well underway. Finally, a comment on helium, as we mentioned last quarter new supply has come into the market, improving the supply-demand balance, while also impacting the industry’s cost structure. At this point, any pent-up demand from years of shortage has been met. Looking forward we are focused on managing price, cost, and volumes, but we do not see helium as material upside in the near future. With that, please turn to Slide 11 for a review of our Gases Americas results. We delivered strong results this quarter with broad volume growth in North America and strong pricing. Latin America market was weak in comparison. We kept a very tight focus on cost and have taken actions throughout the region, which will begin to hit the bottom line in Q2. Sales of just over $1 billion were up 6% versus last year. Volumes were up 4% with liquid oxygen, nitrogen, and argon volumes up mid-teen digits in North America on strength across our customer base - I’m sorry, mid-single digits in North America. Hydrogen volumes were up significantly over last year, as we continue to see strong demand from refinery customers on the US Gulf Cost, and we had fewer planned maintenance outages. South American volumes were flat with last year. Pricing was also strong up 3% versus prior year with good results across all of the liquid bulk products in North America, and more inflation driven increases in Latin America. Higher energy prices added 2% to sales, while currency reduced sales by 3%, primarily from the translational effect of the Chilean peso moving about 14% and the Canadian dollar down 8%. Underlying sales were down 1% sequentially, primarily due to seasonality in North America versus last year EBITDA grew 8%, increasing EBITDA margin to 33.1%, the highest in the last two years. Operating income grew by 14% as we saw good leverage on the volume increases. We did see lower maintenance costs, but this was more than offset by a prior year equipment sale gain. We saw a positive effect of continued focus on cost, and we expect the benefits of the reorganization to start to ramp-up in Q2. Sequentially profits were down on lower volumes and lower incentive compensation costs in Q4. Now, please turn to Slide 12, for the Europe, Middle East, and Africa region our results were essentially flat compared to last year before the impact of currency. It’s always important to manage costs, particularly so in today’s soft economic environment. Our restructuring is well-timed. The new organization structure is in place and a number of actions are underway, we will deliver these savings to our bottom line over the course of the year. Underlying sales were flat versus last year, with lower energy pass through reduced sales by 2% and currency negatively impacted sales by 7%, primarily the euro, the British pound, and the Polish zloty. Liquid bulk volumes were positive, while cylinder volumes were negative, reflecting a general trend of larger customers showing greater strength than our smaller ones. Underlying sales were flat sequentially. Operating income of $81 million and EBITDA of $143 million were both down 5% versus last year, but again, would have been slightly positive without the currency impact. Sequential profits were increased or were impacted by currency, higher power costs, and lower Q4 incentive compensation costs. Please turn to Slide 13. Asia Gases delivered a strong quarter having brought new plants on stream and controlling costs. As we have said, our large onsite customers may experience some delays in bringing their projects on stream. But the core message here is, we are executing our projects on budget. Our customers are progressing their projects, start-ups are happening, plants are running, and we are getting paid. Underlying sales were up 5% versus last year, as volumes were up 6%, primarily on the new plants particularly the large PCEC project. We continue to see price pressure in the China liquid market, although we have somewhat mitigated that by improving our whole sale retail mix. It has been more than two years since Air Products decided to add liquid capacity in China, but we still see new capacity coming into the marketplace. The sequential sales increase was also primarily driven by the new plants. EBITDA of $155 million was up 12% to 38.8% margin. And the operating income was up 9% to 22.7% margin. Obviously, the volume growth from the new plants brings additional costs, but we are still seeing strong leverage. The sequential profit increase was driven by the new plant start-ups, partially offset by lower Q4 compensation. I’ll close with a few words on the Global Gases segment. This segment consists of most of our air separation unit, sale of equipment business and the associated service. These businesses naturally generate sales and profits. This segment also includes costs associated with industrial gas business, which are not region specific. So for example, R&D, product development, management costs, costs which we can leverage globally are in this segment. I am accountable for those costs and by not allocating them I can hold the regional managers accountable for what they directly control. And that’s an example of our new philosophy. In terms of results for this quarter, our sales were down versus last year on lower product - project activity. And we’ll see that sort of variation in this segment. Excluding a favorable inventory revaluation last year, our profits would have been relatively flat. Our non-business costs were flat versus last year and down slightly sequentially. Now I will turn the call over to Guillermo for a review of our Materials Technologies segment results.

Thanks, Corning. Please turn to Slide 14. The Materials Technologies segment delivered another very strong quarter including record safety performance driven by good top line growth and significant leverage to the bottom line with higher volumes and very tight cost focus. The new organization is in place and delivering on its commitments. We have taken action on our restructuring plans and will start seeing benefits from lower costs in the coming quarter. The team is excited to have full and direct control over all the key elements of their business performance including operations and supply chain. Electronic Materials sales were up 13% versus prior year as we have seen increased demand across all three businesses. Higher demand in process materials was driven by significant growth in the memory market. We are leveraging tighter markets to secure long-term volume commitments and drive pricing. We expect to begin to see pricing benefits next quarter. Advanced Materials continues to grow as customers ramp production of their next generation nodes. And finally, Delivery Systems’ business activities remains at a high level, although we will likely see it drop off later in fiscal year 2015. Performance Materials grew 6% as strong growth across all the businesses more than offset the negative currency impact. Most of our segment currency impact was in Performance Materials business. End market demand remains strong and we are additionally benefiting from share gain and successful new product introduction. Sequential volumes were down 6% on typical materials seasonality and strong prior quarter equipment business in Electronics. Versus last year, EBITDA of $129 million was up 45% to a 24.7% margin and operating income of $105 million was up 63% to a 20% margin. Strong operating leverage on the volume increases, productivity, continued tight cost focus and negative prior year inventory revaluation drove the increase. Profits were down sequentially on lower volumes and lower Q4 incentive compensation costs. Now I will turn over the call to Simon.

Thanks, Guillermo. I will make a few comments on our other two segments. First, our Corporate segment. Just to clarify, this segment consists of our LNG and helium container manufacturing businesses. For Q1 of last year, this segment also included our PUI business which we exited in December 2013. This segment also includes our corporate costs, which are not business specific. Examples include Seifi’s costs, Scott’s costs and other corporate functions. As we have said before, we no longer allocate general corporate costs to our business units. In terms of results for this quarter, our sales are flat versus last year excluding the PUI business. In Q1 of last year the PUI business had about $35 million of sales and contributed about $0.04 of EPS. This year LNG sales were up and helium container sales were down. Our LNG projects continue as expected and we have not yet seen any sign of a slowdown in development activity, although we will be watching this very carefully. In fact, just yesterday we announced a new order to provide LNG technology and equipment to the Cameron LNG project in Louisiana. This represents our third large order for the US LNG export market. Excluding PUI segment profits improved as business profits were up and corporate costs were down. The other segment is Energy-from-Waste. The Tees Valley Projects continue as expected. For Tees Valley 1, we have already begun commissioning a few of the systems and we expect to be in start-up mode through the rest of 2015, so do not expect any revenue or earnings in 2015 in this segment. In short, no change to what we have told you before. We do see a small ongoing reported loss associated with the land lease and commercial management of this segment. Now, I will turn the call back over to Seifi.

Thanks again, Simon. Now please turn to Slide number 15, for a discussion of our outlook. At this point in time, based on what we know today, our guidance for the next quarter is $1.50 to $1.55 per share. At midpoint this will be an increase of 16% over the previous year. As for all of fiscal year 2015, we are slightly increasing our guidance to $6.35 to $6.55 per share. At midpoint this represents a 12% increase over our 2014 results. All of the numbers that I just quoted are in actual exchange rates. We are not going to use currency changes as an excuse to reduce our targets. As for capital expenditure in 2015, we expect $1.7 billion to $1.9 billion which is in line with what we have told you before. We continue to enjoy a very robust backlog with a high level of secure on-site pipeline projects. The backlog of $3.2 billion is down from $3.5 billion last quarter as we are very pleased to have one of our major projects in China successfully on the stream. As you have heard me say before, we are totally focused on actions that we can control to deliver on our commitments. The new organization is in place. We are executing on our improvement actions and our teams are working together to achieve our goals. Our new structure enables us to reduce overhead costs, which we have continued to improve cash flow and earnings in 2015. In addition, our new organization and our new reward system allows us to be more effective in improving performance of our existing assets and businesses with a laser focus on cost reduction, utilization, and asset management. I once again want to thank all of the very talented, committed, and dedicated people, and Air Products for their contribution and I continue to be optimistic about the future of Air Products and our ability to deliver excellent results. Now, we will be delighted to answer your questions.

Good morning. Thanks for taking my questions.

Good morning, John. How are you this morning?

Great, great, thank you. So a question. With regard to the margin improvements, you’ve gotten 240 basis points of improvement year-over-year. And I guess, and listening to some of Corning’s comments, it sounds like a lot of the cost-cutting initiatives haven’t really started to kick in all that much yet and it’s more - those are more on the come as we kind of look forward. So I guess of the margin improvement that we saw so far on the year to - year-over-year improvement, how much would you say is tied to cost-cutting and efficiency programs versus just volume and pricing coming in and kind of what you would have expected normally anyway?

I would say, it’s about half and half.

Okay. And then just with regard to the targets that you are thinking about for 2015 in terms of some of the cost-cutting levers that you expect, I know, originally you had said, look, to close the gap to be the best, we need kind of 600 basis points to 700 basis points of margin improvement. How much do you think you get in 2015 based on the cost-cutting initiatives you’ve already put in place?

John, you know you are asking obviously a very good question. But you know that I’m going to dance around in giving you a timing. We have said that, our goal is to close the 600 basis points of gap in EBITDA margin that we have with the best performing in the industry. We demonstrated that we are making progress, 240 basis points is a significant step forward in one quarter. And we will continue working at this thing as fast as we can. There is a lot of other things that can happen in terms of the worldwide economy and all of that. But we are focused on closing the gap as soon as we possibly can, John.

Great. Thanks very much for the color, Seifi.

Thank you, sir.

And we’ll go next to Duffy Fischer with Barclays.

Yes, good morning, fellas.

Good morning, Duffy.

Hi, Duffy.

A question around the comment you made on FX, Seifi. Where you said actual exchange rates, it sounds like what you are saying is come hell or high water you are going to deliver those numbers, no matter what currency does. But can you talk about what type of headwinds you are having to overcome at, say, the midpoint of that number for this year?

Duffy, yes, you are very right in characterizing my comment. The second thing is that overall the headwind for us for fiscal year 2015, where the exchange rates are right now versus 2014 is a $0.25 headwind. That means that if exchange rates were the same as they were in 2014, our guidance would have been $0.25 higher than what we have given you. That’s the order of magnitude of the headwind that we are talking about.

Okay, thanks.

Thank you.

And then, Corning, a question for you on the oil comment you made where you didn’t see really any effect in Q1. Going forward, would you expect that to change? Do you see some puts and takes if oil stays at this lower level over the next year?

Corning, you want?

So I think at this point we would say, if you look at what exactly impacts us in oil, let me just kind of put this in perspective. So let’s say exploration and production, what’s our sales into that area? It is nitrogen for Oil Field Services and in Guillermo’s area some chemicals that go into the fracking mixes just to span it, it’s about $35 million of nitrogen we sell into Oil Field Services, it’s like an $8 billion business, and it’s even less in Performance Materials. Now, obviously if there is a big change, it can impact project timing and all of that. But for right now, we’ve fully anticipated that in the guidance we’ve given you.

Great, thanks, fellas.

Thank you.

Thanks, Duffy.

And we’ll go next to David Begleiter with Deutsche Bank.

Thank you. Good morning, Seifi.

Good morning, David. How are you, David?

Very good. Thank you. Very good. Seifi, you mentioned again that your core business is Industrial Gases. Any further thoughts or update on what that means for Materials Technologies long-term in the portfolio?

Well, we told you that we are not in a hurry to do anything, because I thought, I mentioned this at our July call, that I said that these guys are going to really perform. And Guillermo is helping me prove me right by performing. I mean, look at the improvement that that business has enjoyed in the last two quarters. My God, their EBITDA margins are now 25%, their EBIT margin is around 20%. So we are going to watch that business improve and then, everybody understands what their long-term plan is, but we are not in a hurry to do anything. They are doing a great job and who knows, if they get their EBITDA margins to 32%, 33%, and their EBIT margins to more than 25%, they might suddenly become a core business.

Very good. And just on pricing, Seifi, can you talk about the success of your recent price increase, as well as the overall industry pricing environment?

David, I’m with - I’m not going to make any comments about pricing, David. I don’t think it’s appropriate for us to engage in that kind of a conversation. I apologize for that. My lawyer is kind of - he’s very conscious that we should not say anything about pricing.

Understood. Thank you very much.

Thanks very much.

Thank you. We’ll go next to Vincent Andrews with Morgan Stanley.

Thanks very much. There was a comment made at one point in the presentation about how your larger customers were doing better than your smaller customers. I wonder if you could just expand on, I think it was specific to a particular region. I wonder if you could just expand on that dynamic and just help us understand what that is and why that might be?

Very good question, Vincent. I think I will have Corning address that, please. Corning?

Vincent, that’s more or less an empirical observation of what’s going on in the ground in Europe for us right now. Personally, I think, the larger customers just simply have broader exposure to broader markets, including export markets, where the smaller ones tend to be more local. And I see that as probably what’s driving it.

Okay. And maybe just as a follow up. Could you just walk us through sort of where merchant utilization rates are in the various geographies and what your sort of outlook is there?

Okay, yes. Merchant rates are very close to where they were as last time we reported. So that means in North America we are, let’s say, in the high 70s, mid 70s in Latin America, Europe in the high 70s. Asia, I would say is now mid to high 70s, so that’s just slightly down from where we were last time and in part that’s, because with this new on-stream we just brought on some new capacity. And in addition to that, as we rebalance our wholesale/retail, we’ve shed some of the wholesale business.

Okay, great. Thanks very much.

We’ll go next to Jim Sheehan with SunTrust, Robinson Humphrey.

Good morning, Seifi. Just with respect to the FX headwind that you mentioned $0.25, and you said that your EPS targets would have been $0.25 higher. Could you just comment a little bit about what you have done to offset that headwind?

Jim, what we have done is everything that we are doing. I mean, I have always said that for us to do what we need to do at Air Products is not the one magic wand, it’s about 10,000 different things that we need to do right. And that is what we are focused on, the whole organization change, the whole focus on every single dollar that we have spent, the organization being rewarded based on specific areas of performance where people have line of sight. It’s just - I can just go through a list of about 500 items that we are doing. Everybody - the great thing is that we have all of our 20,000 people engaged. This is not a one-person job or 10-person job, we need to get all of the organization engaged. I’m very encouraged, because when I look at the safety result and I see a 50% improvement that means our people are paying attention and they are involved. So we have to do many, many, many, many things that we would have done. I mean, whatever the exchange rates would have been, obviously, we would have wanted to have a guidance of $6.80. I mean, that’s what we are working toward. And the currencies are going to be what the currencies are. But I don’t think we should use that as an excuse and say, well, now let’s lower the guidance. We have said, we are going to do something and we are going after that.

Great, and also one for Scott, thanks for the guidance on 2015 free cash flow outlook. I was just wondering if you could also comment a little bit about how that looks further out, say, in 2016.

Scott?

Thanks, Seifi. So, yes, thanks for the question. So as Seifi has mentioned, we are looking at maximizing the cash flow out of our existing assets driving EBITDA increases. And now we have an organization that is accountable and have all the levers all the way through that incentive compensation targets. So the main thing we are looking to do is drive cash flow from the assets we have. We don’t, excuse me, we don’t have a target in terms of capital spending, we’re going to look at what the opportunities are that are out there. As Seifi had mentioned, every project greater than $3 million comes to him for his review. And I will tell you, the review and the discussion is around why is this consistent with our strategy? What’s the external market, what’s the competitive position, and how do we get a good investment for the risk and create value for the shareholder? So a little bit more background. We do not - we are obviously working, as I mentioned, trying to get to free cash flow positive for this year and looking forward to driving that even more in the future. So don’t have a target per se, but just telling you what we are focused on and how we are managing the business.

Thank you.

Thank you. And we’ll go next to Kevin McCarthy with Bank of America Merrill Lynch.

Hi, this is Wei Zhang calling for Kevin. I just had a quick question on EMEA. So the sales decline seemed to be primarily from FX. Do you expect to see any impact on - from lower volumes basically due to the macro condition over there?

Corning, do you like to handle that?

So, I think a key thing in our strategy right now is to do the right things, to do the 10,000 small things that Seifi talked to get our cost position right, to get the restructuring. And the overall economic environment, I don’t know that I’ve got any greater insight than you do other than our most recent results. So I want to be prepared for volume moving up or down. I don’t think anybody sees a huge upswing in the offing. But our goal is just to be ready for whatever eventuality plays out.

Great, thanks. And just a follow up, if I may. Do you see any cost relief from FX in terms of capital spending for fiscal year 2015?

So an impact on our capital costs based on the currency shifting, is that the question?

Yes, CapEx.

Scott?

Yes, let me comment on that. So first of all, obviously we are not in the business of trying to project out where currency and exchange rates are going to go. What we do is make sure that when we’ve got a project that has difference in terms of revenues and some equipment that’s coming from a different currency, we are going to hedge from a cash flow perspective, we are not going to hedge from an earnings perspective. So in our latest guidance at $1.7 billion to $1.9 billion, obviously we’ve looked at where the currencies are. Frankly, we’ve got a lot of investment going in in China, we’ve got a lot of investment in the UK. The RMB and the pound haven’t moved that much. And so, our guidance continues to be $1.7 billion to be $1.9 billion. But, again, the key point here is the translation is going to be whatever the translation is going to be. What we are focused on is generating cash for the shareholder. And to the extent that there is any cash exposure, we’ll hedge that for a project, but we don’t - we are not going to have the - hedge the earnings.

Great, thanks.

Thank you. We’ll go next to Jeff Zekauskas with JPMorgan.

Hi, good morning.

Good morning, Jeff. How are you doing?

I’m very fine. The - in the cash flow statement, your cash flows year-over-year were down about 11%, even though your earnings were up 12%. And I think your - I think your guidance for the year or your talk for the year is that, you wish to be free cash flow positive. Just being free cash flow positive is not really very much growth in operating cash flow. Was there something unusual that happened in the first quarter? And in general, what kind of growth are you expecting from your cash from operations this year?

Very good question. Scott is going to answer that.

Yes, sure. Thanks, Jeff. Good question. So again as I mentioned, and Seifi has been very clear around the simplified cash flow metric. It is very straightforward, it is clear, where it’s consistent between the internal organization, all the way to the outside. And again, as has been mentioned, there is EBITDA targets down through the organization. Clearly, though, then there is some of us at Air Products that are managing the full cash flow beyond the simplified approach. So examples that we saw in this quarter, for example, were pension contributions, about $76 million of pension contributions. We had some cash associated with the severance actions we are taking, and we also had a little bit in terms of the earnings that we recognized from our affiliates versus the timing that we received those dividends. So we are managing that, as well as receivables and so on and so forth. We are trying to make sure that we are optimizing all of that, but recognize again the simplified free cash flow mechanism is just that, it’s clear, it’s simple, and it’s got alignment between inside the organization and outside.

Okay. And then for my follow-up. Last year in the first quarter, there were large maintenance expenses, especially in the United States, and there were some outage issues. What was the change in maintenance costs year-over-year in the first quarter?

Corning will answer that, Jeff, because it’s mainly in industrial gases.

Yes. So I don’t know that I have the number fluid for you in the second, but I just want to clarify. So these are maintenance outages by and large which a large refinery will schedule oftentimes years in advance, and then during that outage when they don’t need the product, we and other suppliers all do our outages. So we can follow up with you on what the exact swing was quarter from quarter and we did see a drop off in that. It was offset by a sale of equipment. And I’m being coached here it’s about a $0.01 impact that gave us in the first quarter.

Jeff, just to emphasize that…

Sure.

…the difference in maintenance cost translates into $0.01 in earnings per share. So out of the $0.21 increase, $0.01 was lower maintenance costs.

Okay, great. Thank you so much.

Thank you.

Thank you. We’ll go next to David Manthey with Robert W. Baird.

Yes, hi, good morning. The 3% year-on-year price increase in North America seems really very high, just given that I assume that’s concentrated in Merchant Gas. And I’m wondering can you give us some color on how you’ve been able to drive that kind of improvement and with volumes remaining as strong as they have, were you that far below market on big percentages of your business, or what’s going on there? I know the market is strong right now, but that seems like a very high number.

I think, Corning, first - I mean, before Corning answers the question, it is the result of having high-quality focused management, but Corning?

First, I just like to thank you for asking me this question, because although Seifi doesn’t want to talk about pricing in this call, let me assure you when I’m alone with him, there is a lot of questions about how I’m doing on pricing. So I would say it’s a reflection in some degree with supply and demand and increased loading in the market, as well as just a lot of discipline and using tools and so forth to go out and get the pricing that we are entitled to in this market. We give our customers good service and we are entitled to our pricing.

Okay, so it’s just blocking and tackling, looks good though. Congratulations, it’s a good number.

Thank you.

Thank you for your comment. We very much appreciate that.

Thank you. And we’ll go next to P.J. Juvekar with Citi.

Good morning.

Hey, P.J., how are you today?

Good, good. Seifi, you had talked about increasing asset density as one of the key reasons for going to a regional structure. Can you tell us on that, where do you stand on that? How do we measure the performance of that from outside?

Well, quite frankly, I think, one of the measures would be to see how we are doing in terms of pricing and volumes. I mean that - if you have that kind of a stuff that you will be able to get the kind of numbers we are talking about in terms of pricing. But we have not, P.J., as you know, in the last two quarters done anything dramatic in terms of buying somebody or building an asset or anything like that. So we haven’t done that. We certainly look for opportunities to be able to do that. But improvements in the result is not any significant structural change, it’s just the blocking and tackling that Corning was talking about before.

Thank you. And then secondly, a few companies have talked about delays in coal gasification, secure projects, I think Corning mentioned that. So what are you seeing in the backlog in terms of any potential delays either due to the oil price or slow China growth, et cetera?

On that one I can say that on the existing projects that we have and their execution, we are not seeing, and we don’t expect to see any change or any cancellations due to lower oil prices. Those projects are solid. They are under construction, and we don’t have any indication of anything happening to that. As far as any prospective future ones, P.J., we just have to wait and see. It’s difficult to make predictions about that.

Thank you.

Thank you, sir.

We’ll go next to John Roberts with UBS.

Thank you. Do you have a raw material index for the Materials segment and some indication of where raw materials are entering the March quarter versus where they were a year ago?

I will have Guillermo answer that, because raw materials are really only relevant in his business. Fortunately, raw material for the rest of our business is air and natural gas, which seems to be at very low prices these days.

Correct, I was just asking about Materials.

Yes. Thank you, sir.

If you look at our portfolio Electronics and Performance Materials, first in Electronics, probably we are not seeing - the oil impact, that kind of thing is not a big impact on our raw materials. We are seeing some changes, but it’s really around some of the supply/demand dynamics on metals and other materials that we use on different parts of our products. And the material component is an important factor, but costs - the conversion costs, the shipping, the whole supply chain is very complex, so there is a lot of different drivers in Electronics. So the bigger raw material purchase is really more on our Performance Materials business. We are seeing some changes there. Most of raw materials are not - I mean oil, ethylene, propylene in some products have some impact, but we are seeing, it’s not the biggest driver for the types of raw materials that we are driving. So again, supply and demand dynamics and some raw materials are really driving where our costs are going. So we will probably see some cost reductions, but not as much as we expected. A good example of that would be for example EO, the ethylene prices are coming down, but that material, the tightness is really dictating the price. So we should get some improvement, but it’s going to vary a lot by business.

Thank you.

Thank you, sir.

Thank you. We’ll go next to Bob Koort with Goldman Sachs

Thanks for me come in. Two questions if I might. Seifi, you’ve taken a pretty, I guess, low-key approach to some of the head count reduction in terms of sizing it and how fast and how furious. But it seems like you’ve maybe reduced head count by about 500 so far. Can you talk about what the anticipated benefit from that would be, and then any anticipated additional moves that would be forthcoming?

Well, Bob. First of all we would have waited until you asked a question anyway. We wouldn’t have ended the call without your question. So just - I just wanted to make sure you know that. In terms of 500 people, that’s kind of the number that is in the footnotes. Order of magnitude what saving that would result to is order of magnitude about $50 million to $60 million.

Okay.

On an annual basis.

Right. And, Guillermo, I’m wondering in your business, the EBITDA margins obviously have moved up quite prominently. How does the return on capital in your business compare to the Gases business?

Well, thanks, it’s a very good question. I would say, hopefully, we’ll get a little bit - give a little bit more of a glimpse of that at our coming investor conference, so that you can see a little bit of the feel. In general, we are less capital intensive and our returns are, versus our peers and versus gases, I would say higher and doing very well. And that’s really what we look at. If you look at our improvement to be non-dilutive to the company EBITDA is our target. But to get there, really for us, it’s about our operating margins, because our depreciation doesn’t change that much and our returns on the investments that we make.

Bob, we will try to do a good job delineating that at our Investor Day. But for sure the return on capital is significantly higher, obviously.

Yes, it certainly makes it seem like it will be a hard decision to not embrace them as part of the portfolio if these trends continue.

Well, you are asking the question and Guillermo is smiling. So he is happy for your comments.

Terrific. Thanks, guys.

Thank you very much.

Thanks, Bob.

Thank you. We’ll go next to Mike Harrison from First Analysis.

Hi, good morning.

Good morning, Mike. How are you?

Hello, Mike.

Doing well, thank you. Guillermo, you mentioned that on the Process Materials side you expect pricing to start improving in the rest of the year. I believe that’s an improvement from what has been some historical pressure on pricing. Can you talk a little bit about what’s driving your more positive outlook there?

Great. Well, thank you for that question. Let me sort of use this opportunity to point out two things. One, as you said, this is the segment that traditionally has been underperforming for us and the industry has over invested, if you look at the photovoltaic history, and if you look at our - a lot of the efforts that we put in the last two years, it’s really been about improving this business. We’ve shutdown production, right sized our capacity, shifted more of our supply to Asia, where we have most of our business. So we are in a much better cost competitive position to supply - profitably supply the industry and that’s driven the improvement. But if you look at the pricing trends because of the oversupply, supply/demand balance, it’s been pretty negative over time. What we are seeing is just things are turning around, especially driven by memory, a few key raw materials have really jumped and that’s really driving the supply/demand balance in a very different direction. So we are fortunate that we’ve done the right things and we are well-positioned to take advantage of this from a cost perspective. But more importantly now we are engaging our customers to make sure that not only we supply them today and that’s the supply/demand is dictating some of the pricing, but also talking about volumes as we look at debottlenecking and adding capacity in the future. We want to learn from the history and this is an important area for win-win for our customers. They require reliability of supply they want to know, they are going to have the material for their needs in the coming years. So we want to make sure that we are reliable with them. But at the same time, we want to learn from some of the dynamics from the past and be very judicious on how we add capacity so that they get reliability, but we also get the returns that we expect on any investments we make.

All right. And then just looking at North American tonnage business, I was hoping that you could maybe discuss your expectations for outage activity for your refiners in the rest of the year, particularly as we see gasoline inventories creep quite a bit higher in the US.

Yes, so our current forecast anticipates the outages. I think we have given guidance in general we expect this to be a lower year than last year. Last year was a bit of an anomaly. I guess the thing I would like to stress in this is, these are big outages and they are timed when the customer is already planning to take their units down. So I don’t think there is any changes from any of our customers in a significant way changing around outage plans based on the shift in oil prices right now.

Thanks very much.

Thank you, Mike.

Thank you. And we’ll take our final question from Don Carson from Susquehanna Financial.

Thank you. Thank you. A couple questions, one on volume. What you used to refer to as Merchant looks like it was relatively flat as operating rates were flattish. So of your growth in tonnage, how much of it was from new projects versus how much of it was just increased demand for Hico? And as we look forward to the rest of the year what’s the contribution from new projects whether you want to quantify it in either a volume or revenue or earnings per share framework?

Thanks, Don. Good to hear from you. Corning will address that.

So, Don, I think you are referring mainly to America’s when you say that?

Yes.

Okay. So actually we had volume growth in this quarter in liquid/bulk across all the different products and they were up, let’s say, mid-single-digit. So there was something positive there. We did see good volume growth in this quarter in the Gulf Coast. A fair amount of that is customers who are seeking additional hydrogen beyond which they’ve necessarily contracted for, that gives us a certain amount of the uplift. As we go through the year, as is always the case any on-streams we have are listed later on in the slide deck. But I think the - let me see how to say this, any forecasts, any issues we have on that are sort of encompassed in our current set of numbers that we’ve given you. Does that answer your question? There is no - there is no like the big project coming on in the Gulf Coast the duration of this year if that’s what you are asking?

Okay. But and then globally, I mean, you used to talk about almost a $0.30 number in terms of EPS contribution for new projects. Is the kind of still what you are thinking of in terms of contribution this year?

Yes. So I don’t think we’ve given out specific numbers on what we expect new projects coming in. You’ve seen the impact of PCEC that was a partial month, we’ll see more of that as we go forward and we have other start-ups coming.

Okay. And, Seifi, just one follow-up on restructuring. Obviously, it’s going a little faster than expected. I know in the past you’ve talked about a $600 million EBITDA benefit from restructuring with half kind of SG&A and half sort of production and distribution efficiencies. Is everything we are seeing today from sort of these overhead cuts, or are you starting to see some efficiencies in the business as well?

We are seeing some, because if you look at our direct margins in terms of before overheads and all of that, the direct margins are up too. So we are seeing some improvements in operations and distribution, but they are not material right now. But I think you will see a lot of that as our organization kind of gets settled down, as our people in the regions and sub-regions get their hands on the details and all of the - as I said, the 10,000 things to do. So I would expect that those would materialize more in 2016 than in 2015, Don.

Okay. Thank you.

Well. Thank you very much.

I’m going to make some comments about before we wrap-up, please. We are waiting for the queue from the operator. But first of all, I’d like to thank all of you for being on our call today. But then, I just want to say that we will be holding our 2015 Investor Conference in New York on March 31. And we’ll be - that event will also be webcast. What we will do in that Investor Conference, obviously, we are not going to announce any newer strategy or any new direction for the company, what - where we are going. And obviously we are going to be consistent with what we have told you before. But the key element of that meeting is going to be to giving you exposure to the real people who are actually doing these things. The people who are key executive, who are actually responsible for delivering the results, so that you see that there is a depth of talents within their products, and then I think it’s worthwhile to hear directly from them about what they are doing. I mean, in that Investor Conference are expect to be talking for 10 minutes, and then give our people and other five hours to tell you what they’re really doing. So that’s really the purpose of the meeting, and we are looking forward to your participation. But once again, thank you for being on the call and have a wonderful day. Thanks again.

And that does conclude today’s conference. Thank you for your participation.