Air Products & Chemicals (APD)

Q1 2012 Earnings Call

January 24, 2012 10:00 am ET

Executives

Paul E. Huck - Chief Financial Officer and Senior Vice President

Simon R. Moore - Former Director of Investor Relations

Analysts

P.J. Juvekar - Citigroup Inc, Research Division

Robert Koort - Goldman Sachs Group Inc., Research Division

Laurence Alexander - Jefferies & Company, Inc., Research Division

James Sheehan - Deutsche Bank AG, Research Division

Mark R. Gulley - Ticonderoga Securities LLC, Research Division

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Duffy Fischer - Barclays Capital, Research Division

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Michael J. Harrison - First Analysis Securities Corporation, Research Division

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

John P. McNulty - Crédit Suisse AG, Research Division

Presentation

Operator

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Good morning, and welcome to the Air Products and Chemicals First Quarter 2012 Earnings Release Conference Call. [Operator Instructions] Also, this telephone conference presentation and the comments made on behalf of Air Products are subject to copyright by Air Products, and all rights are reserved. Air Products will be recording this teleconference and may publish all or a portion of the teleconference. No other recording or redistribution of this telephone conference by any other party are permitted without the express written permission of Air Products. Your participation indicates your agreement.

Beginning today's call is Mr. Simon Moore, Director of Investor Relations. Mr. Moore, you may begin.

Simon R. Moore

Thank you, Mark. Good morning, and welcome to Air Products First Quarter Earnings Teleconference. This is Simon Moore. Today, our CFO, Paul Huck, and I will review our Q1 results and outlook for the remainder of 2012. We issued our earnings release this morning. It is available on our website along with the slides for this teleconference. Please go to airproducts.com to access the materials. Instructions for accessing the replay of this call beginning at 2:00 p.m. Eastern Time are 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 these slides and at the end of today's earnings release, explaining factors that may affect these expectations.

Now I'll turn the call over to Paul for a review of our financials.

Paul E. Huck

Thanks, Simon. Good day, everyone, and thanks for joining us. Please turn to Slide #3 for a review of our first fiscal quarter of 2012.

For the quarter, sales of $2.4 billion were 1% higher versus prior year. Underlying sales increased 1% year-on-year and higher prices in our Merchant Gases and performance materials businesses. While overall volumes were flat, volumes were higher from new plants in Tonnage Gases but were offset by lower equipment sales and lower volumes in our performance materials and Merchant Gases businesses. Sequentially, sales declined 7% with volumes down 4% due to seasonality in our Electronics and Performance Materials and Merchant Gases segments. Merchant volumes declined more than we expected as we experienced weakness in Asia, including China. Simon will provide the geographic details later. Sequentially, lower energy prices reduced sales growth by 1% and currency reduced sales growth by 2%. At the current rates, currency would be a headwind for the remainder of 2012. Operating income of $385 million decreased 5% from prior year due primarily to lower volumes in our equipment and Merchant Gases segments. Higher pricing did not fully recover raw material increases, but productivity offset this impact. Our operating margin declined to 15.9%, down 100 basis points versus prior year and was 60 basis points due to volume and the rest due to under recovery of raw material increases. For the quarter, net income decreased 1% while diluted earnings per share increased by 1% due to share repurchases. Our return on capital employed on an instantaneous or run-rate basis dropped to 12.2%. On an annual basis, return on capital employed is 13%.

Turning to Slide 4 for a review of the factors that affected the quarter's performance in terms of earnings per share. As we announced back in October, we settled the dispute in Spain where the authorities disallowed certain deductions taken by the company's Spanish subsidiaries in fiscal years 2005 to 2011. This $44 million or $0.20 per share charge is excluded from our quarter 1 EPS analysis. Our adjusted continuing operations earnings per share increased by $0.01. Lower volumes decreased earnings per share by $0.05 year-on-year. Pricing, energy and raw materials, taken together, reduced EPS by $0.02. And costs were $0.02 favorable as our productivity gains more than offset cost inflation. Currency translation and foreign exchange taken together had a $0.02 unfavorable impact. Equity affiliate income was $0.03 higher as the prior year had a charge for a plant sale within one of our Asian affiliates. Excluding the Spanish tax settlement and as we guided to last quarter, our effective tax rate of 23.5% contributed about $0.02. For fiscal year 2012, we still expect the rate to be in the range of 25% to 26%. And finally, fewer shares outstanding contributed $0.03.

Now I'll turn the call over to Simon to review our business segment results. Simon?

Simon R. Moore

Thanks, Paul. Please turn to Slide 5, Merchant Gases.

Merchant Gases' overall sales of $989 million and underlying sales were both unchanged from prior year with positive pricing offset by lower volumes. Sequentially, sales declined 5% due to a 3% unfavorable currency impact and lower volumes partially due to seasonality. Pricing was positive. Merchant Gases' operating income of $192 million was down 4% versus prior year and flat sequentially. Segment operating margin of 19.4% was down 90 basis points compared to last year but up 100 basis points sequentially. Versus last year, operating income declined on lower volumes particularly on our European liquid/bulk and packaged gas businesses. Our cost performance improved significantly this quarter but did not overcome the volume decline. The startup of our new LaPorte ASU this quarter helped alleviate the liquid argon sourcing challenges we had previously experienced. Versus prior quarter, the improved operating and distribution cost performance offset lower volumes and unfavorable currency as operating income was flat. And the 100 basis point improvement in operating margin versus prior quarter resulted from the improved operating and cost performance, more than overcoming the impact of lower volumes.

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