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Air Products & Chemicals (NYSE:APD)

Q1 2013 Earnings Call

January 23, 2013 10:00 am ET

Executives

Simon R. Moore - Director of Investor Relations

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

M. Scott Crocco - Principal Accounting Officer, Vice President and Corporate Controller

Analysts

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

P.J. Juvekar - Citigroup Inc, Research Division

Vincent Andrews - Morgan Stanley, Research Division

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

David L. Begleiter - Deutsche Bank AG, Research Division

Duffy Fischer - Barclays Capital, Research Division

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Robert Koort - Goldman Sachs Group Inc., Research Division

Alina Khaykin

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

Jeffrey Schnell - Jefferies & Company, Inc., Research Division

Mark R. Gulley - BGC Partners, Inc., Research Division

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

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

Operator

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. Please go ahead, sir.

Simon R. Moore

Thank you, Gwen. Good morning, and welcome to Air Products' First Quarter Earnings Teleconference. This is Simon Moore. I'm pleased to be joined today by Paul Huck, our CFO. As we announced in October, Paul will be retiring at the end of February. I'm also pleased to be joined by Scott Crocco, who will succeed Paul as CFO. Paul will review our overall Q1 results, I will review the segments and Scott will provide our outlook for Q2 and the rest of 2013.

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 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.

Paul E. Huck

Thanks, Simon. Good day, everyone, and thanks for joining us. Let me start by saying it's been a pleasure working with all of you over the past 9 years. I will truly miss it.

Let's turn to our results for the quarter on Slide #3. Our overall earnings per share results were in the top half of our expectations. However, softer-than-expected economic growth in the U.S., a deeper contraction than expected in Europe and continued soft volumes in China and a weaker electronics market prevented volumes from growing as much as we had hoped. Despite the weaker economic environment, we continue to take actions to improve our businesses.

Pricing held firm. We are almost complete with our Europe restructuring actions, and our plants ran well. We also repurchased 5.7 million shares this quarter. We did this opportunistically when we saw the weakness in our share price in the fall. Our cash projections had us repurchasing shares later in our multiyear planning cycle. When we saw the weakness in the price, we decided to move the repurchase forward. Overall, we spent $462 million and paid an average price of $80.69 per share. We still have a little under $500 million left in our repurchase authorization.

Our cash priorities remain the same, investing in good high-return projects, increasing our dividend each year and maintaining our A bond rating. For the quarter, sales of $2.6 billion were 10% higher versus prior year, with the Indura and DA NanoMaterials acquisitions contributing 6%. On an underlying basis, sales were up 4% on higher volumes in our Tonnage Gases segment across all regions. Our Equipment and Energy segment and our Performance Materials business also posted strong year-on-year volume improvement. Not surprisingly, this was partially offset by weakness in our European Merchant and Electronics businesses.

Sequentially, overall sales declined 2%, with underlying sales down 4% on seasonally lower volumes across the Merchant and Electronics and Performance Materials segments and lower activity in Equipment and Energy. Simon will provide more segment and geographic details later.

Operating income of $372 million increased 5% versus prior year and decreased 9% sequentially. Our operating margin of 14.5% was down 70 basis points versus prior year, mainly due to the impact of inventory accounting revaluation, higher pension costs and the Indura acquisition. Excluding these impacts, operating margin would have been up 50 basis points, primarily due to our European cost reduction and improved plant operating efficiencies.

This quarter, we had some larger-than-normal impacts flow through our P&L related to inventory accounting and not related to cash or inventory levels. In our year-end balance sheet, we adjust our inventory to actual costs for the year. During the year, we use standard costs for our inventory. This necessitates an adjustment at the beginning of the year to move from the previous year actual cost to our new standards.

Typically, this adjustment is not large, as the prior year actual and the new standard are usually close to one another. For example, last year, the total adjustment was $2 million favorable. This year, however, the adjustment was $10 million unfavorable due to the following actions taken to lower cost and improve our Electronics and Performance Materials business. First, we moved to in-house production for a product which we had previously purchased. Our in-house production cost is much lower, therefore, our standard cost is lower than the cost we used at the end of 2012. Second, given the slow demand, we have been able to negotiate a number of price decreases for raw materials in 2013. This also lowers our standard cost versus our cost used at year end. Both items are positive for the business but produce a current period P&L expense to reflect the adjustments to the carrying value of the inventory. As we go through the year, we should recover these expenses as the products are sold at higher margins.

Sequentially, our margins declined 120 basis points primarily due to seasonally lower volumes and higher pension costs. Net income and diluted earnings per share were both up 3% versus last year. Our return on capital employed of 11.2% was lower due to our higher capital spending, acquisition and lower asset loadings.

Turning to Slide 4 for a review of the factors that affected the quarter's performance in terms of earnings per share. Our adjusted continuing operations earnings per share of $1.30 increased by $0.04 versus last year. Volumes increased earnings per share by $0.12, including $0.07 from acquisitions.

Pricing, energy and raw materials taken together decreased earnings per share by $0.03 due to higher raw material and energy prices. Net cost performance was $0.05 unfavorable. Base business costs were $0.08 positive, primarily from the impact of our European cost reduction and improved plant operating efficiencies. This was more than offset by inflation, inventory revaluation impacts and higher pension costs.

Currency translation and foreign exchange taken together were $0.02 favorable. Equity affiliate income and noncontrolling interest taken together was $0.01 higher. Interest expense was $0.02 higher due to acquisitions and our share repurchases. A higher tax rate this year reduced earnings per share by $0.02. Our tax rate guidance for the year remains unchanged at approximately 25%. And finally, lower shares outstanding contributed $0.01.

Now for a review of our business segment results, I'll turn the call over to Simon.

Simon R. Moore

Thanks, Paul. Please turn to Slide 5, Merchant Gases. Merchant Gases sales of just over $1 billion were up 14% versus prior year, driven by the Indura acquisition. Underlying sales were down 1% on 3% lower volumes and 2% positive price. Sales were down 1% sequentially, underlying sales were down 2% on 1% positive price and 3% lower volumes due to seasonality.

Merchant Gases operating income of $171 million was up 3% versus prior year and up 6% sequentially. Segment operating margin of 16.9% was down 180 basis points compared to last year but up 110 basis points sequentially. Versus last year, operating income was up on the benefits from our Europe cost reduction programs and profits from the Indura acquisition, partially offset by lower volumes, particularly in our Europe packaged gas business.

Overall, we are pleased with the performance of the Indura business. We continue to see solid growth in the base business and are excited about a number of small on-site opportunities that bring together Indura's local knowledge and our on-site expertise.

As we have said, given Indura's large hardgoods business, their margins are in the low double digits, about what we expected but below the Merchant segment average. For the quarter, Indura negatively impacted segment margins by about 80 basis points. Margins were also impacted by the lower volumes and higher pension costs. Versus prior quarter, we did see the expected seasonal volume weakness and higher pension costs, but improved productivity and prior quarter Indura acquisition costs improved margins.

Let me now provide a few additional comments by region. Please turn to Slide 6. In U.S./Canada, sales were up 2% on 1% higher volumes and 1% higher price. Liquid oxygen, liquid nitrogen volumes were up on strength in chemicals, foods and metals. We continue to be successful bringing contract signings onstream, and new signings this quarter were well above prior year. Lost business this quarter was at more typical historical levels, much lower than we had been seeing recently.

Helium availability has improved since last summer, but helium volumes are still down versus prior year and below our expectations due to supply constraints. We expect to get feedstock to bring our new Wyoming facility onstream late this fiscal year and expect helium to remain tight until at least then. We are also pursuing additional global opportunities to increase our helium supply.

Argon availability improved as we worked hard to increase production and also saw softer demand. Pricing continues to be favorable led by helium, and LOX/LIN capacity utilization remained in the low 70s.

In Europe, sales were down 6% versus last year. Underlying sales were down 4% on 5% lower volumes and 1% positive price as we continued to successfully implement increases. Currency had a negative 2% impact. LOX/LIN volumes were stronger in U.K., Ireland and Central Europe, but weaker in Southern Europe and the Northern Continent.

Packaged gas volumes were weak across the region, and helium volumes were down on supply availability. Despite the weaker demand environment, pricing continued to be positive, up 1%, led by strength in helium. LOX/LIN plant loadings were in the high 70s, and new contract signings were up versus last year.

In Asia, sales were up 5% versus last year. Underlying sales were up 2% on flat volumes and 2% higher price. Currency had a positive 3% effect. LOX/LIN volumes, excluding conversions, were up 2% across the region and up 4% in China. Similar to last quarter, liquid argon volumes were down significantly on lower steel, wholesale and PV demand in China.

Packaged gas cylinder volume growth was moderated by customer profitability actions. However, we continue to see good growth in our Microbulk product line. Pricing was up 2% on strength in helium, plant loadings remain in the mid-70s and new contract signings for the quarter were up over last year and last quarter.

Please turn to Slide 7, Tonnage Gases. Tonnage Gases sales of $898 million were up 11% versus last year on strong 13% volume growth. Base volumes contributed about half of the growth, with particular strength on the U.S. Gulf Coast where our new pipeline connection enabled us to support increased customer spot demand as our competitor had short-term capacity challenges.

Air Products' new projects onstream this quarter include our hydrogen plant in Detroit for Marathon and the Petrochina ASU. As we announced last quarter, we are exiting our polyurethane intermediates business and have shut down our Pasadena PUI facility. We will be reporting PUI in continuing operations as we establish a buyer-resale arrangement to serve customers through the end of their contracts, but we will help you understand the impact of changes in the PUI business.

For the quarter, sales were down less than $10 million versus prior year, and operating income was relatively flat as we gave price relief last year to a customer. For the full year, we expect PUI sales to be down about $150 million, more than we previously communicated, as one of our remaining customers is not currently operating their facility. We still expect about a negative $0.05 EPS impact for the year, unchanged from our previous guidance.

For the segment, sequentially, sales were up 6% on 4% higher volumes and a positive 4% impact of higher energy pass-through. Currency had a 1% positive impact, while PUI was negative 3%. Operating income of $138 million was up 24% versus prior year on the strong demand, better operating performance and lower maintenance spending at our facilities.

Operating income was down 2% sequentially, primarily due to the PUI business. Operating margin of 15.4% was up 160 basis points versus prior year on higher volumes and lower maintenance. Margin declined 130 basis points sequentially on lower PUI results and higher natural gas prices.

In October, we dedicated the world's largest hydrogen plant and pipeline system, stretching from the Houston Ship Channel in Texas to New Orleans, Louisiana. The new pipeline connects our Texas and Louisiana systems, creating a 600-mile pipeline with over 20 hydrogen sources, and increases the reliability and flexibility of our hydrogen supply, which is critical to our customers along the pipeline.

The pipeline helped us supply spot opportunities as we can move product as needed, as well as use the pipe capacity itself to respond more quickly to changes in demand. We also announced a new long-term hydrogen agreement with OCI Beaumont to supply approximately 25 million standard cubic feet per day of hydrogen from our system to OCI's integrated methanol and ammonia plant in Beaumont, Texas. In addition to these near-term and longer-term volume benefits, we also saw improved system efficiency as we can manage the system to optimize the most efficient plants.

In November, we announced an agreement to expand our syngas separation unit in Geismar, Louisiana to increase the supply of carbon monoxide, primarily for BASF's new world-scale formic acid plant in Geismar. This expansion will also provide additional hydrogen for our Gulf Coast pipeline system.

Please turn to Slide 8, Electronics and Performance Materials. Segment sales of $549 million were up 3% versus last year, driven by the DA Nano acquisition. Underlying sales were down 1% on flat volumes and 1% lower prices. Sequentially, sales were down 11% on 11% lower volumes.

Versus prior year, Electronics sales were flat, with the DA Nano acquisition offsetting weaker materials volumes and lower equipment sales. Sales were down 15% sequentially on weaker seasonal materials volumes and significantly lower equipment sales. With the lower demand and some increase in competitive pressure, electronics materials pricing did see some negative impact but still remained relatively stable. Silane, driven by very weak PV markets, continues to be an exception.

Performance Materials sales were up 6% versus last year as we saw strong volume growth across all 3 regions. Prices were slightly negative, but this was offset by lower raw material costs. Sequentially, PMD sales were down 4% on the expected seasonal slowdown.

Operating income of $61 million was down 22% versus prior year, and operating margin was down 340 basis points to 11.2%. Paul discussed the inventory accounting revaluation. At the segment level, we had a negative effect from inventory accounting revaluation this quarter and a positive effect in the prior year. Excluding this impact from both quarters, operating income was down $3 million or 4%, and operating margin was down 100 basis points.

x inventory, operating income was down, primarily driven by the weaker electronic materials demand and higher costs. Sequentially, operating income was down 28%, and operating margin was down 260 basis points on the lower volumes and higher costs.

In Electronics, we announced another ultra-high purity nitrogen expansion and a further extension of our pipeline in the Tainan Science Park in Taiwan. This is in addition to the new contract announced in September to expand capacity for UMC's Phase 5 to 8 expansion. The new expansion will add 2 air separation units to the system that has been successfully serving electronics customers in Tainan for over 15 years. Air Products also serves electronics customers via pipeline networks in the U.S., Korea and China.

Now please turn to Slide 9, Equipment and Energy. Sales of $106 million were up 19% versus prior year, primarily on higher project activity across the business. Sequentially, sales were down 16%, primarily due to lower ASU project activity. Operating income of $8 million was up 15% versus prior year on the higher activity. Sequentially, income was down 53% on the lower sales and higher project development costs.

Backlog is up 25% over last year and down 14% versus last quarter as ASU bidding has slowed, while LNG project development continues to be strong. Consistent with our previous outlook, we still expect Equipment and Energy to provide a $0.05 tailwind for the full year as we expect improvement from new LNG orders starting in Q2.

Now I'll turn the call over to Scott.

M. Scott Crocco

Thanks, Simon. Now please turn to Slide 10, and let me provide you a brief summary of our outlook. From an economic perspective, we still expect modest but improving growth in FY '13, with global manufacturing at the low end of our 2% to 4% range.

In the U.S., inventory de-stocking and fiscal cliff concerns negatively impacted manufacturing in the first quarter. The pending debt ceiling and spending debates add to uncertainty, which depresses hiring and investment and lowers consumer confidence. Going forward, we expect slow but modestly improving growth, driven in part by the recovering housing market and the Fed monetary policy.

In any scenario, reduced government spending will lower 2013 growth. So overall for the year, we expect U.S./Canada growth to be close to the low end of our 2% to 4% range.

Europe is in a recession now, and we are forecasting slow improvement through the rest of the year. In China and throughout Asia, there were some positive signs in manufacturing in Q1 driven by stimulus spending. We expect to see the benefits of this in the second half of the year.

In electronics, industry production is weaker than last year, and fab utilization has softened. We expect this to slowly begin to recover in the second quarter.

Our full year EPS guidance is $5.70 to $5.90, up $0.05 from our previous guidance, with the positive impact of the share repurchase partially offset by the slower economic environment going forward. CapEx is expected to be about $2 billion, consistent with the more focused guidance we gave in November. And our backlog is at $2.8 billion, down slightly from last quarter, as we brought onstream a number of projects.

As we have said in the past, it is not unusual for the backlog to move around quarter-to-quarter. We still see robust bidding in the oxygen-for-gasification market in China but continue to see decisions being delayed for potential hydrogen and electronics projects.

For Q2, our EPS guidance is $1.34 to $1.39 based on the following factors: On the positive side, we expect to see improved volumes in the Electronics and Performance Materials and Equipment and Energy businesses; no inventory revaluation impact; the increasing positive effect of our cost-reduction programs; and a full quarter effect of our Q1 share buyback.

Partially offsetting the sequential improvement, Tonnage Gases profits are expected to decline due to seasonally higher maintenance spending and lower volumes as refineries begin taking their annual outages. We also expect reduced spot sales on the U.S. Gulf Coast. The PUI business and the impact of Lunar New Year are also expected to be headwinds.

Now let me wrap up. Overall, Q1 gives us a good start to the year, with solid execution in an uncertain economic environment. We are taking actions to control our own destiny, including efficient plant operations, cost-reduction programs, price improvement and excellent project execution. We are well positioned to grow in the long term with the size and strength of our backlog, over 80% of which is committed to long-term, on-site or pipeline contracts. We have significant leverage on our existing assets to load them as the economy recovers. And we are focused on our core business and cash priorities.

And finally, on behalf of John McGlade and the rest of Air Products, I would like to personally thank Paul for all he's done over his 33 years with Air Products, especially the last 9 as CFO. Paul hired me into the company, and I have worked either directly for him or in his organization for all of my 22 years with Air Products. While I have some big shoes to fill, I plan to approach my new role with the same integrity, transparency and passion that Paul has and to continue to focus on driving long-term profitable growth for Air Products by increasing returns and ensuring capital discipline consistent with our cash priorities.

I enjoyed the opportunity to get out and meet a number of you in December, and I look forward to getting out again very soon as we finalize the CFO transition in late February.

Thank you. And now I'll turn the call over to Gwen to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Don Carson with Susquehanna Financial.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Yes, 2 questions actually. On the inventory revaluation in Electronics, I know in the past there's been offsets to -- within the corporate line. Did that occur this time? And am I correct in saying or in understanding that you expect to reverse this as the year goes on? And then just secondly, how much of the European $60 million of restructuring did you get? I think you had $40 million left to come there.

M. Scott Crocco

I'll take the second, Paul, if you take the first.

Paul E. Huck

Okay, yes. On the inventory, Don, there is some offset which occurs in the -- in there, but there are impacts which occur in the Merchant area also. And those -- and that offset is really around what occurs on the LIFO accounting, and the bulk of that is offset against the Merchant area for us in this quarter. So there is a small impact there. But for the large part, the Electronics and Performance Materials segment, that flowed directly through to the bottom line in the consolidated results.

M. Scott Crocco

And the second question, Don -- this is Scott. In terms of the Europe restructuring, we're on track to wrap that up by the end of the second quarter. And we saw in this quarter about a $0.03 benefit. And as we take the actions then going forward, we expect to have that step up modestly in the second quarter and then to get to a run rate of about $0.05 per quarter, $60 million or so on an annualized basis. So consistent with what we've said in the past, we would expect to see in fiscal '13 about a $0.15 favorable impact from the cost-reduction actions in Europe.

Operator

And we'll go next to P.J. Juvekar with Citi.

P.J. Juvekar - Citigroup Inc, Research Division

Can you talk about your utilization rates in Merchant business by region? And given some low rates, is there any possibility of consolidation of merchant facilities in any region that you can do?

Simon R. Moore

Yes. Great, P.J., good question. So let me just go over the numbers that we talked about. So for the U.S./Canada -- and again, these are our LOX/LIN utilization rates. So in the U.S./Canada, the low 70s; in the Europe, high 70s; and in Asia, in the mid-70s. And I think one of the things that as I know you know in this business, we have a very modest distribution radius for product out of these plants, perhaps 100 miles. And so in that environment, it gets very difficult to create value just by shutting down capacity. It's certainly something that we look at on an ongoing basis, but it isn't really one of our expectations for one of the big drivers going forward. We are working hard to bring load to those facilities. We're doing that in a disciplined manner relative to pricing with our applications expertise and loading up our sales teams. So as we said, that's one of our big opportunities going forward as those assets load up.

P.J. Juvekar - Citigroup Inc, Research Division

So I understand that -- sorry, go ahead.

Paul E. Huck

P.J., I think the thing is, as Simon said, our pricing has been good in most regions here as we go through. And so we don't think the utilization rate is impacting pricing.

P.J. Juvekar - Citigroup Inc, Research Division

No, I understand that you don't transport gases in Merchant more than 100, 200 miles. But is there a way you can do piggybacking on on-site projects and then shut down some older merchant facilities?

Simon R. Moore

So I think anytime that we have an opportunity to do that, P.J., we would absolutely take a look at that. To be honest with you, in U.S./Canada, there's only a modest amount of new ASU on-site opportunities. So again, we look at that every time. I just -- I guess my point is I don't think that's going to be a huge driver of the growth going forward. I think more of an opportunity is to leverage the economic recovery that we're expecting to grow the volumes.

P.J. Juvekar - Citigroup Inc, Research Division

And then secondly in electronics, there was a sequential decline. How much of that was seasonal? And then you talked about equipment decline, can you just talk about how much was equipment versus gases and chemicals?

M. Scott Crocco

So P.J., this is Scott. From a sequential in electronics, it's about half between equipment and materials and heavily driven from a materials perspective from seasonality.

Operator

We'll go next to Vincent Andrews with Morgan Stanley.

Vincent Andrews - Morgan Stanley, Research Division

Could you talk a little bit more on -- you talked about electronics rebounding in your 2Q, or I assume that was your 2Q and not the calendar 2Q. What gives you the confidence in that at this point? And what signposts should we be looking for to know that that's actually happening?

Simon R. Moore

Yes. It's a good question, Vincent, thank you. I think a couple of things there. First of all, obviously, we just talked about the seasonal pattern, right, and we recognize Q1 as typically weak. We typically see improvement through the year. So I think, to some degree, you would expect a typical seasonal pattern. I think as we talked to some of our customers, that's the feedback that they're giving to us. They wouldn't be surprised to see utilization rates be a little bit soft here but then continue to improve through the back half of the year. And again, as we look at what some of our customers are talking about, they're also looking, for example, I think both Intel and TSMC have pretty robust capital spending expectations for this upcoming year of 2013, which obviously goes to one of the concepts we've been talking about, that the big, strong players in this industry are the ones who have the ability and the capacity to continue to invest in the new fabs, and those are the companies that we're the leading supplier to.

Vincent Andrews - Morgan Stanley, Research Division

Okay. And just as a separate follow-up to that. I believe in the 2Q guidance you gave, you were talking about sort of the annual outages in refineries as being a negative for this quarter, for your second quarter. And just help me understand, I mean, it's obviously -- there's got to be some mismatch between the size of the outages this year and last year and so forth, right, because otherwise, they're annual and there shouldn't really be a comparable issue. So what's the difference this year versus last year?

Paul E. Huck

As far as that's concerned with that, Vincent, is that in last year and this year, the outages are probably about the same from a maintenance standpoint. We had -- our plants ran better in Q1 of this year than they ran in Q1 of last year. And so we had some plant issues in Q1 of last year which we talked about at that point in time. We are over them, and so we had a very good first quarter in that. As you look at this, the high point for turnarounds is typically our quarter 2 for the refineries. There's also turns which occur in quarter 1 and quarter 3. There's not that many which occur in quarter 4, we think. So this is typically the high point for the maintenance activities which we would normally expect. The aberration was more in the prior year than in the current year.

Vincent Andrews - Morgan Stanley, Research Division

And related to your own productivity versus the customer?

Paul E. Huck

For last year, yes.

Operator

And we'll go next to Jeff Zekauskas with JPMorgan.

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

When one reads accounts of Chile, there's a sense that electricity prices have really moved up. Can you give a sense of Indura's margins on a sequential or year-over-year basis and the volume growth pro forma year-over-year? How's that acquisition doing?

M. Scott Crocco

Jeff, this is Scott. The acquisition is doing very well. We're very pleased with the business that we've acquired, and we've seen all sorts of opportunities. I'll remind you, too, that this acquisition was -- we had some cost synergies, but it was heavy on -- from a growth perspective. And in the early days here, we've been able to identify several small on-site opportunities in steel and glass, and we're pursuing them. So we are very pleased with the acquisition. In terms of your question of margin, as we've said before, to be in the low teens, given that the nature of that business is more in the hardgoods. But we do see sequential growth not only from the markets that we're in, but also, as I've mentioned, from our offerings. And as we expand and identify more opportunities, both from small on-sites, as well as in the applications arena, we expect to see continued good growth. So we're very pleased with that.

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

Okay. And then your pension contribution, I think, was $320 million in the quarter. Are you...

Simon R. Moore

$230 million.

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

$230 million, I misspoke. I'm sorry. Are you expecting to contribute under $300 million this year or what's your expectation?

M. Scott Crocco

Yes. So -- Scott again, Jeff, modestly up from the $230 million, won't be $300 million, $275 million or so for the year.

Operator

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

David L. Begleiter - Deutsche Bank AG, Research Division

Scott and Paul, just on the backlog, I know it does move up and down. But would you expect the backlog at year end to be higher or lower than it was at the end of Q1?

M. Scott Crocco

I would say -- so this is Scott, Dave. As you mentioned, it's lumpy, especially as we've got more larger deals, China gasification and so forth. But I would expect it to end the year about where it is now, kind of bumping along but moving sideways. Again, a lot of good opportunities that we're out there looking at.

David L. Begleiter - Deutsche Bank AG, Research Division

And just Europe, Scott, I know it's been under a lot of scrutiny, restructuring and management changes. Has a corner been turned in Europe? And what's the margin potential in the European Merchant business from where it is today and where can it be in 2, 3 years if filings pick up and pricing holds?

M. Scott Crocco

So from a cost perspective, as I mentioned, we're running through and almost finalized with the provision. But I also say that we're focused on additional cost reductions beyond simply people reductions. We've got a lot of initiatives going on from a supply chain perspective, as well as trying to push price. And as you saw in our results, we do have prices up. So in terms of where could it get overall, we're looking at this and trying to make substantial, continued improvement, recognizing that the economy in the short term and for some time is not going to be a big tailwind. And so we're going to continue to drive the business and do what we need to do in order to get it profitable, both from price and cost. But hopeful, again, from a volume perspective, through applications and making sure that we're going after the right customers and the right locations to drive margin improvement.

Operator

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

Duffy Fischer - Barclays Capital, Research Division

Let me just add my thanks to Paul for all the years you've put in. Thank you.

Paul E. Huck

Thank you.

Duffy Fischer - Barclays Capital, Research Division

When you look at the Asia volumes being flat, we've seen your competitor come out this morning with bigger numbers there now. Some of that may be new start-ups. DuPont yesterday was kind of talking about 8% sales growth in Asia. To be flat seems like one of the disappointing areas of this quarter. Can you kind of talk about what you think volumes are doing in Asia and kind of how you're doing relative to the market in Asia?

Simon R. Moore

Yes. Duffy, this is Simon. Good question. And of course, I know that you know one of the big differences is, when we talk about this region, we're just talking about our Merchant business, right, and whereas other people are talking about the impact of Asia of their whole company. So for example, if you had large tonnage plants starting up in Asia, they'd be included in the other guy's Asia comments but not in ours. And I know you know that. But just if I could then focus on what we've seen in Asia, couple of different things going on. We commented that argon has been particularly soft in Asia in our Merchant business. And you have a dynamic there of some of the steel companies who own their own air separation units. Sometimes, they need a little bit of extra argon. If they're not running as hard, they actually have a little bit of extra argon to put into the marketplace. So that has impacted our wholesale demand for argon, as well as soft photovoltaics market. Again, as we said, LOX/LIN volumes have been up x conversions about 2%. So that's a positive. Obviously, we're working hard to make that number larger. We've also seen a little bit of softness in our cylinder business in Asia. And as we commented, we've done some things to focus on the higher profitability customers, so have done a little bit of business-shedding there as well. So we do expect to see a pickup in economic activity and volume growth in the back half of our year in Asia, particularly in the Merchant business. And again, just as a reminder, we have a lot of significant asset investments in the Tonnage business that are expected to come onstream this year as well in Asia.

Duffy Fischer - Barclays Capital, Research Division

Great. And then the opportunity with the on-site businesses around Indura, roughly what are we talking, 2,000, 4,000, 6,000 tons per day? I mean, what's the cumulative opportunity over a 2- or 3-year period there look like?

Paul E. Huck

Yes. And Duffy, this is Paul. If you take a look at that, the thing which we're looking at are what we would call the small generated gas type of plants. So typically, most of your opportunities there are going to be under 100 tons a day, but they turn out to be a good opportunity for us, very nice things which we do. And we are finding a lot of them principally because the business was focused on packaged gas previously. And so now as we bring our applications expertise into this country, we think we're going to be able to sell a number of these plants over the next few years.

Operator

And we'll go next to Kevin McCarthy with Bank of America.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

I guess following the sizable share repurchases in the first quarter, your net debt's up to about $5.4 billion or 2.2x to 2.3x trailing EBITDA. I guess 2 quick questions. First, how does that compare at this point to what you would consider optimal leverage? Is there room to take that higher? And related to that, did you purchase any additional shares in January? And would you care to venture any thoughts on the likely pace of execution on the remainder of the authorization?

Paul E. Huck

If you take a look at our leverage overall, right now, it's on the high side, so -- because we move the share buyback forward with those things for where we would like to run it. Now as far as buying back shares in January, no, we haven't. As far as a buyback in the future -- of this year, we would look at this from an opportunity standpoint. As you can see is that we bought the shares at a low price. If the stock does drop down, we would look at that again.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Okay. And then second question if I may on Tonnage. Can you refresh us on projected start-ups in the March quarter, other projects that may be ramping if we're thinking about sequential contributions to growth?

Simon R. Moore

I'm sorry, yes. Sorry, Kevin. Yes. So we've updated our major projects slide in our package, and we do have some projects that we expect to come onstream here soon. So particularly in the second quarter, really the Yankuang project in China will come on stream. In the third quarter, we would expect to see PetroChina in China. That's, again, very exciting project, as it's the first steam methane reformer, the first hydrogen plant that's ever been outsourced by a state-owned oil company in China, so a great opportunity. And then we have some electronics projects that are expected to come onstream later in the year. So that's kind of the framework of how things look for the rest of the year.

Operator

And we'll go next to Robert Koort with Goldman Sachs.

Robert Koort - Goldman Sachs Group Inc., Research Division

Wanted to ask a question on the U.S. Merchant business. You guys had taken some lumps previously on the performance there, and you mentioned that the new signings were above the prior year and that your lost customers were below prior periods and more normal. Do you have a net win when it comes to new signings versus lost business?

Simon R. Moore

Yes, we do. Yes, absolutely, Bob. And I think I would just -- for the quarter, that is absolutely the case. We had a lot more new signings, lot more new business coming onstream. Obviously, when you look at the year-on-year comparison, right, we see some of the business that was lost through the second half of last year.

Robert Koort - Goldman Sachs Group Inc., Research Division

Okay. And then maybe a longer-term question. As we see shale gas continue to expand in the U.S. and the promise of a lot more light oil, does this diminish the hydrogen business at all? You've always talked about more heavy sour crude slates, but it looks like the U.S. market is maybe moving opposite to that. So how does that impact your business?

Paul E. Huck

As far as that is concerned, it depends where that goes. For right now, as we look at this, there's still a good amount of heavy crude which comes into the refiners, which they process. And it also gets around what sort of the product mix which they make. We've talked about this before, that as they tend to move more and more to more transportation fuels, even a light sweet crude, they wind up cracking that further down. So as the U.S. market, especially the Gulf Coast where we have a large presence, turns into more of a market for export, that -- and that's going to favor more use of hydrogen and principally, the export which is going out is diesel, which is the heaviest consumer of hydrogen in the mix.

Operator

And we'll go next to John McNulty with Credit Suisse.

Alina Khaykin

Yes. This is actually Alina Khaykin, sitting in for John. Quick question on the guidance. I believe you've raised the midpoint by a bit. So what has changed since last quarter? Is it more restructuring, is it the share repurchases or is it faster growth in some of the markets?

M. Scott Crocco

So this is Scott. If you look at the impact from the share repurchase, roughly $0.10 up from what the previous guidance was. But then given the economic situation that we're in and the environment that we saw in the first quarter, and as we talked about a decelerating momentum through the quarter, we've taken that down by about half, just given the uncertainty of the economic growth going forward. And so that's what translates into taking it up by about $0.05.

Alina Khaykin

Okay, got it. And then on Indura, how are you progressing towards the $20 million synergy target? And could there be upside from that?

M. Scott Crocco

As I mentioned before, we're progressing very well. And again, the cost synergies are relatively modest, driven more from a corporate governance and an oversight, and we're on track there. But really, this acquisition was driven by the top line growth synergies that we can bring, marrying their local knowledge in the hardgoods business with our application knowledge and on-sites. And so, as I mentioned before, very happy with the acquisition. It's running very well, and we look forward to continue to drive top line growth in that new market.

Operator

We'll go next to Mike Harrison with First Analysis.

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

Just looking at the Tonnage business, how much of that hydrogen spot volume growth do you think is sustainable and sort of driven or supported by the pipeline? And how much of that was more temporary, driven by the competitor issues that you referenced? And can you maybe address, while you're talking about the pipeline, any surprises, pleasant or otherwise, since the pipeline has been up and running for 4 or 5 months now?

Simon R. Moore

Great. Mike, good questions. So again, if we just kind of break down the Tonnage volume growth, we said about half of that was from new projects. So obviously, that's sustainable. The other half was from base business load-up. And I think of that base business load-up, probably half of that was increased volumes in the U.S. Gulf Coast. So to be honest with you, we call them spot volumes for a reason. There was an opportunity here where customers' demand exceeded their capacity to get product from somebody else. And we were extremely pleased that the pipeline enabled us to literally move product from one region to the other, support these customers in their time of need and also create a good opportunity for us. So one of the things we talked about in our sequential guidance going forward is we wouldn't be surprised if we saw a little bit of softening of some of those spot volumes. But again, those are exactly the opportunities and exactly the reason why we invested in the pipeline. In terms of the pipeline, I think things are going very well. The team's becoming very familiar with that and emphasizing how to best utilize it. We're getting the efficiency benefits that we expected out of it. And I would say probably, since it's come onstream, I would say the volume opportunities have perhaps exceeded our expectations as well. So things are going well down there.

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

And then just looking at the Merchant business, a couple of questions. One, how much of a headwind was helium under U.S./Canada Merchant volumes? And then can you give a little bit more detail on the LAR business in the U.S. and what steps you had to take in order to alleviate the supply constraints that you were facing?

Simon R. Moore

Yes. So I think as we've said a couple of times in terms of helium, but overall, as well as in the U.S./Canada, it was down in U.S./Canada. So it has a little bit of an impact on the top line. I think, overall, for the company, not much of an impact. And as we said before, given the teams out there working very hard to drive price increases, it has a very modest bottom line impact. In terms of argon, obviously, I think we talked about this at our event in November, some examples of where we're worked hard to improve the recovery of argon at certain plants and also improve the purification. So it's not one single project, it's a matter of getting a little bit more argon out of a few different locations. And again, I'd just also point out that we've seen a little bit of demand softening as well. So argon, really, I think we would say, generally speaking, was not a constraint during the quarter.

Operator

And we'll go next to Laurence Alexander with Jefferies.

Jeffrey Schnell - Jefferies & Company, Inc., Research Division

This is Jeff Schnell on for Laurence. Just going back to Europe, you mentioned that Europe is in a recession. But have you seen any signs of a stabilization or conversely, are any regions within getting worse?

M. Scott Crocco

This is Scott. So we actually saw in the first quarter a deceleration and a bigger impact from the holiday slowdown. Now early on, we're just partially way through January, we have seen that turn, and we are hopeful that as we get past the holiday slowdown, that we see sequential growth not only in the second quarter, but then through the rest of the fiscal year. In our forecast, we anticipate that for the full year, we get back about even, slightly unfavorable overall from a manufacturing output in Europe.

Jeffrey Schnell - Jefferies & Company, Inc., Research Division

And then you mentioned briefly in your prepared remarks, but can you talk about which projects and regions you're seeing customers scale back on CapEx? And are you seeing an increased reluctance on behalf of these customers to sign larger contracts given the uncertainty?

Paul E. Huck

And so as far as that's concerned, we said the gasification area in China is still plowing forward, so we're seeing contracts occur there. Then if we turn to the hydrogen contracts in the U.S. and around the world and also if we turn to electronics, we are seeing customers hold back. Certainly, within the U.S., investment plans are holding back somewhat because of the uncertainty around tax rules and things like that, which are holding back things.

Operator

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

Mark R. Gulley - BGC Partners, Inc., Research Division

I want to talk a little bit about what's happening in Algeria. Is the unrest there hurting your ability to get helium recoveries from the facility there, and whether or not you're seeing any pressure on future LNG projects due to political uncertainty in that region?

Paul E. Huck

As far as that's concerned, Mark, we haven't seen an impact on our plants for helium in Algeria. The place where this occurs is pretty far from our plant, with that is concerned. But it's a situation which we obviously watch, and we want to be able to get people and to have the country still work and be able to ship product out. So we'll watch that. As far as the impact on future LNG projects, I don't think anyone -- I don't think the situation here is going to have a single impact here on people looking at LNG projects. They know the Middle East is a tough place to operate. They've operated there for years with these projects, so I'd still see projects going forward. The other thing is that a lot of the development on LNG right now is really occurring in the Australia area and Indonesia area.

Mark R. Gulley - BGC Partners, Inc., Research Division

Okay. And then secondly, on the structure of the balance sheet and leverage, I do applaud your share repurchase plan and that sort of thing. But if I look at your cash flow statement, it appears as if you're having to borrow to pay the dividend, that is your free cash flow is not quite supportive of the full dividend payment. Is that something that would concern you, Scott? And how should I think about maybe the potential for future dividend increases if I'm right on my logic?

Paul E. Huck

Yes. Mark, I'll let Scott speak on this. One of the things which you got to realize here is that as we invest capital, new capital for growth, we do increase our borrowing activity. So it looks like we are going to borrow to pay a dividend. In actuality, we are leveraging our product -- our projects as they go in. We make an equity contribution and a debt investment in these things -- for those things. And so -- and that depends upon the type of project. Certainly, an on-site project, which we're seeing a lot of our projects being right now, we're putting a lot more debt against those projects for us. In general, I don't see this concerning us going forward as far as the structure of the balance sheet.

M. Scott Crocco

But just to build on that, obviously, the focus going forward is going to be expand margins and bring those projects onstream, on time and profitably, load the assets, and so looking to generate more cash out of the investments that we've made through margin expansion.

Operator

And we'll go next to Mike Sison with KeyBanc.

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

Nice start to the year, and have fun there, Paul.

Paul E. Huck

Thanks, Mike. I will.

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

In terms of Tonnage, you had a nice start to the year. Any changes to the outlook for the contribution for earnings this year? Is it still the same? Is there a potential for upsides, a little bit early to tell maybe?

Paul E. Huck

Well, on Tonnage -- and they have had a good start to the year. You're right, poor thing. I think towards the top end of the range, you're going to look at that as one of the things which is going to drive us there. So perhaps as we look at the full year that -- and that we have business which is going well, and we hope is continue to go well.

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

Okay. And then second question in terms of the outlook for silicon growth, you were at mid-single digits at the beginning of your fiscal year. Any changes to that? Maybe give us a feel for how the first quarter went so we can see how that's expected to unfold as the year progresses?

M. Scott Crocco

So this is Scott. In general, no change, but we would expect it to be a little at the bottom end of that range that we gave before.

Operator

And we'll take our last question from David Manthey with Robert W. Baird.

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

I was just wondering if you could quantify the maintenance impact this quarter. And just -- is this a factor, as you talked about before, where it was different last year than it is this year and therefore, there's the year-to-year impact as opposed to being significantly higher this quarter? Or was it just higher this quarter for some reason?

Paul E. Huck

Yes. If you take a look at that, the impact was about $0.03 a share for us versus the prior year...

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

Right. I'm sorry, it was lower this quarter $0.03 relative to...

Paul E. Huck

In this quarter against the prior year, that's right. And as I said, it was the prior year amount of spending which we didn't expect going into the quarter 1 of last year, but we had about $0.03 a share which was favorable year-over-year.

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

Okay. So having said that, as we move forward, the level we're at now is a more normal level, is that what you're saying?

Paul E. Huck

No. I think as we move forward, so if we go into quarter 2, right, as we look at quarter 2, quarter 2 is going to be down in the Tonnage area because of increased maintenance, which comes about by the turnarounds. And we get -- and not only the cost impact, but we also get the volume impact of that flowing through also.

Simon R. Moore

Okay, thanks, everyone. Please go to our website to access a replay of this call beginning at 2 p.m. today. Thank you very much for joining us, and have a great day.

Operator

Thank you, everyone. That does conclude today's conference. We thank you for your participation.

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