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Air Products & Chemicals (NYSE:APD)

Q3 2012 Earnings Call

July 24, 2012 10:00 am ET

Executives

Simon R. Moore - Former Director of Investor Relations

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

Analysts

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

James Sheehan - Deutsche Bank AG, Research Division

Vincent Andrews - Morgan Stanley, Research Division

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

John Hirt

Brian Maguire - Goldman Sachs Group Inc., Research Division

Mark R. Gulley - Gulley & Associates LLC

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

Alina Khaykin

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

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

John E. Roberts - The Buckingham Research Group Incorporated

Operator

Good morning, and welcome to the Air Products and Chemicals Third 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 express written permission of Air Products. Your participation indicates your agreement. [Operator Instructions]

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

Simon R. Moore

Thank you, Lea. Good morning, and welcome to Air Products' third quarter earnings teleconference. This is Simon Moore. Today, our CFO, Paul Huck, and I will review our Q3 results and outlook for the remainder of 2012. We issued our earnings release this morning. It is available on our website along with the slides for this teleconference. Please go to airproducts.com to access the materials. Instructions for accessing the replay of this call beginning at 2 p.m. Eastern Time are also available on our website.

Please turn to Slide 2. As always, today's teleconference will contain forward-looking statements based on current expectations and assumptions. Please review the information on these slides and at the end of today's earnings release explaining factors that may affect these expectations.

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

Paul E. Huck

Thanks, Simon. Good day, everyone, and thanks for joining us. Please turn to Slide #3. Before we get into the quarter's operating results, I want to spend a few moments reviewing a few key items affecting this quarter's numbers. First, the sale of our Continental European Homecare business closed, and included in our quarter 3 discontinued operations results is an after-tax gain of $150 million, or $0.70 per share.

Regarding the remaining European Homecare business located in the U.K. and Ireland, we have received bids from several interested parties, and we expect to close on the sale of the remaining business before the end of calendar 2012. Quarter 3 results include an after-tax charge of $30 million, or $0.14 per share, in discontinuing operations to adjust the book value of the remaining Homecare business to its estimated net realizable value.

As we mentioned on last quarter's call, we closed on the acquisition of the remaining 50% of our DA NanoMaterials joint venture at the beginning of April. Included in this quarter's results is a $55 million, or $0.25 per share, after-tax gain. This represents the gain on our previously held 50% ownership. This acquisition supports our strategy of delivering a portfolio of differentiated offerings to our semiconductor customers. Excluding these items, our adjusted non-GAAP earnings per share from continuing operations is $1.41 for the quarter, within our $1.40 to $1.45 guidance range. Good performance, given the weaker economy and unfavorable currency impacts, driven by a stronger dollar.

To help you with the quarterly comparisons, Slide #14 in the appendix shows earnings per share from continuing operations x disclosed items for the past 2 years. We are on track with our cost reduction plans, and in fact, saw about $4 million of benefit in this past quarter. As we said last quarter, most of the actions should be completed by the end of our fiscal year.

In quarter 4, the savings should more than offset the approximately $6 million of quarterly stranded costs generated by the Homecare divestiture. When fully implemented in 2013, we expect the cost-reduction plan to provide $60 million of annual savings.

Now let's turn to our operating results. Please turn to Slide #4. Overall results were within our expectations. However, weaker economic growth prevented our volumes from growing as much as we had forecast, and we had headwinds from the stronger dollar. While our forecast for stronger demand in the second half of fiscal year 2012 did not come true, we are pleased that our strong operating and cost performance drove improved margins broadly.

The European recession continues, and conditions worsened this quarter. Growth in China has slowed, and the seasonal rebound in electronics and other industries has been weaker than expected. For the quarter, sales of $2.3 billion were 5% lower versus prior year, primarily due to lower energy pass-through and a stronger dollar, particularly against the euro.

Underlying sales increased 1% year-on-year, primarily due to higher pricing in Merchant Gases. Higher Tonnage Gases volumes and higher Equipment segment sales were offset by lower volumes in both Merchant Gases and Electronics.

Sequentially, overall sales were unchanged. Underlying sales increased 1% on higher volumes in our Tonnage Gases and Electronics and Performance Materials segments, offset by lower equipment sales, and the DA NanoMaterials acquisition contributed 1%. Simon will provide segment and geographic details later.

In spite of the weak volumes and unfavorable currency, operating income of $397 million increased 2% from the prior year due to excellent cost performance. This is the result of better planned operations and fewer turnarounds reducing maintenance spending and the positive impact of our cost-reduction plan in Europe.

Sequentially, operating income was also up 6% on improved cost performance. Our operating margin improved to 17%, up 130 basis points versus prior year. Sequentially, our operating margin improved 100 basis points.

Net income was up 2% versus last year and 8% sequentially. Diluted earnings per share increased by 3% versus last year and 8% sequentially. Our return on capital employed on an instantaneous or run-rate basis is 12.2%. On an annual basis, return on capital employed is 12.5%.

Returning -- turning now to Slide 5 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 $1.41 increased by $0.04 versus last year. Volumes decreased earnings per share by $0.04. Like last quarter, the mix impact of volumes was the principal factor. Unfavorable volumes in Merchant and Electronics were only partially offset by favorable volumes in Tonnage and Performance Materials.

Also, lower-margin air separation unit sales replaced higher-margin LNG heat exchanger sales in our Equipment and Energy segment. Pricing, energy and raw materials taken together increased earnings per share by $0.02. And as I mentioned, excellent cost performance was $0.10 favorable.

Currency translation and foreign exchange taken together were $0.05 unfavorable. Equity affiliate income was $0.01 higher due to strong volumes from our Mexican affiliate. Our effective tax rate was about 1% higher, which reduced earnings per share by $0.02. And finally, fewer shares outstanding contributed $0.02.

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

Simon R. Moore

Thanks, Paul. Please turn to Slide 6, Merchant Gases. Merchant Gases sales of $874 million were down 5% versus prior year, driven by the negative currency effect. Underlying sales were flat, with 2% positive pricing offsetting lower volumes.

Sales were down 1% sequentially, again, driven by currency as volume gains of 1% were offset by lower pricing. Merchant Gases operating income of $165 million was up 4% versus prior year and up 8% sequentially. Segment operating margin of 18.8% was up 160 basis points compared to last year and up 150 basis points sequentially.

Versus last year, operating income was up on higher pricing across all the regions and better cost performance. Our distribution and production systems ran more efficiently, and we began to see the benefit of our restructuring program in Europe. Versus prior quarter, positive volume growth offset lower pricing, with better cost performance improving profits and margins.

Let me now provide a few additional comments by region. Please turn to Slide 7. In U.S./Canada, sales were up 1% on positive pricing. Overall, volumes were flat, with liquid oxygen/liquid nitrogen up slightly, liquid hydrogen up and argon and helium down as supply availability limited sales. As we mentioned last quarter, we report Mexico as an equity affiliate, so neither the volumes nor sales are included here. If we included Mexico with U.S./Canada, our overall North America LOX/LIN volumes would be up 3% on strong oil and gas injection volumes in Mexico.

Unfortunately, we did not see any improvement in the helium situation this quarter. Supply challenges continue in both the U.S. and Algeria. We expect the situation to improve in FY '13, helped by the onstream of our new Riley Ridge facility and other new sources we are exploring.

Argon supply was also limited this quarter as reduced oxygen demand for steel impacted argon co-production. We are working to expand argon production but expect supply limitations to extend into next year. Pricing was up 1%. LOX/LIN/LAR was flat, liquid hydrogen was down on lower natural gas costs, and helium was up. Contract signings were the strongest in 4 years and are well above target year-to-date, providing confidence for growth next year. LOX/LIN capacity utilization improved slightly but remains in the low 70s.

In Europe, sales were down 12% versus last year, primarily due to currency, with underlying sales down 2%. Volumes were down 4% on weaker end-market demand for both liquid/bulk and packaged gases, particularly in Spain and Portugal. Helium volumes were down on supply availability. Pricing was 2% positive, with strength broadly across the businesses. LOX/LIN plant loadings remain in the low 80s, and new contract signings slowed but we are still ahead of our target year-to-date.

In Asia, sales were up 6% versus last year on positive volume and price. Overall, volumes were up 4%. LOX/LIN volumes, excluding conversions, were up 7%, and packaged gas volumes continue to show strength across both our base business and the microbulk product line. Pricing was up 3% on strength in helium and packaged gases. Plant loadings remain in the high 70s as new capacity additions offset the volume growth. New contract signings remain strong, and we are above target year-to-date.

During the quarter, we announced the acquisition of a majority position in Indura, the largest independent industrial gas company in Latin America. Combined with our existing business in Brazil and our Mexico joint venture, Air Products will be the second-largest industrial gas producer in Latin America, a region second in growth only to Asia. We closed on the purchase of approximately 65% of Indura in early July, and we'll be including Indura in our results beginning in our fourth quarter. We are very excited about the great opportunities we see as we join the Indura team's local expertise with Air Products' global experience.

Please turn to Slide 8, Tonnage Gases. Tonnage Gases sales of $767 million were down 12% versus last year, driven by a negative 12% impact from lower energy pass-through. Volumes were up 2%, primarily on new projects, and currency negatively impacted sales by 2%. Sequentially, sales were down 2%, driven by a negative 3% impact from lower energy pass-through and a negative 1% impact from currency. Volumes were up 2%, again, primarily on new projects.

Operating income of $134 million was up 17% versus prior year on the higher volumes and lower operating and maintenance costs. Operating income was up 7% sequentially as higher volumes and lower maintenance costs more than offset the anticipated impact of lower annual operating bonuses.

Operating margin of 17.5% improved 430 basis points versus prior year and 150 basis points sequentially, primarily on the higher operating income. Lower energy pass-through contributed 80 of the 430-basis-point improvement versus prior year and 30 of the 150 basis points sequentially. The primary driver of improved margins was the lower costs.

In terms of new business, we announced another contract to provide additional hydrogen to Motiva's Convent, Louisiana refinery from our industry-leading Gulf Coast hydrogen pipeline system. We have supplied Motiva for many years, and this is the second instance where our new Gulf Coast pipeline connection allows us to provide flexibility for Motiva to take product at multiple locations along the pipeline, certainly something Motiva values.

Please turn to Slide 9, Electronics and Performance Materials. Segment sales of $604 million were flat versus last year, with growth from our DA Nano joint venture acquisition offsetting 1% lower volumes, 1% lower pricing and a negative 2% impact from currency. Sequentially, sales were up 6% on higher volumes in the acquisition.

Electronics sales were up 2% versus last year. Excluding the acquisition, electronic materials sales were down versus last year as expected with lower semiconductor production. On-site and equipment sales were slightly higher. Sales were up 10% sequentially, with the acquisition adding to higher base business.

In general, electronics materials pricing was relatively stable, but we continue to see pricing pressure in xylene. The overall photovoltaic market and specifically thin-film PV have not developed as was expected a few years ago. Thin-film PV was expected to be a significant consumer of xylene and, as a result, market demand has not grown to match new industry xylene production capacity.

Performance Materials sales were down 2% versus last year as volume growth was offset by lower prices, and currency had a negative 2% impact. Volumes were positive in North America and Asia but weaker in Europe. Sequentially, sales were up 2% on volume improvement across all the regions.

Operating income of $91 million was down 17% versus prior year, and operating margin was down 310 basis points to 15%, primarily on lower volumes and pricing. Sequentially, operating income was up 6%, and operating margin was down 10 basis points as the sales growth was primarily driven by the acquisition.

In Electronics, we just announced a major contract from Samsung to supply their new fabs in Xi'an, China. This is Samsung's largest-ever overseas investment, expected to be over $7 billion. Air Products will build plants to supply Samsung and provide liquid products to the merchant market in the region. This significant contract enhances Air Products' leading supply position with Samsung and the semiconductor industry. We also announced a new contract with Xiamen Tianma Microelectronics for the supply of bulk gases to their new TFT-LCD facility in Fujian Province.

Now please turn to Slide 10, Equipment and Energy. Sales of $95 million were up 19% versus prior year, primarily on higher ASU project activity. Sequentially, sales were down 14%, primarily on lower LNG project activity. Operating income of $10 million was up 14% versus prior year as better project cost performance overcame the mix effect. Sequentially, income was flat.

Backlog is up 76% over last year and up 39% over last quarter, driven by our recent LNG awards to the highest level in more than 5 years. As we've been seeing, LNG bidding activity remains strong. We are pleased to have announced an agreement to supply equipment and technology to the PETRONAS Floating LNG project, 180 kilometers off the coast of Bintulu, Malaysia. This is our second floating LNG equipment order, and we are excited about the opportunities in this new area.

We also shipped a 100th LNG heat exchanger from our Pennsylvania facility earlier this month. Our proprietary and industry-leading technology is helping meet the world's need for clean energy in 15 countries around the world.

Now I'll turn the call back over to Paul.

Paul E. Huck

Thanks, Simon. Please turn to Slide 11. Now let me give you a brief summary of our outlook. As I mentioned earlier, we did not see the expected second half global economic recovery. We have also seen a stronger U.S. dollar than we forecast. Looking forward, we expect that economic growth will continue to be below our original expectations. While U.S. manufacturing has been an economic bright spot, recently, we have seen growth start to slow as consumer confidence remains low, job creation disappoints and concern grows regarding the potential fiscal cliff at the end of the calendar year.

European problems continue, and we do not expect a return to growth any time soon. In Asia, we have not yet seen the impact of Chinese stimulus actions, and the rest of developing Asia continues to experience below-trend growth as exports to Europe and the U.S. are slow.

Electronics growth should continue this quarter. Overall, for the year, we expect square inches of silicon processed to be down about 10%. On the positive side, our project development and contract signings continue to be very strong. A number of these orders are in China for gasification of coal. These projects are driven by the country's need for a cleaner domestic source of energy.

We expect 2012 capital expenditures to be approximately $2.9 billion, including about $700 million for the Indura equity. This will be up about 40% over last year, excluding Indura. Our project backlog has stayed consistent, at about $2.8 billion, which will deliver future profitable growth. You can see an updated list of our major projects in the appendix, Slide #13. To help you with historical comparisons, Slide #15 in the appendix shows non-GAAP capital expenditures, which includes capital lease expenditures. This is on the same basis as our $2.9 billion guidance for 2012.

Now let's turn to our fourth quarter outlook. Our guidance for quarter 4 is for earnings per share of $1.42 to $1.47 based on the following factors. On the positive side, we expect to see Merchant Gases volume improvement, particularly in Asia. Electronics should see sequential volume growth. We will see further benefits from the implementation of our cost-restructuring program, and the improved LNG backlog should increase equipment results next quarter.

Partially offsetting this sequential improvement, the Indura acquisition is expected to be about $0.02 dilutive in quarter 4 as we will recognize the transaction costs and asset write-up. We expect the U.S. dollar will remain strong. We also will see higher power prices and lower cryogenic plant efficiencies due to high summer temperatures. Therefore, we expect our earnings per share to be between $5.40 and $5.45 for the fiscal year, up 1% to 2% versus last year.

Our guidance for the full year is lower by about $0.11 per share, on average, for the last half of the fiscal year. This decline is due to a stronger dollar, which has lowered our earnings by about $0.06 from our expectations last quarter. The Indura acquisition will reduce earnings by $0.02. Slower economic growth has reduced our forecast by approximately $0.08. And costs, as a partial offset, are favorable by about $0.05.

Now let me wrap up. While economic growth continued to disappoint and currency headwinds were greater than expected, we are pleased with the strong cost performance delivered this quarter. We also have taken several portfolio actions to improve our business in the future, including selling our Continental European Homecare business and the Indura and DA Nano acquisitions.

As we look beyond next quarter, we have a number of significant opportunities. Both our U.S. and Asia Merchant Gases business have installed capacity to sell. When manufacturing picks up, we will have the capacity to serve it. We are on track on our European cost reductions, and our productivity efforts worldwide are delivering results.

Our capital expenditures continue to increase, and we expect to announce more projects before the end of the year. And LNG project interest is at an all-time high, and we expect the LNG project backlog to continue to grow. 2012 has certainly offered its challenges. Our focus is on meeting these challenges and achieving our 2015 goals.

Thank you, and now I'll turn the call over to Lea to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll hear first from Jeff Zekauskas of JPMorgan.

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

What was your tonnage hydrogen growth in the quarter?

Paul E. Huck

The growth in volumes, Jeff, was a couple of percent. We didn't have anything new come on in this quarter.

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

What's your outlook for volume growth in tonnage hydrogen for the fourth quarter and for next year?

Paul E. Huck

If we look at for the fourth quarter, we think the hydrogen growth should pick up in this quarter, principally because the refinery should run hard with the driving season in the summer, we think. So, that ought to be a favorable impact. As far as for next year, as we look at it, we'll have more to say to that. But it should be for gross, probably in the mid to high single digits, Jeff. We'll have more to say about that in the 4Q.

Operator

Our next question comes from David Begleiter with Deutsche Bank.

James Sheehan - Deutsche Bank AG, Research Division

It's Jim Sheehan sitting in for David. And just wondering if you can talk a little bit about the trends you're seeing in Asia and specifically China on Merchant pricing. What is your outlook for trends in Merchant pricing going forward?

Paul E. Huck

Simon, you want to take that?

Simon R. Moore

Sure. So I think when we talk about pricing in Asia and China, it's actually a pretty good story. We saw good volume growth and we saw decent pricing in Asia. As we said, the volume growth perhaps not as great as we would've liked and would've expected. We've seen announced some of the China stimulus actions. We need those to translate into activity. And of course, in our Merchant segment, the volumes are affected by what's going on in electronics as well. So we continue to see some decent pricing in China and in Asia overall, and we'd expect that to continue.

James Sheehan - Deutsche Bank AG, Research Division

And on Electronics, I guess the expected return -- rebound in year-over-year comparisons is taking a lot -- a little bit longer than expected, and you made some comments about what you thought about Q4. Is there any basis for additional optimism for 2013? Or are you expecting trends to remain pretty consistent over the next 6 months or so?

Paul E. Huck

I think a good portion of that, Jim, goes with how people feel from a consumer standpoint. And so we have consumers in the U.S. and Europe and in China who right now, as we track these consumer confidence indices, which don't feel great. And so if -- and once we remove some of the uncertainty, which exists around the world, I think we'll see better pickups on those things. But for right now I think everyone is being cautious. They're waiting for the outcomes of the U.S. elections and policy decisions on things and to see how Europe resolves itself with those things. There's a little too much uncertainty in the world right now. All that said, I would not paint the economic situation as horrible. It is just slow for us.

James Sheehan - Deutsche Bank AG, Research Division

Just in Europe, you mentioned volume growth slowing a little bit there, and then your outlook is basically for more of the same. Just wondering if you're seeing any signs of stabilization in Europe yet.

Paul E. Huck

As far as being stable, I mean, it is not diving -- things are not diving down. We are still seeing decreases from a volume standpoint overall in certain countries, especially places like Spain, of 3% to 4% with those things. So it has been tough from -- on a volume standpoint in Europe for us. But we haven't seen that start to level off from an economic standpoint, and we're going to need that to happen sometime soon before we can return to some growth there in Europe.

Operator

Our next question comes from Kevin McCarthy with Bank of America Merrill Lynch.

Unknown Analyst

Paul for Kevin. I just wanted to follow up on the new business signings in Merchant Gases in the U.S. When do you expect to see volume growth flow through from that momentum?

Paul E. Huck

We would expect to start to see the volumes pick up in -- probably from the signings in this quarter, probably sometime toward the end of the first quarter, the beginning of quarter 2 of next year. It normally takes 6 to 9 months to bring our customers onstream with those things. Now, we have had momentum for a few quarters now, so we would expect to see volumes improve in quarter 4 in the U.S. with things. And to be honest with you, our volumes were pretty good in the U.S. x the supply constraints, which we had, and Simon mentioned, we had supply constraints in helium and argon. If we look at that overall, we think our underlying growth in the U.S. probably would have been about 3% to 4%, if those supply constraints weren't there. So you can look at that as an upside for us. If we can get out of the -- out from under the supply constraints, which is going to take us a while, it's going to take us some quarters to get past there. But there's some growth there for us to harvest.

Unknown Analyst

All right. And as a follow-up, in the U.S. Gulf, when you flip that pipeline on or connect the 2, what impact do you expect to see right off the bat on the P&L?

Paul E. Huck

The impact on the P&L is not going to be great initially. We are going to have some more product which we can sell, and we have pretty much sold that. So we have people who are coming onstream as we look in our plannings for -- on signings on the pipeline. So that's going to happen over 2013. You're obviously going to see the depreciation of the pipeline coming in as a negative, but we'll also be able to run the pipeline better -- to run this, and not the pipeline, but to run the system better. That's going to take us some time to learn how to do that, but we think the efficiency gains on the system are going to be pretty good, because we'll be able to always run our most efficient plants and be able to cross volumes across the Louisiana system and the Gulf Coast system right now.

Operator

Our next question comes from Vincent Andrews with Morgan Stanley.

Vincent Andrews - Morgan Stanley, Research Division

I've got 2 questions for you. First, could you go into a little bit more detail on the cost performance just in terms of the splitting it out between -- I guess what I'm thinking about is, how much of it is a function of restructuring? How much of it was a functioning of sort of your operating efficiency? And how much of it should we be carrying forward as we go into future quarters? And what other, if any, new opportunities do you see there?

Paul E. Huck

Yes. So if you take a look at the things that happened from a restructuring benefit, as Simon said, we had about $0.01 per share benefit from the restructuring. So it was overall $0.10, which we got from costs. If you then -- and if you look at that remaining $0.09 a share, about half of that came from variable cost efficiencies. And so that's us running our plants better, our power, our -- the natural gas for hydrogen using less for that to make hydrogen, saving on diesel fuel, et cetera, and about -- and the other half of that comes from lower spending, principally on maintenance in the operations area.

Vincent Andrews - Morgan Stanley, Research Division

Okay. So when we think going forward, I assume the $0.01 should be getting larger as we move forward, right, as you move forward into the restructuring program? And then the question is, just how much of the balance of the $0.09 can you continue perpetually? Is that fair?

Paul E. Huck

We -- yes. And I don't think we saw anything unusual about the $0.09 going forward here. And so we think that, that's going to continue. And we think we can build upon that.

Vincent Andrews - Morgan Stanley, Research Division

Okay, terrific. And if I could just ask one other question. You've got 5 major projects that, on Slide 13, you have listed as the first half of fiscal '13. I'm just wondering if you can give us any sort of update on any of those projects leaning more towards the beginning of the first half or the end of the first half or anything we should be thinking about for that.

Paul E. Huck

Yes. Well, if you look at them -- if I look at them overall, I would say about those 5, about half and half roughly. Then when you look at these things, half come onstream in the first quarter, the other half come onstream in the second quarter for us right now.

Operator

Our next question comes from Mike Sison with KeyBanc.

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

In terms of new projects this year, I think the expectation was supposed to add $0.30 to $0.35 in EPS. Is that roughly what it's going to contribute this year in '12? And would you see that number increasing, staying about the same, going down in 2013?

Paul E. Huck

It did, Mike, in 2012, so we did see that. And so the thing, which we haven't seen is -- we've actually seen areas, such as Europe, offload from us. But the new projects did contribute that. If we then take a look at 2013, we think we get a similar to maybe a slightly larger amount in 2013.

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

Okay, great. And then, Paul, I think you or maybe Simon noted that packaged gases is still seeing some strength. Was that primarily in the U.S.? And could you sort of give us a reason why that market has held up?

Simon R. Moore

Yes. So Mike, good question. I think there, we were referring to Asia for packaged gases. Obviously, not having the U.S. business in Europe, packaged gases really being relatively weak. So that was primarily an Asia comment, and it's both on our, if you will, our base Packaged Gas business as well as strength in our marketable product line.

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

Okay, great. And last question, you also noted weaker demand in steel for oxygen. Was that on a sequential basis? And is that -- did that sort of get a little bit weaker as the quarter unfolded?

Paul E. Huck

It did, as the quarter came through. We think it's going to continue in the summer also, Mike. And it is weaker sequentially and weaker year-over-year.

Operator

Our next question comes from P.J. Juvekar with Citi.

John Hirt

This is John Hirt on for P.J. this morning. In Merchant, it sounds like you'll be facing helium and argon supply challenges for another quarter or maybe even longer. Can you give us a sense of what the margin drag that is having currently and how much benefit you could get in FY '13 once those issues are resolved?

Paul E. Huck

Yes. And John, I don't know if it's having as big a drag on margin as it's having on growth because the industry is tied in helium, the industry is tied in argon, in the U.S. particularly, is where we're talking about argon, and the discussion on helium go worldwide. But the prices of both have been up for us. So from a margin percent standpoint, there has been a drag. As I said, if you take a look at the U.S., we think that it probably cut back 3% to 4% on our growth within the U.S. in those 2 areas. And that's about a $1 billion-a-year business for us, so that's somewhere between $30 million and $40 million in sales. The contribution margins of those products are probably up in the 40% range for us, so you can see what the impact of that is for us.

John Hirt

Okay, that's helpful. And in Electronics, can you just talk about the trends that you're seeing across each of your end markets: semis, LCDs, PV, and kind of how do you see that playing out for the rest of the year?

Paul E. Huck

Simon, do you want...

Simon R. Moore

Sure. And I think, as always, we talk mostly about the semiconductor market because as you remember, that's about 80% of our business. So we made a reference to PV, which is really quite weak right now. That's only about 5% of our business. TFT-LCD is fairly flat, not showing a lot of growth. That's only about 10% of our business. In the semiconductor, the external forecast that we see are forecasting a drop for our FY '12 of about 10% to 11%. So Q3 was better than Q2. It was worse than Q3 last year. We expect kind of the same story for Q4 that things will be better than they were in Q3 but worse than they were in Q4 last year. I think one of the key points though is, again, as we talked many times, is our strength. We're the industry leaders. Our electronics sales were up 1% through 3 quarters, while the industry was down, and as I've said, in the low double digits. Intel's CapEx continues to be up significantly over last year. TSMC's Q2 sales were up about 20%, stronger than the industry. Certainly, both those folks are commenting about maybe there's a little bit of weakness in Q4 and Q1. But, again, Intel, Samsung and TSMC, where we're the leading supplier, are going to spend the majority of the industry's CapEx in this year. So that helps us grow going forward.

John Hirt

Okay. And where are your NF3 operating rates currently?

Simon R. Moore

So NF3 operating rates are probably in about the 80% range.

Operator

Our next question comes from Bob Koort with Goldman Sachs.

Brian Maguire - Goldman Sachs Group Inc., Research Division

It's actually Brian Maguire on for Bob this morning. With some of the slowing macro numbers coming out of China, I was wondering if you've seen any kind of deferral or a little bit lengthening in the pipeline for new contract signings there or any signs of customers wanting to defer the timing of new projects coming online over there.

Paul E. Huck

We have not seen that occur. And on the -- in the speech portion of this teleconference, one of the things that I talked about was that really the drive for gasification projects is to give them a clean source of energy in China, so it's really an infrastructure project and less tied to the economic growth of the country there.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Okay. And on the Tonnage volume, I think you mentioned there was maybe a negative currency impact to the volumes in some regions. Which regions and maybe end markets were you talking about specifically there?

Paul E. Huck

Europe.

Brian Maguire - Goldman Sachs Group Inc., Research Division

It's in Europe.

Paul E. Huck

Europe, yes, on Tonnage. It wasn't on volume. It was on sales activity. It was on sales that Simon talked about.

Brian Maguire - Goldman Sachs Group Inc., Research Division

And are you seeing any of your customers in Europe on the Tonnage side start to come close their minimum take on their take-or-pay contracts?

Paul E. Huck

We have not seen that.

Operator

Our next question comes from Mark Gulley with Gulley & Associates.

Mark R. Gulley - Gulley & Associates LLC

Yes. Now that you've closed the Indura acquisition, can you comment a little bit about the earnings accretion you might enjoy for fiscal '13?

Paul E. Huck

Yes. And so I can't give you some more -- the comments on that, Mark. And the comments will get better as we get the -- a good look at the write-up, which is going to happen. As you know, we have to have a third party take a look at our -- at the company and do the write-up. But as we look at the accretion dilution impacts for 2013 for Indura, we would expect that to be somewhere around $0.05 to $0.10 right now, depending upon what happens with the asset write-up for us.

Mark R. Gulley - Gulley & Associates LLC

Okay, turning to Tonnage, if I can. You reported a 2% volume gain in the quarter. Can you break that down, as you often do, between base tonnage volumes and how much you enjoyed from new plant startups?

Simon R. Moore

Mark, really, that was almost all from new plant startups. The base volumes were fairly consistent.

Paul E. Huck

Overall, yes, overall.

Mark R. Gulley - Gulley & Associates LLC

Okay. And then finally on Tonnage, the maintenance expenses kind of jump up and down a little bit, and so the margin or the operating income gain we saw in the quarter, how much of that was due to a lower than, let's say, normal maintenance expenses? And -- or how much is really true underlying operating income growth that you might see into fiscal '13?

Paul E. Huck

I think, as far as the maintenance expenses for this quarter, they were low. It's always hard to put a number around whether that was the right number or not. We had good performance. We expect good performance in quarter 4. We would expect the spending to kick up in quarters 1 and quarters 2, because they're normally higher as far as the expenditures are concerned on turnarounds. But the performance in that area was good, Mark. So I think, overall, we have had a good couple of quarters in a row now on the spending in that area.

Operator

Our next question comes from Mike Harrison with First Analysis.

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

You had mentioned that you weren't seeing any slowing in China tonnage projects, primarily because you're still seeing gasification being a new driver. I was just wondering, given the discussion about the potential of shale gas in China, how might that impact the gasification opportunity over time? And are you expecting that as we get into the later part of this decade, that maybe the coal gasification opportunity isn't as big as you might have expected a couple of years ago?

Paul E. Huck

We have taken a look at that, Mike, and we think that shale gas -- actually, if the findings are large, which is still a question mark, and it's going to take a while to get there for China, but that it would first eat into the LNG sales into China. And that the gasification projects are really intended to get at the energy independence aspect of things, and that shale gas would replace LNG right now. That would be our view. So we don't see a lot of that curling back, trying to cut back on that. Now the gasification opportunity, we also think, is not going to always be there. We think there's a lot of development around that, because China has the coal. They want to use the coal. Gasification is a good way to use that coal. It makes it easier to transport the coal. It also makes it more environmentally sound. But we think that those gasification opportunities occur basically between now and 2020, and I don't know what happens after that. We'll see what -- and we'll see what things happen. But there's still a lot of those opportunities there going forward. They're putting in place the infrastructure to do that, so we feel sound that those projects are going to continue regardless of what happens to shale gas. Because shale gas actually is a play probably out in the late portion of the decade, which we're now in.

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

Got it, got it. And then in terms of the Merchant volume trends, particularly on the liquid side of Merchant, just wondering if you can comment on what you saw across the 3 geographies in kind of June versus May and thus far in July versus June. Are you seeing any deceleration as you look across those geographies?

Paul E. Huck

We are not seeing a deceleration across the geographies of the trends right now. So Europe is -- has continued to move down, and we would expect that happening. Asia has started to move up, particularly in China. It's early to call that. We hope that, that continues. But we are optimistic about that, and that's a factor which I've called out in the guidance. The U.S. still is -- the forecast we have is for growth to be slow for us, but we do expect to see growth in the U.S. sequentially.

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

And then last question, Paul, is just on the share repurchase activity during Q3. How much did you repurchase? What was the share count at the end of the quarter? And can you remind me what your -- what's remaining on the authorization and how you might expect to deploy that, given the Indura acquisition?

Paul E. Huck

So we did not repurchase any shares in this past quarter -- in quarter 3. We did, in quarter 2, repurchase $53 million as far as those -- as far as shares are concerned. Our diluted share count is like 214.7 million or so, I think, for us. And if we look at going forward, given Indura as we said last quarter, we would not expect to be in market and buying back shares.

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

So the quarter-on-quarter decline in share count was purely the impact of activity during Q2?

Paul E. Huck

Well, yes, yes. It was the impact of quarter 2.

Operator

Our next question comes from John McNulty with Credit Suisse.

Alina Khaykin

Yes. This is actually Alina on for John. Quick question on the Merchant business. It seems like you guys have been a lot in terms of operating efficiency and cost cutting. So 2 things. One, how much more kind of low-hanging fruit do you have left there? And it also seems like, how much of the cultural change is internally, how much more do you have to go in that area?

Paul E. Huck

Alina, as far as we are concerned, there's probably not a lot of things, which I would call low-hanging fruit. I think we got them more back in the '90s to a great extent. But as far as changes are concerned, and we still see a lot of it, I believe, to make changes and to use and to run the system and gain efficiencies. And so a lot of that gets around trying to use the data we have in SAP and continuing to improve the tools we have to make our deliveries more efficient, to open up windows and things like that and operate better, both our plants and the distribution system itself, and also for better ways to serve and interact with our customers electronically. So we continue on this journey every day.

Operator

Our next question comes from Don Carson with Susquehanna Financial.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Yes. Paul, a question on going back to U.S. Merchant. I mean, you've talked about some time now about additional signings, building up your mini-bulk sales force. And I'm just wondering why we're not seeing more and more volume from this activity. Can you kind of tell us when you really expect volumes to pick up, how those signings are going? And speaking of Merchant overall, if you do get some of this volume growth next year, would you -- and the cost cuts that you're taking in Europe, would you expect to get back to and beyond your old 20% operating margin target in the Merchant business?

Paul E. Huck

The answer on that -- on the last question is yes, Don. And we do expect to get above that 20% target in this business here. With regard to the volumes, as I said before, I think we -- our growth would've been about 3% to 4% in this past quarter if we didn't have the supply constraints. So that's one of the things which we have to fix, that we have to get more access to more argon. We're taking steps to do that. We have to get access to more helium. We're taking steps to do that. It's not going to all happen in one quarter. It's going to something which is going to unfold over 2013 for us as we work those -- as we work our options there for us. With regard to the signings which we're seeing, we are also seeing a number of customers go away. And that's occurring for a couple of reasons: number one, lower power prices have moved some of our food business out, as people have chosen to go to mechanical freezing; number two, oilfield services has been slow in the Appalachia area. And principally there because of -- it's mainly dry gas, and the rigs have moved out of there and moved to the Bakken. We have seen a pickup in that area for those things, but they're still drilling and so they've got -- it's a while before some of the frac-ing will -- and will pick up out there. But we do have a new plant going on -- going out to serve the mid-Continent area, so we feel good that we're going to have some growth from that in the future. With regard to the other aspect of signings, growth overall within the U.S. has been slow from a process manufacturer's standpoint. Steel growth has been tempered. Petrochemical growth has been tempered and mainly because the new plants aren't onstream yet in those areas. And so as we look to the future, we think there's lots of opportunities for us. But we got to get the economy moving a little bit stronger.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Well, I guess I'm a little confused because your rates have languished in the low 70s since the beginning of the upturn in mid-'09, your competitors in the low 80s now. So I would have thought that -- I mean, they've seen many of these same problems. I would have thought your signings would've closed some of that gap by now.

Paul E. Huck

Yes. And they should have, Don. But as I've said, we have also seen business move away from that, and that's been the issue. There have been a number of people who have stopped using products or who have gone out of business for us and shut down.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Okay. And then one follow-up. Speaking of gaps with your competitors, your stock continues to be at quite a high historical gap with Praxair. I know you've bought Indura. You've got additional CapEx requirements, but you still got room in your balance sheet, it would seem, to lever up and buy back stock here, what would seem to be an attractive price if all your growth plans do come to fruition. So just if you can comment on why you're not buying back stock anymore.

Paul E. Huck

Yes. And the reason why is because of the way in which we're going to run the company. We're going to maintain an A bond rating. As we look at this, we don't have room to buy back stock and maintain the A bond rating for us. If we did, I would be in the market to do that. But we want to maintain the flexibility to operate. And we think that is best when -- at an A bond rating for ourselves.

Operator

Our next question comes from Laurence Alexander with Jefferies.

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

Two quick questions. One, on -- often, when you discuss pricing in -- for on-site projects, you talk about sort of the substitution costs that the customers face. As the customers see their -- as the large customers see their cost of capital coming down, are you seeing more pushback on pricing for projects?

Paul E. Huck

No. We are not seeing them favor the main case anymore than that, typically.

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

Okay. And as you look at the U.S. economy, how would you gauge the sort of -- your sensitivity to possibly triggering a round of productivity in the U.S.? I mean, is that -- you've taken down your outlooks a couple of times. Can you speak just a little bit about -- are you fairly comfortable with the U.S.? Do you feel that maybe there might be another round that's needed, given the environment or how you're thinking about the risks as we look toward 2013?

Paul E. Huck

Our business within the U.S. is solid. Our margins are good. Our -- and as we look at the growth prospects, we're there and we feel good about that. So I would not see us trying to take any action within the U.S.

Operator

Our last question comes from John Roberts with Buckingham Research.

John E. Roberts - The Buckingham Research Group Incorporated

I think you said that adding in Mexico alone would have increased your North American volumes by 3%. Was that with 100% of Mexico or just your proportional share? And could you tell us what Mexico is up year-over-year and what the oil and gas component of that was, because that seemed like that drove it?

Simon R. Moore

Yes, John. So just to be clear, what we said, our LOX/LIN volumes would've been up 3%, and that assumes 100% of Mexico. The oilfield services on a year-on-year basis were up pretty significantly. I think it was in the range of 20% to 30%. And, again, most of that was driven by the liquid nitrogen for oilfield services.

Operator

And there are no further questions at this time.

Simon R. Moore

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

Operator

Thank you. Ladies and gentlemen, that will conclude today's presentation. We appreciate your attendance. You may now disconnect.

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