Air Products & Chemicals (APD) Q3 2010 Earnings Call July 22, 2010 10:00 am ET Executives Paul Huck - Chief Financial Officer and Senior Vice President Nelson Squires - Analysts Mark Gulley - Soleil Securities Group, Inc. David Begleiter - Deutsche Bank AG Michael Sison - KeyBanc Capital Markets Inc. Jeffrey Zekauskas - JP Morgan Chase & Co Robert Koort - Goldman Sachs Group Inc. John McNulty - Crédit Suisse AG Lucy Watson - Jefferies & Co. Michael Harrison - First Analysis John Roberts - Buckingham Research Associations Christopher Shaw - UBS Investment Bank David Manthey - Robert W. Baird & Co. Incorporated Kevin McCarthy Paul Mann - Morgan Stanley Robert Reitzes - Bear Stearns P.J. Juvekar - Citigroup Inc Presentation Operator
Please turn to Slides 2 and 3. 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. Please turn to Slide 4. Once again, our quarterly results showed the benefits of our restructuring actions and our focus on continuous improvement as we continue to drive margins and returns higher. We are delivering operating leverage to the bottom line. Sales were 14% higher versus prior year. Underlying sales increased 12% year-on-year due to higher volumes in our Electronics and Performance Materials segment and our Tonnage and Merchant segments. The Merchant segment growth continued to be driven by strength in Asia. We are also seeing improvement in both our U.S. and European Liquid Bulk businesses. Sequentially, sales were flat. Underlying sales were up 4% on volume growth across the same three business segments. The 4% underlying volume growth was offset by currency and energy pass-through impacts. Operating income of $374 million increased 22% from prior year due to higher volumes. Operating income was up 3% sequentially on operating leverage across all segments. Our operating margin improved to 16.6%, up 100 basis points versus prior year and 40 basis points versus prior quarter, and we remain on track to deliver our 17% goal in fiscal 2011. Looking forward, this margin improvement is sustainable, and margins should continue to expand as volumes recover. We still have operating leverage available, and we remain committed to driving sustainable cost reduction. For the quarter, net income increased 23%, and diluted earnings per share increased by 22%, each versus prior year. Return on capital employed improved to 12%. On an instantaneous or a run-rate basis, we have improved return on capital employed to 12.6%.
Turning to Slide 5 for a review of the factors that affected the quarter's performance in terms of earnings per share, our adjusted continuing operation's earnings per share increased by $0.23. Higher volumes in Electronics and Performance Materials and Tonnage and Merchant helped to increase earnings per share by $0.36 year-on-year.Pricing, energy and raw materials together were unfavorable, subtracting $0.09. Costs were $0.01 unfavorable as higher year-over-year pension costs and the final Electronics restructuring actions offset our productivity gains. The unfavorable impact to operating income from currency translation and foreign exchange was $0.02. Higher equity affiliate income due to stronger volumes at a number of our joint ventures was offset by higher noncontrolling interest. Interest expense was $0.01 higher due to lower capitalized interest. Our effective tax rate for the quarter of 25% was within our full year guidance range and contributed $0.02, and higher shares outstanding subtracted about $0.02. In summary, we generated excellent financial results again this quarter. We are delivering on the improvements we told you about from our new investments and our cost reduction efforts. Now I'll turn the call over to Nelson to review our business segment results. Nelson? Nelson Squires Thanks, Paul. Please turn to Slide 6, Merchant Gases. Merchant Gases posted sales of $915 million, up 4% versus prior year. Underlying sales improved by 6%, with volumes up 7% and pricing down 1%. Currency reduced sales by 2%. Underlying sales were up versus prior year due to continued strong performance in Asia and improved volumes in North America and Europe. Sequential sales benefited from an improving economy and seasonally higher volumes, offset by a sharp decline in the euro. Merchant Gases' operating income of $176 million was up 5% versus prior year and down 1% sequentially. Segment operating margin of 19.3% was up 20 basis points versus prior year and flat sequentially. Income and margins were higher than prior year with higher volumes particularly in Asia, partially offset by the impact of currency and higher power costs. Read the rest of this transcript for free on seekingalpha.com