Air Products & Chemicals Inc. F2Q10 (Qtr End 03/31/2010) Earnings Call Transcript
Air Products & Chemicals Inc. (APD)
F2Q10 Earnings Call
April 22, 2010; 10:00am ET
Executives
Paul Huck - Chief Financial Officer
Nelson Squares - Director of Investor Relations
Analysts
Kevin McCarthy - Banc of America/Merrill Lynch
Mike Sison - KeyBanc
Jeff Zekauskas - JP Morgan
Sergey Vasnetsov - Barclays Capital
Donald Carson - UBS
David Begleiter - Deutsche Bank Securities
Pj Juvekar – Citi
Mike Harrison - First Analysis Security
Rob Koort - Goldman Sachs
Laurence Alexander – Jefferies
Paul Mann - Morgan Stanley
David Manthey - Robert W. Baird
Edward Yang - Oppenheimer
John Roberts - Buckingham Research
Peter Butler - GlenHill Investments
Presentation
Operator
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Good morning and welcome to Air Products and Chemicals, second quarter earnings release conference call. Just a reminder that you will be in a listen-only mode until the question-and-answer segment of today’s call. In order to accommodate everyone, we ask that each person limit themselves to two questions, plus one follow up question.
Also this telephone conference presentation and the comments made on behalf of Air Products are subject to copyright by Air Products and all right 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 written permission of Air Products. Your participation indicates your agreement.
Beginning today’s call is Mr. Nelson Squares, Director of Investor Relations. Mr. Squares you may begin.
Nelson Squares
Thank you Treka. Good morning and welcome to Air Products second quarter earnings teleconference, this is Nelson Squares.
Today our CFO, Paul Huck and I will review our fiscal Q2 results and provide some thoughts about the rest of the year. We issued our earnings release this morning and it is available on our website, along with the slides for this teleconference.
Please go to
and click on the scrolling red banner to access the materials. Instructions for accessing the replay of this call, beginning at 02:00pm Eastern Time are also available on the website. Please turn to slides two and three.
As always today’s teleconference will contain forward-looking statements based on current expectations regarding important risk factors. Please review the safe-harbor language on these slides and at the end of today’s earnings release.
Now, I’ll turn the call over to Paul.
Paul Huck
Thanks Nelson. With half of our fiscal year 2010 behind us, we are well on our way to delivering on our financial targets. Please turn to slide number four. This slide highlights some of the key financial metrics and the progress that we have made coming out of the recession.
Just a bit of history; if you take a look at the left side of this slide, you’ll see the improvements that we have made as an organization, over the five-year period before the recession. We have moved our margin up a couple of 100 basis points, and we improved our return on capital by just short of 400 basis points.
The other thing you can see on the right side of this slide is the impact of the global recession on the first half of our fiscal 2009. During that time we took a number of significant actions to position us appropriately coming out of the recession. Our results show the progress we have made since then, and the impact of those actions on our first half results, and the sequential improvement that we are continuing to make as an organization.
Sales continued to improve as our underlying sales growth, which turn positive last quarter continued to recover. Year-to-date underlying sales growth is up 6%. Our operating margin in the first half has improved to 16%, and we remain on-track to deliver on our 17% goal in fiscal 2011.
Earnings growth remains strong, and as you already seen in our press release this morning, we raised our full year earnings per share guidance again this quarter. We now expect earning per share growth to exceed 20% this fiscal year; and most importantly we continue to drive return on capital, and employ it higher, striving to keep our return on capital three to five points above our cost of capital across the cycle. This lower cost structure makes us even more competitive and well positioned, to grow faster with higher returns.
Please turn to slide number five for a quick look at the current quarter. Sales increased 15% versus prior year. Underlying sales increased 9% year-on-year, due to higher volumes in our electronics and performance material segment, and our tonnage segment. Volume performance in our merchant segment continued to be mixed, with strength in Asia being offset by slower recovery in both the U.S. and Europe.
Higher natural gas prices, which raised our contractual pass through of energy related costs increased sales by 2%. Additionally, favorable currency translation from a weaker dollar increased sales by 4%. Sequentially sales increased 3%, with underlying sales up 3% on volume growth across all business segments versus the prior quarter.
Operating income of $364 million increased 40% from prior year, primarily due to higher volumes and better cost performance. As a result, our operating margin of 16.2% improved by 290 basis points versus last year. This improvement in margin can be sustained and should continue to improve as volumes recover.
Looking forward we still have significant operating leverage available. For the quarter net income increased 41%, and diluted earnings per share increased by 38%, each versus prior year. Return on capital employed improved 70 basis points sequentially, to 11.6% on an instantaneous or run rate basis. We have improved return on capital employed to 12.1%.
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