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Air Products and Chemicals, Inc. (APD)

February 21, 2013 10:30 am ET

Executives

M. Scott Crocco - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Duffy Fischer - Barclays Capital, Research Division

Duffy Fischer - Barclays Capital, Research Division

We'll go ahead and we'll get started with the Air Products presentation and Q&A. And again, we're very pleased to have the incoming CFO, Scott Crocco, here with us today, who's been with Air Products for quite some time. Came up under the old CFO -- old CFO -- the former CFO, Paul Huck, who, as many of you know, have just been a wonderful guy and a great asset for Air Products over the years, who will be stepping down here in the next couple of weeks. And so we also have Simon Moore, the head of IR for Air Products, with us today. But I think what we'll do first, like we did yesterday, we'll roll through some of the questions. And the 6 standard questions we've been going through just so we can kind of level set what people are thinking about for Air Products, maybe relative to some of their peers relative to the other industrial names.

So if we could just get the first question up there. The question, do you own Air Products stock currently? And you have 6 seconds to answer. Are we going or no? Here we go.

[Voting]

Duffy Fischer - Barclays Capital, Research Division

Okay. And then second question is, your general bias towards the stock now? Positive, negative or neutral?

[Voting]

Duffy Fischer - Barclays Capital, Research Division

Third question. In your opinion, through the cycle, does EPS growth for Air Products grow faster than peers, in line with peers or below peers?

[Voting]

Duffy Fischer - Barclays Capital, Research Division

Okay. In your opinion, what should Air Products do with excess cash?

[Voting]

Duffy Fischer - Barclays Capital, Research Division

Okay. In your opinion, what multiple should Air Products trade?

[Voting]

Duffy Fischer - Barclays Capital, Research Division

Nobody under 10x. That's a good start. I like that. And was that the last one or is there one more? One more. Okay. Last one. What do you see is the most significant investment issue for Air Products?

[Voting]

Duffy Fischer - Barclays Capital, Research Division

Okay. All right. And now why do we do something. Scott, maybe just a good way to start off -- we did this yesterday with the competitor. Just kind of walk us through maybe the 3 modes of distribution that you guys utilize as an industry and kind of talk about where does Air Products have competitive differentiation within those modes of transportation or those business models and how do you see that changing over the 3 to 5-year time frame?

M. Scott Crocco

Sure. Thanks, Duffy. And I just like to say it's good to be here with you today. So if I start with the on-site business or tonnage. This is where we build, own and operate a large facility that serves either a single customer or a pipeline franchise. These investments can be fairly large. It can range from tens of millions of dollars to hundreds of millions of dollars. They are under long-term contracts, typically 15 to 20 years, which provides a nice, stable cash flow. The other thing about these on-sites is it -- we do not take the volume or the energy risk. We're able to pass that on to the customer. Typically, the products that are made from the on-sites, it's oxygen, nitrogen and hydrogen. Oxygen for combustion and various applications such as coal gasification or steel or glass. Nitrogen used for inerting and a variety of different applications in the industries, electronics, chemicals and so forth. And then hydrogen, principally used in refining to remove sulfur, as well as breakdown or crack crude oil. And in this part of business, Air Products actually has a -- 40% of our portfolio is in on-sites. And that is -- compares to an average in the industry of 25%. So that's an area where we do see nice, stable, steady revenue and earnings. And frankly, Duffy, your question around where do you see this going longer-term, I think that the on-site or the tonnage piece of the business is going to be a bigger part of our portfolio going forward as we pursue a variety of opportunities, including things like coal gasification.

The next mode of supply is liquid/bulk. Products are principally oxygen, nitrogen, argon and helium. And this is where over the road, a tanker will haul from our facility where we liquefy it or compress it, and then deliver to a customer site in a tank. So these are smaller quantities than the on-sites but still fairly significant. We have typically 3 to 5-year contracts and we have the ability to recover both the power and diesel in our contracts, as well as general price increases. These products go into a variety of different end markets; general manufacturing, aerospace, pulp and paper, foods, et cetera. A wide variety of uses. And this comprises about 20% of the Air Products portfolio.

And then the last distribution mode is Packaged Gases and Specialty Materials, which makes up about 28% of our portfolio and it's about evenly distributed between packaged gases, electronics materials and performance materials. Packaged gases goes into a variety of different applications; general manufacturing, cutting and welding. And then we also have a variety of differentiated materials that go into specialty applications in both the electronics and performance materials.

Duffy Fischer - Barclays Capital, Research Division

Okay. And then when you look through each of those areas, where is it that you think Air Products has particular strengths and what are those strengths where you would assume that you get to have a disproportionate number of wins over time?

M. Scott Crocco

So from an on-site perspective, what Air Products is very good at is understanding what the customer's need is and making sure that we have an offering to satisfy that customer need. And what I mean by that is do we have the right size, the right purities, the right pressures, and working with that customer to make sure that we're helping them improve their manufacturing process. So in the on-site business, a way to win is making sure you have the right offering to satisfy the customer and the market's needs. Another core competency of Air Products is in the area of applications. We -- I've had a variety of roles in my tenure here at Air Products and one of which was in the Merchant business and absolutely, we've got folks on our team that understand very well our customers' process. Sometimes, even better than the customers, in the portion of the process that pertains to the use of industrial gases. And what we do is to help the customer provide a better product, a cheaper product, help them save on energy costs, improve their environmental processes. And so, it's another core competency that Air Products has is working with the customer, understanding their needs and helping them work through from an applications perspective.

Duffy Fischer - Barclays Capital, Research Division

Okay. And one question I get a lot from investors is what's better business for you? So, let's say you could win a hydrogen plant. You could win a coal gasification plant, large one with no liquid, or you could win a traditional air separation unit that had liquid with it near your footprint. I mean, as you think through those different types of wins that you get, what's the better business for your products at the end of the day? Or is there not much differentiation between them to you guys?

M. Scott Crocco

The way that we look at our opportunities is to step back and make sure that we understand the risk return profile. And not just doing an evaluation of that customer per se, but making sure that we understand the viability of the asset. And evaluating whether or not that asset is going to be there for 15 or 20 years if it's on-site. So from our perspective, we're going to go after the opportunities that makes sense in terms of our capabilities. We're very good at developing projects and working with the customer, again, whether it's from an on-site or from a liquid/bulk perspective, but it's imperative that we understand the risk and returns of the deal before we get into it. Given that we are more on the tonnage side of things than others in the industrial gas industry, once you put that big facility in the ground, you don't have an opportunity to really adjust it for a long time. And so it's critical that we understand what that opportunity is, the risks involved, manage it and get into tight terms and conditions that we can ensure that we're making a good return on that over the life of that contract.

Duffy Fischer - Barclays Capital, Research Division

Okay. And then last night at dinner, it was interesting, you were talking about your program internally where you go back and do your after action review for these large projects. Maybe walk people through what that is and what you guys have found over time when you've analyzed those projects?

M. Scott Crocco

Sure. So what Duffy was referring to is what we do every year, is we do something that refer to as a make good evaluation. So for every project that we have that is greater than $10 million in capital, once it's constructed and on stream for 2 years, we'll go back and evaluate how that project performed relative to the expectations. And we'll look at each of the various pieces in that project from a capital execution perspective, from a plant operations perspective, from a volume standpoint, from a price standpoint, and do a robust evaluation to understand what went well and what didn't go well and learn from both. And we've been doing this for 20 years. I've had the opportunity now as the Corporate Controller to do it for the last 6 and go directly to our Board of Directors. And what that had shown consistently is that we are very good at executing projects and building the plant on time and on budget. Operating the plant very well. And from the tonnage perspective, in my early comments around the security of the cash flows, being able to deliver as promised on those earnings. The one area that we focus on and try to improve on is when we're talking about the Merchant business and the loading of the assets, especially if we put a facility on the ground and the expectation is that a certain loading profile, nobody really forecasts a recession, so if you see a downturn and we don't load it at the rate that we expected, that's been a situation that we've gotten into from underperforming assets. But we try to learn from that and go back and adjust. The other thing that we've done in this regard, too, is taken a robust evaluation of all the different risks in any deal, specially the on-sites and do an evaluation of whether it's construction risk or operating technology, customer credit worthiness. And I think we've improved on our execution of these projects in the make good process over time as a result of this robust evaluation going into the deal and identifying those risks, managing those that we can and taking the actions to make sure we get a good return on the investment.

Duffy Fischer - Barclays Capital, Research Division

Okay. And then you had mentioned the economy. It's interesting because you guys have a pretty direct view into what's happening in local economies geographically just because it's very hard to store your products. So if you are shipping it, somebody's generally using it. Can you kind of walk through the world geographically what you guys are seeing in the first couple of months of the year so far?

M. Scott Crocco

Sure. So we're still seeing a challenging and uncertain economic environment. So as we said -- so I'll take you around the major geographies. Let's start in the U.S. Like we said in our earnings call, we saw a slowdown in the back half of our first quarter. We're a 30 September company, so our first quarter ends 31 December. So we saw bigger impact than we had anticipated in December from the holidays. There's a fiscal cliff concerns and so forth, and so it was weaker than expected. Now going forward, we still have things that need to be resolved in Washington, there's still a lot of uncertainty out there. That uncertainty then translates into deferrals of decisions around business investment, hiring, consumer purchases. And so going forward, we would expect in the U.S. to see, from a manufacturing output perspective, a sequential growth that would put us at the low end of our range, kind of 2% to 4% for the year for fiscal '13 is consistent with what we said in our earnings call. If I go over to Europe, tough economic environment there as well. It's currently in a recession, right? And similarly, we saw a bigger impact than we had anticipated around the holiday. And as we see going forward, hopeful that there will be some improvement sequentially from seasonality and other initiatives that are being put in place, but for FY '13, we would see it being maybe breakeven year-on-year at best, scratch again on a manufacturing output basis to slightly negative. Then move over to Asia, in the first quarter, we saw some underlying statistics around manufacturing. Things like rail freight and power generation start to improve. And we saw a little bit in that in our business but not a whole lot. And now, as we sit here in the middle of February, we're right in the middle of Lunar New Year. We're just coming out of the back end of the Lunar New Year. So it's tough to say. So we saw some underlying improvements and some statistics in the first quarter with the Lunar New Year right through the second quarter, it's tough to say that with what we've seen in terms of an improved -- we'll have better visibility when we get into March and then look back. So overall for Asia, we would see kind of a, for '13, FY '13, a mid-single to high-single digit growth.

Duffy Fischer - Barclays Capital, Research Division

So but in general, from the earnings call, so the 3 weeks or so we've seen in the order books since then, there's been no appreciable difference in what would you have seen at that point?

M. Scott Crocco

Yes, that's right.

Duffy Fischer - Barclays Capital, Research Division

Okay. And then if we just jump, you guys have a larger electronics business than most of your peers. When you look strategically at that business, can you handicap that, I mean, there are a growing number of bears who are saying, we're not going to have electronic cycles like we've had previously. PCs are in a secular decline for as far as we can see. Tablets have seen most of its growth and now are flatlining. Smartphones are still growing but again, the double derivative has turned negative. So barring a new big electronics consumer product, what does that business look like over 5 years? Is the run rate right now how we should size the business to go forward?

M. Scott Crocco

So we've taken a lot of actions in our electronics business to step back and look at both what our offerings are and adjust our costs to try to get more stability. And our results have shown that we've had a downturn in the industry but even with that downturn, our electronics sales have basically stayed flat during this downturn, so we've taken a lot of actions to reposition our portfolio, as well as rightsize our cost. And make no mistake, it is an industry that's get ebbs and flows and some volatility but we worked hard to minimize the volatility for us. The other thing that we've done is try to work with some of the key customers and develop partnerships. And for us, key customers being Samsung, Intel and TSMC, and partner with them and understand what their needs are today and what their needs are going forward and making sure that we're with them every step of the way to provide them the offerings that they need. Whether that's from a nitrogen from on-sites or specialty materials, liquid/bulk, gas cabinets. We provide a variety of different products to these customers. And so, those -- that is -- those are the lion's share of the big gorillas in the industry. So by partnering with them, we would still see this as a segment that's got a lot of growth potential.

Duffy Fischer - Barclays Capital, Research Division

Okay. And then one of the issues that we saw a little bit a little over a year ago was some weakness in pricing in Europe. That seems to have been arrested. But, again, just kind of stepping around the globe, can you talk about what you're seeing in pricing and what your expectations would be over the next year or so as far as pricing goes?

M. Scott Crocco

Right, so particularly on the Merchant side. Because pricing in Merchant around the globe has held up fairly well in all of the regions, and encouraged by that, especially given the loadings that we have, our Asia LOX/LIN loading is in the mid-70%, Europe in the high 70% and U.S. in the low 70%, but even in that environment, pricing has held up very well. Now if I go specifically to Europe, this is an area, as you may be aware, we've taken some cost actions and try to reduce the cost, as well as reorganize our merchant organization to be focused around geographies and be looking across the entire Merchant sector, including packaged gases and liquid/bulk. So we've taken cost out there, but also one of the things that we've done is we put a new tool in to focus on the full cost to serve a customer, and understanding only back to the source from an on-site perspective, that distribution and then any other special handling that we do for the customer, whether it's in the form of applications or special invoicing or anything like that, and being smarter about the full cost to serve those customers. And so we want to make sure that we're making a fair return. So while it's a pricing tool that gives visibility, not only to price but the full cost, in stepping back and looking at what the opportunities are to improve the profitability, both from a reduction of cost, as well as improvement in price.

Duffy Fischer - Barclays Capital, Research Division

Okay. And now if we jump to China, you guys had a nice win in the last -- I don't know when it was, last 48 hours; press release came out in the last day or so. Can you use that as an example and maybe just talk about, one, the types of coal gasification you see in China. And again, it feels a little bit distance for us here, but what are they doing as far as coal gasification? Kind of what's the opportunity there? How do the economics look when you do a plant that doesn't have the liquid business around it like that? And how do you get comfortable with your customer putting that much capital in the ground at the end of the day?

M. Scott Crocco

Right. So fair point. You're right. We had a press release, I guess, it was just yesterday and with that press release, that will be the seventh coal gasification project now that we're building in China. And if I just kind of frame that from a size of oxygen, that's something on the order of like 38,000 tons per day of oxygen that we're executing across those 7 projects. And then if we just put that in the context of like a steel mill, we would say a world class steel mill would use 1,500 to 2,000 tons per day of oxygen. But what we've got going in to China in terms of coal gasification is on the order of like 20 world-class steel mills. Now, in terms of those opportunities, what we do is we step back -- and I had the opportunity a couple of years ago to head up a corporate strategy organization and we took a detailed look at China, some in industrial gases and areas that we need to focus on and how can we win. And one of the things that we did there was we looked at what was the underlying mode of the China government, right? Latest 5 year plan says that one of the things we wanted to do is get more independence from an energy perspective, as well as help develop the interior and the heartland of the country, as well as on the West. And so, when we look at these opportunities, it's, as I mentioned before, do we have the offering that satisfies what the customer needs in terms of the size and purities and so forth. And then we will look at the customer but also, we'll look at the asset. And how do we get comfortable that, that asset is going to be there for the 15 or 20-year contract that we're signing. And do, as I mentioned before, a robust evaluation from the risk return perspective. And so, I'll tell you, we have had terrific success there, excited about it and we like the returns that we're getting on these projects. And also, the terms and conditions that we're getting. It fits very well in terms of what the government wants to do and marries nicely with our capabilities and what we bring to the table. As we look at the growth going forward, there's a variety of opportunities for gasification, whether that's in China, whether that's for synthetic natural gas or coal to chemicals or coal to fertilizer. Lots of opportunities. And we have, again, we won more in this arena than our other competitors.

Duffy Fischer - Barclays Capital, Research Division

And again, because some of it matters over time, when you look at -- let's just put those 3 buckets, coal to syngas, coal to olefins or other chemicals directly, and coal to fertilizer, how would you handicap the viability of the economics of the guys building that part of it because, again, that may matter at some point if things don't work out quite right because you got to take the risk that, is the plant viable when it's done? So different levels of technology, different levels on the evolution curve of that technology. How do you feel about kind of each of those 3 buckets?

M. Scott Crocco

Right. So for each, we feel good. Right? So we've got -- the contract terms are tight and also, once the plant's in the ground and it's got the incremental economics, that's going to continue to run. As well as making sure that these things are in line with where the government is trying to take the -- whether it's provincial or federal government. So we feel good about the long-term viability of the end markets. The facilities that we're partnering with and again, back to work that we did as part of the China strategy obviously, it's a huge country and there's lots of opportunities and we can't be everywhere. We're not going to try to be everywhere. So what we do is try to look at what -- pick our spots. Where do we see those opportunities and where do we have the opportunity to win, and target certain geographies or clusters as we said. So we feel very good about those opportunities.

Duffy Fischer - Barclays Capital, Research Division

Okay. Jump back to the U.S., shale gas has kind of changed the dynamics around the cost of natural gas in the U.S. There's some puts and some takes for your business on that. Maybe spend a little bit of time, what have been the puts and the takes over the last 2 years as that's coming to being, and then maybe what are the puts and takes as we look out over the next 3 years as people now are more comfortable with it. We're starting to take actions, your customers are starting to take actions on the back of that.

M. Scott Crocco

Right. Right. So with -- let's start with energy. Right. so low energy prices is good for manufacturing. And if there's a good manufacturing environment, that's good for industrial gases. And so one of the things that shale gas has provided is that low energy cost. And what that means is, from a refining perspective, low natural gas means low cost of hydrogen. Natural gas is over half of the cost of hydrogen. So as hydrogen comes down, it makes the refineries, particularly in the Gulf Coast, that much more cost advantaged. And then, so it's not only hydrogen is used both in the process for desulfurization and cracking but also, cheap energy would go into providing cheaper power and steam. So both of those have impact of lowering the cost for the U.S. refining industry and they could have an advantage relative to, say, European refineries. And so, we see this as overall, good for Air Products. And we have -- another strength of Air Products. And we got another number strength of our products is we've got the #1 global position in hydrogen and our market share is about 40%. And one of the things that we've just recently completed is down in the Gulf Coast. We have a 600-mile pipeline. It spans from Louisiana all the way over to the ship channel in Houston that includes, across that pipeline, over 20 different sources. And so, we are very well-positioned to provide hydrogen to those refiners, and as a cost of hydrogen comes down, it makes them more economical. The other element that comes up a lot, and you didn't ask, but I'll take us there, is the advent of more light sweet crude, right? And what is going to do in terms of the Gulf Coast and refiners? What we've seen is that light sweet crude not making its way to the Gulf Coast, but rather going to refineries or in the Northeast and Midwest and actually displacing other imports into the U.S. So the Gulf Coast refiners have already made the investments to be able to crack the heavier sour crude and they're going to do that. Whether it comes from Canada or elsewhere, they've got investment already in place and the low cost of the heavier sour. We see that to be a continued opportunity going forward.

Duffy Fischer - Barclays Capital, Research Division

Okay. And for you guys, in particular, is the Keystone pipeline meaningful? I mean obviously, it will bring some more crude down. Maybe it actually speeds some of the development in Canada over time. Or is it's nice that it happens but it really doesn't drive your business if you look at it?

M. Scott Crocco

Certainly, if that happens, it would be good for us. Make no mistake. But at the same time, it's not like without that, we're not going to continue to see hydrogen grow. First of all, if it doesn't come down -- well, there's been some announcements that whether the pipeline happens or not, there's been some announcements from some customers that they would rail it or barge it down into the ship channel, back to my point around the investment having already been made. So it -- but if the -- it's done, that would be good for business. On the other hand, too, if it doesn't get done and it ends up being exported someplace else, then we are in a position to also participate in that processing up in Canada. Absolutely.

Duffy Fischer - Barclays Capital, Research Division

And if you had your choice, is -- in the U.S., is $3 natural gas or $5 natural gas better for Air Products at the end of the day?

M. Scott Crocco

So the thing that I think is best is stable energy prices, right, and not having the volatility. We have, and as I mentioned before, low energy provides a good manufacturing environment, right? And so whether it's $3 or $5, if it's stable and it stays in that level, that will create a good manufacturing environment. We do have, with a little bit of on our hydrogen facilities, there's -- we have some efficiencies that we're able to get if we run our plant at a certain efficiency level, then we're able to pocket some of that. And so the value of that is obviously less if it were at $3 natural gas than a $4 or $5 natural gas. But it's not a big item for us. It's something on the order of lower sensitivities for $1 per MMbtu of natural gas is about $250 million a year of sales and about $15 million of operating income. So it's not a big number. I would rather have a good fundamental economy, good manufacturing environment and stable energy prices would be the preference.

Duffy Fischer - Barclays Capital, Research Division

And then if we look into your Merchant business. Again, that's the one where we've been bedeviled a little bit by loading rates today. So you can argue there's a little bit overcapacity. CapEx, is kind of at record levels across the industries, if you look at you guys and your 3 big competitors. And demand does not feel robust. So as the investor, you step back and you put that together and it's like, okay, how does this get better? Now that there's some skew in that CapEx, it might be difficult for us to see as far where it’s going but walk us through why that scenario shouldn't worry us that things would not get better and maybe even get worse with that much CapEx flowing in?

M. Scott Crocco

So when you look at our CapEx, we're currently at about -- in a backlog where a backlog is about $2.8 billion. And it's been -- so that's high. We were up at $3 billion, it's come down a little bit, but that's historically, a high-level. But 85% of the spending that's in that backlog is towards the on-site tonnage opportunities that, I mentioned at the beginning, are secured cash flows, right? Take-or-pay, monthly facility charges. And so, while we're doing a lot of spending, it is overwhelmingly towards these on-sites and we're in the process now of digesting a lot of that investment. At least the projects typically take 2 to 3 years to bring on stream. And so while we've seen those ramp up in spending, we haven't yet seen those projects come on stream and start contributing, but we will. So when you look at our CapEx spending, while its high, it's heavily driven by these tonnage opportunities and particularly coal gasification, which we talked about having good returns, good terms and conditions and us being very thoughtful around which one of those opportunities that we're going to go after. Now that said, I mean, some of these opportunities, when we look at it, and then getting back to China work, for example, we'll look at a certain geography and if we think that there are opportunities to also sell liquid, we'll oversize the plant a little bit and then liquefy oxygen and nitrogen and sell it to manufacturers in the surrounding area. But these are huge investments, right? We won't scale out proportionally the amount of liquid. And so it's not dependent -- the facility success is not dependent on that liquid . That said, we have brought on Merchant capacity. The one area that we brought capacity on more than any other area is in Asia, right? And we saw the downturn and we need to make sure that we're focused on loading those, that capacity. If I step back and think about it from a total Air Products perspective and its particularly Merchant, and each of the different geographies, we have currently about $1 billion worth of sales in unutilized capacity. That's capacity that's in the ground. We're currently incurring the depreciation cost of that, as volumes increase, whether that's from an increasing economy or as I mentioned before, around our applications work and working with the customers to utilize industrial gases to get lower-cost, more throughput. As we load that capacity, those incremental volumes will be very high margin, call it 30% to 40% margin as we load that investment that's already in place. But I think it's important to distinguish between our backlog and all the capital spending that we're doing now and recognizing that there's a lot that is about to come on stream and start contributing, but that is heavy on-site tonnage. The Merchant opportunities that we have, we need to load those facilities but that's a small part of what's in the backlog now and we need to focus on getting that loaded.

Duffy Fischer - Barclays Capital, Research Division

And so if we realize that $1 billion of sales, roughly what would the operating rates be then? Would -- I mean, would that be -- if you looked over the last 15, 20 years would that be at like the 90th percentile of how good it gets or is that kind of getting back to what a normal operating rate it has been over time?

M. Scott Crocco

So we would say kind of the upper 80% capacity utilization is kind of effectively sold out on a bunch of facilities. So that $1 billion of sales takes each of the opportunities up to kind about that rate to be able to make sure that we're reliably able to supply all our customers.

Duffy Fischer - Barclays Capital, Research Division

So if we've got there it's fair to say that, that would kind of be the top quartile of where operating rates have been if you looked over the last 20 years? So, okay. Okay. And then, when you look at it, as the incoming CFO, kind of cash and cash management is a pretty big job for the CFO. How do you look at the cash spend or the cash, you should say, that Air Products has done over the last, call it, decade. How does that look going different forward? And if you do a SKU between you and your competitors, your cash usage has been a little bit different over times, maybe talk about why that is. And I think the follow on, as most investors would say, we'd like to see a little bit more of it coming back to us than we've seen over the last 5 or 6 years. Is that a fair comment for investors to make?

M. Scott Crocco

One of the things that Paul did was he came into the CFO role -- and absolutely something that I'm going to carry forward is adherence to our cash priorities, which are these: The first cash priority is to make sure that we're investing in core project at good returns. And by good returns, that's an understanding of what the risk return profile is. It's about the nature of the opportunity and making sure that we have got the right terms and conditions and we're going to be able to deliver a nice return on that opportunity. The second priority is to increase the dividend every year. And then the third being to strive to maintain an A credit rating. And then lastly, with the excess cash to do share repurchases. So that is well understood by the management team and I understand it and we'd look to adhere to that going forward. But not in a dogmatic sort of an approach. We, as you are probably aware, we had -- we bought back about $460 million worth of shares just last quarter. We saw an opportunity that the market presented and we bought it back at just over $80 per share. And so we're going to manage this over the long term but in that order. And making sure that -- the share repurchase was in our plan but it wasn't in there for this year. So we saw the opportunity and we pulled it forward. So that's what I would say, as the incoming CFO, I will continue to focus on that understanding what these opportunities are. Making sure we're going after the right opportunities where we can win and get good returns, then at the same time, making sure that we're increasing the dividend and keeping our A rating.

Duffy Fischer - Barclays Capital, Research Division

And how does that change, because the investment opportunity in your own stock changes based on the stock price. So the way that order lays out, if the stock is $70 versus $100, does that change? Do you put them side-by-side, so okay, here's our return project then a new oxygen plant in China, that gives us this IRR versus at $70 we have some intrinsic idea of what we think our stock is worth. That's an x return. And then if it's $100, it's a Y or...

M. Scott Crocco

We'll look at what our current share price is and to see if we think that, that is a buying opportunity, and then opportunistically, go after it. I mean obviously -- and not all companies do this. But what we'll do is we'll not announce that we're going to do a share repurchase because then that's going to increase the amount that we have to pay for that. So we're constantly looking at what do we think our intrinsic value is, where do we think that, that's going and then what are the opportunities that we have in terms of capital investment. And again, not going after all the opportunities that are out there but rather the ones that makes sense for us based off of the offerings that we have and the locations that these opportunities are in. And not we don't have a, we're going to spend this money just because we have it. We constantly evaluate what the opportunities are and rank order them.

Duffy Fischer - Barclays Capital, Research Division

Okay. Well, we got a few minutes left. So is there are any questions from the audience? And I think we've got a mic runner who--

Question-and-Answer Session

Unknown Analyst

Duff, how come you didn't ask him about Merchant gas? So you guys have lagged behind in Merchant gas in terms of margins, et cetera. And you've tried to fix that by hiring people, all that type of stuff. Where do you stand in this? Are you -- are we ever going to see the margins get equal to your competitors or are they going to stay depressed?

M. Scott Crocco

So I think maybe your comment around hiring folks might be towards the North America Merchant gas business and so we have -- first of all, that is a very good business. We've got real nice margins in that business. Now we have hired sales folks and have tried to do a better job of loading the facilities. But that is a nice business with nice margins. If I go to -- and we see good growth opportunities. Again, applications, as well as from the economy. We go to Europe, as I mentioned, volume is not going to be the way that we're going to get those margins up any time soon. So there, while we're focused on going after the right opportunities, we're also focused on the costs either we've taken a position as I mentioned, but we're also looking across the entire supply chain in order to take cost out there so we can get the margins up. And then over in Asia, it is also more of the got to load the assets. We've got the opportunity, it's already in place and we need to bring it on at these high margins that I've mentioned.

Unknown Analyst

Just as a follow up to a different type of question. Yesterday at Praxair seemed to be a little bit more optimistic than you guys were in terms of their business picking up or -- and I'm sure you've mentioned or you heard about it. Do you feel -- are you being more conservative? Or it sounds to me like you haven't seen the kind of pickup they have.

M. Scott Crocco

We haven't seen anything different than what we said in our first quarter earnings call, right. There's still a lot of uncertainty out there from an economic perspective and between holiday shutdown, that's longer than what we expected or bigger impact in December. And then is the bounce back driven by a more robust manufacturing environment or is it just bouncing back off of a low-level coming out of the holiday. And then you move into February is a short month and then you've got the Lunar New Year in Asia. And so it's -- we haven't seen, at this point, anything different than what we have said at the end of our first quarter part of our earnings call.

Duffy Fischer - Barclays Capital, Research Division

Perfect. One last question for Air Products? All right. Well, Scott, Simon, thank you, guys very much for coming down. Appreciate it.

M. Scott Crocco

Thanks, Duffy.

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Source: Air Products & Chemicals Inc. Presents at Barclays Industrial Select Conference, Feb-21-2013 10:30 AM
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