Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Air Products and Chemicals, Inc. (NYSE:APD)

Houston Investor Conference Call

November 7, 2012 06:30 ET

Executives

Simon Moore - Director, Investor Relations

John McGlade - Chairman, President, and Chief Executive Officer

Paul Huck - Senior Vice President and Chief Financial Officer

Analysts

Kevin McCarthy - Bank of America Merrill Lynch

John Roberts - Buckingham Research

Mike Harrison - First Analysis

Bob Cole - Goldman Sachs

Simon Moore - Director, Investor Relations

Well good evening and welcome to Air Products 2012 Investor Conference. As most of you know I am Simon Moore, Director of Investors Relations. We are looking forward to a great evening tonight and a great day tomorrow. We really appreciate all of you that are here. There are also folks joining us via webcast, so just as a reminder as we are doing Q&A later we would ask you to get a microphone which will be passed around and so the folks on the webcast can hear this. Certainly appreciate those of you who travel to Houston here and certainly any of you that were affected by the Hurricane last week and I understand some of us left behind a little bit of potential snow fill for the next two days. So, it’s good to be down here with the weather is warm. So, you have a hand on in front of you which contains the slides for tonight, tomorrow you will get a book with all of the slides then will also be a copy of these.

So, if you want to take some notes with those and keep them that’s fine, if you want to refer to them and leave them behind we will pick them up please don’t throw them among the core during the game that gets us in trouble, okay. So, whatever you want to do there so we appreciate it. So, as always today and tomorrow’s discussions will contain forward-looking statements based on current expectations and assumptions. Please review the information on these slides explaining factors that may affect these expectations. So, I’m just going to take a minute and go through the agenda. So, we passed the first test, we got here, we got started on time, so we really appreciate that. So, after I just spend one or two minutes we will have John McGlade and Paul Huck will each make a presentation and then we’ll have a joint Q&A session with Paul and John. So, we would ask you to hold your questions until both of them have finished their presentation.

I hope you’ll enjoy the light snacks and some wine while we are doing this part of that and then at around 6:45 we will make our way over to the (indiscernible) where Jeremy Linden here, he is going to rock it, see I’m not an announcer, we are taking on the Denver Nuggets and we will have some dinner over there. So, hey guys thanks. We have your seat. So, just to do a little logistics for tomorrow, so tomorrow morning at 7:30 the buses will depart from the lobby of the Four Seasons at what time 7:30, okay, excellent, okay.

We’re going to go out to our LaPorte facility where we are going to have most of the day and what I hope you appreciate is we are doing this out in one of our operating plants and this is one of the reasons to ask you to come to Houston, they help you not only two other plants but get a little bit of a feel of what it’s like an operating plant, guess what we’ve not shut down the plants for tomorrow’s activity, so you’re going to see an operating plant, you will see some maintenance going on, we are actually back in the middle of the plant in a conference room doing this, so I think we’ll have a great day. You should have received a bag when you checked in with a Green Air Products puller shirt in it, I’d appreciate it if you were kind enough to wear that tomorrow, you don’t have to, but and Dana if you are wearing this tonight I’ll leave it up to you, how about that, no problem.

We’re going to have coffee and light breakfast out of the plant, so if you want something a little bit more you are welcome to do so with the hotel on your own in the morning, we’ve got a great day planned tomorrow, presentations from Steve Jones, Alan Gelder, who works for Wood Mackenzie, an outside company to provide a perspective on their view of the global oil industry, Wilbur Mok, Corning Painter, Paul Huck will wrap up, we’ll have lunch and during lunch we’ll have a Q&A session with all the speakers and then we will do a walking tour of LaPorte the ASU in the gasifier, we’ll get on the buses, we’ll go to our Pasadena facility whether is a steam-methane reform or a hydrogen plant and perhaps most importantly a chance to tour our operating service center and customer service center.

So, we are looking forward to a great day tomorrow, we will finish at about 3'0 Clock at Pasadena and one bus will be going to Hobby Airport, one bus will be going to Intercontinental Airport. So, in the morning once you’ve checked out of the hotel and you’ve got your luggage bring your luggage with you, get on the right bus. So, whichever airports you are supposed to go to get on that bus and you just leave your luggage on that bus in the morning, okay. I know that’s a lot of logistics, but I fear I do that before we had too many more beverages. So, okay, great. Well at this point please let me introduce John McGlade our Chairman, President and CEO.

John McGlade - Chairman, President and Chief Executive Officer

Simon, let’s talk (indiscernible) night. For those on webcast hang in there with us and we wish you we are here. Simon did go through a whole lot of logistics when we go the plant, the plant guys would tell you this tomorrow though, don’t touch the red button, we don’t like that, shut things down unintendedly. Tonight you have about 90 minutes with Paul and I and we’re going to focus on the total company. Tomorrow as Simon mentioned is going to be a whole, whole lot more focus on the tonnage business, okay.

Here we go, focus on our tonnage business, so get your questions out of the way if you will on the enterprise, on our merchant and EPM. This evening one thing that you probably also heard in Simon’s introduction and so I have to ask for apologies is I’m going to have to leave tonight about midway through the game for a long-standing commitment in Chile with several senior government officials and our new Indura team as you know we acquired the leading position in South America with the acquisition of Indura and this just couldn’t be rescheduled and so except my I’ll have to offer my apologies and hopefully understand you’re going to have the entire management team and I’ll be hanging around a bit here before I go to go the airports to catch your flight overnight to Santiago. So, the theme of our, the theme of the next couple of days is very clear winning in energy for profitable growth and I think you’re going to be pretty excited when you have the opportunity to tour our facilities here in the Gulf Coast and really put together the words that you’ve heard from us over the number of years and see the old adage of pictures worth of 1000 words sometimes and I think you will really come away with a good appreciation of our tonnage business, the excitement we have that we are investing in that business particularly as it relates to the global energy dynamics that are out there.

Before I get too far into this evening though in the call we acknowledge some management changes that are in front of us. First and foremost the long time friend colleague and mentor Paul Huck has announced his desire to retire next year, I can’t do just as to explaining why Paul has chosen, but I think Paul will share a few views on that with you when he gets up here in a moment. But I did want to take a moment and really acknowledge Paul’s tremendous service, he exemplifies everything that we want in a leader at Air Products and has worked tirelessly for the company for 33 years in really driving towards the company we are close to $10 billion when he and I started it was under $1 billion enterprise. So, he is really seeing quite a significant amount of growth and development of the company on a global format, so Paul thank you so much. We also took tonight the opportunity to introduce to other folks they are going to be with us Paul’s successor in Scott Crocco. Scott has got over 20 years with the company, Paul would argue he is (indiscernible) to Scott from right out of Cornell and you might know those of you who know Paul knows that Cornell is also very near and dear to his part.

Scott has been in just about every part of our financial community at Air Products in those 22 years, his current role is Vice President, Controller and Chief Accounting Officer. Scott, I think you are back there somewhere, so welcome Scott. And the other individual I would like to take an opportunity to introduce Guillermo Novo, who has joined us from Dow where he spent the last number of years since Dow acquired Rohm and Haas, but probably about 20 years with Rohm and Haas, a lot of global business experience, lived internationally in just about every one of the geographies you might think are important to our company going forward. Guillermo’s role is Senior Vice President of the Electronics & Performance Materials segment along with I’ve asked him to take the responsibilities for Technology and Strategy for the corporation. So, Scott and Guillermo welcome as well.

And I think tonight you will have and tonight and tomorrow you have an opportunity hopefully to get to know Scott and Guillermo a little bit better as we go through the next day or so. Let me start by giving you just sort of a step back to fiscal year 2012, I’m not going to dwell on this slide. This really was a slide or a similar version out of our end of the year earnings announcement, but I wanted to put a little color commentary about how I John McGlade and frankly the leadership team and the management team at Air Products really felt about 2012. And at the highest level we should have been - could have done better, we need to do better, we understand our performance is not up to your expectations frankly it’s not up to our expectations as well.

We talked about some of the reasons for that and we are taking control and tonight Paul and I will be talking about some of the actions that we are putting in place to help us get back on the trajectory that I believe we are capable of delivering, over the last number of weeks, we’ve had a number of senior level meetings both at the executive committee level and with the senior leaders around the globe as we began to see where the economy was going, what are we going to do to offset some of that uncertainty and not let ourselves be totally captive to the economic momentum in the global economy and I believe that we do of actions that we can take. Having said that ‘12 wasn’t all negative from our perspective in the fact that we took a number of portfolio actions that I believe really serviced for the long term in terms of really setting us with a solid set of growth opportunities whether would be through the acquisitions of Indura which is obviously was the largest independent industrial gas company in South America.

Our partnership in the largest industrial gas company in Saudi Arabia Abdullah Hashim Industrial Gases and buying up the other 50% of our joint venture DA NanoMaterials and then really putting that right into the advanced materials portion of our electronics business. We also took steps to reduce our exposure to certain markets such as the sale of our European profitable business, the sale of our European homecare business but one that we didn’t feel had the right technology fit for us long-term. The exiting of our polyurethane intermediates business and the restructuring of the photovoltaics business.

In my mind some of those were very difficult discussions as I said on the call at least as it relates to the photovoltaics a bad decision in our part but one that I felt that we needed to acknowledge, put behind us so that the success and strength of the electronics business going forward we have a lot of confidence in. And then finally the restructuring moves that we are making in Europe really to right-size our European organization for what is going to be and admittedly a much slower economic outlook at least as we are looking towards the view to the future in Europe today. And with that restructuring not only the restructuring from a total cost point of view but really refocusing the merchant team into a very tight integrated model in four regions throughout Europe, which I think will serve us well in going to market as we do see a bit of poor momentum in that business.

On to more organic side of investing in our businesses significant successes across the board I think you will hear tomorrow from Steve about the oxygen and hydrogen side of the businesses so I’m not going to dwell on it although I will say 28,000 tons a day of oxygen that we are executing in China as we speak, I was over for the signing of one of the contracts back about eight or nine months ago and talking to the business team there and said I don’t think this was about 11,000 tons, it was poor trained, I don’t think I sign that much off during my 35 years career at Air Products. So, a really exciting opportunity in oxygen, a continuing story that you’ve heard for years in hydrogen, I think a significantly repositioned electronics business that had some great wins in the fiscal year ’12 and it is really poised as the economy or as the demand for mobile devices, the demand for PCs et cetera begin to recover, really poised to outperform going forward targeted, targeted capacity additions in certain geographies where we were sold out or what we do see some growth continuing, good wins people talk about LNG and they will really talk also about energy from waste project and how that really is represent a nice extension of our onsite business development, onsite business model and our capabilities around as you will see tomorrow operating complex process plant, designing and operating complex process plant.

And then couple of other comments here. Step-up in productivity we can always do more in this area but really did have a significant step-up and if you step way backing up and out of the P&L and just sort of thought about the volume headwinds we saw, the productivity headwinds offset most of those volume headwinds, so that at least we maintained our operating margin returns if you will obviously we didn’t expand them and obviously that was going backwards from where we wanted to go to our 2015 goal, I’ll come back to that a minute. And then of course our 30th consecutive year of increased dividend something that Paul and I and our predecessors are very proud about. This is a slide that you’ve seen before, I’m not going to dwell on this slide only to say look the industrial gas industry and you know that you are all investors in industrial gas industry are following this for a long time.

It’s a great industry, its long-term trend for growth are significant. We’re going to be focusing on the energy, the environmental and the emerging market side of this industry and a lot of the projects that you saw on the prior slide where we were talking to some of the accomplishments that we achieved in fiscal year ‘12 on the growth side of things really fit one or multiple of these categories. And then from an Air Products point of view I’d like you to think about our discussions around innovation, integration and improvement as we go through my talk, the rest of my talk, Paul’s and the management team’s talks tomorrow around how one or multiples of those levers really will go towards not only helping us drive the growth but also helping us drive the improvement in return.

So, from an innovation point of view Tees Valley is a great example of taking or thriving through onsite business model and expanding it to an adjacent space will deliver some very nice profitability, Steve has specifics on that in his discussion tomorrow. On an integration front the work we are doing in Europe as we’ve restructured there and really tightened up our integrated gases model in that market. And Steve when he talks about some of the oxygen opportunities that you will see in China one of the things I think you will note on his slides are just about everyone of those are piggyback so really driving the integrated gases model from day one as those investments and really prioritizing against those orders that give us that opportunity. And then finally on an improvement front you’re going to hear a lot tomorrow from Wilbur Mok and Corning Painter on where we are driving and utilizing our investments in Lean Six Sigma tools, designing for Six Sigma and really lowering our overall cost of our plants and or lowering our overall operating cost from a variable cost point of view.

Let me step back and in the call as you well know we spoke to the fact that our goals of achieving a 20% operating margin and a 15% return on capital employed was still the underlying goals that we are driving for but we did acknowledge that we didn’t believe that given the performance in ‘12, given our view of the economic outlook that we’d be in a position to hit those goals in 2015. We also said that we would look to provide more specificity around that when we had a clear more certain view of where the global economy is going. Paul is going to put some factors up for you in his presentation around what some of the pluses and minuses are as it relate to what we think we may progress towards those long-term goals and what we’ve got more work to do.

We’re not going to sit here today and give you another set of timing on when those goals are but when we have a better view of things we will come back to them. The thing I do want to be clear about though is the goals, the underlying goals of 20% operating margin and a 15% return on capital employed are the goals that we are driving against this as a management team and I didn’t want anyone to leave the call at the end of the year or leave this webcast or meeting with any confusion around that. And we’ll give you some insight as to the levers that we are pulling to try to get us back on a track that can give us and you a more clear view of the path towards those goals. So, when we look and talk to some of the levers that we have to pull one of the things that I did want you to know and when we’ve talked about these goals in the past our ability to achieve those goals was a combination of really three things.

One making sure that the growth was there, the organic growth in this business that would allow us to achieve the top-line growth that we needed. Two, to load our existing assets and we’ll talk on - I’ll talk that, Paul talk to that as well. And then three to drive appropriate levels of productivity consistently and to continue to step up productivity that we are getting to the bottom-line. One thing I wanted to just address on this slide is as you know our CapEx for fiscal year ‘12 was about $3 billion with about $800 million of that being in Indura acquisition. So the underlying investment in the overall CapEx that’s really going into onsite in the merchant and the electronics businesses on that $2.2 billion level. What I’m showing on this pie chart is a little different cut on it. This is a high level representation of the backlog that we are executing today which is about $3 billion. The point you ought to take away from this is 85% of that backlog is in the onsite business model, most of it in the tonnage segment that Steve is responsible for and then some smaller tonnage assets such as the ones that were on that first slide for the electronics sector and as you know the smaller onsites in the merchant sector goes through the merchant side.

But if I aggregate all of the capital that we’ve been in that backlog of $3 billion 85% of that’s going in into tonnage, is about 10% that goes piggybacks and some targeted merchant investments on a global basis and then the remainder is going into our Packaged Gases businesses and our specialty materials businesses. The other point I would like to make is that the bidding activity and you will hear a lot more about that from Steve and Wilbur, but the bidding activity on a global basis is pretty robust and one of the highest levels that we’ve seen, I recognize that to a degree that’s inconsistent with a view that there is a fairly weak economic momentum out there but I think you will get a better picture as they go through the presentation tomorrow as to why we can sit here and say the bidding activity in oxygen for gasification, certain hydrogen opportunities et cetera still remains pretty strong. And then the other point and you will probably recall from our investor call at the end of the year we guided to $2.0 billion to $2.2 billion CapEx for fiscal year ‘13 so similar if you will to fiscal year ‘12 and we are really focusing on ratcheting that back a bit in terms of really probably closer to $2 billion or the lower end of that range with a more significant focus on projects that allow us to focus on our core businesses and really consolidate and build capabilities with a no score businesses. So, as a management team over the last number of weeks we’ve been looking at some of the CapEx opportunities that we have, some of them in adjacent markets or businesses to our gases or materials businesses and we really made the decision in short term to pull back from a number of those opportunities focusing right now on more of the core business.

You will see this slide I think also in Paul’s presentation this should not be a new slide to you, we’ve constantly used this is sort of away to discuss and convey on a long-term basis, what our goals are for utilization of cash, I don’t need to read it for you, but it’s really about investing in the business, it’s about increasing those dividends, working to maintain an appropriate capital debt structure that gives us the bond rating that we think is consistent with the long-term health of our business and then buying back shares when excess cash is available as you know we have an open authorization of just under $1 billion in shares.

And while we look at this I want to assure you we look at this mix of opportunities for utilization of cash both on the long-term trend and also we look at it in current conditions as well and the discussion that we actively have as a management team and with our board. And so you could see that I think from a longer term point of view we manage the use of this cash effectively balancing, growth balancing return, balancing dividend increases. Let me use this slide and the next slide really to just at a very high level, your appetite a little bit on some of the improvement activities that we are looking at and then today Paul and then the management team tomorrow will really put more granularity around these.

The first thing is obviously I’m not going to repeat the portfolio management activities that I talked about on my second slide, but they are live, they are real and I really think they will bring good benefits for the medium and long-term to our growth profile as a company. More to more immediate set of levers that we have to pull from improving our underlying performance today and into the next quarter and next quarter is obviously we’ve talked a lot about the restructuring actions just to remind you that isn’t largely in Europe, we expect by the middle of this fiscal year to get to a $60 million run rate, we said that we got about $15 million of that in fiscal year ‘12 so another $45 million to deliver, we are on track with that and feel very good about that.

On a productivity front I was pleased with the productivity we delivered in ‘12 but I want to be clear we got to deliver more and we got to deliver that consistently if we’re going to deliver on our 2015 goals if you will or on our 20% margin and our 15% return on capital employed. And at this discussion that you will see some in some of the presentations we got a pretty strong focus on how we’re going to go about doing that, some of it gets to just really having the right process, the right tools but also the right resources in Master Black Belt and then really prioritizing at a high level, those high impact projects that we can get quickly to the bottom-line. You’re going to see I think we made great progress and certainly our order book if you will, when you just think about the 28,000 tons of oxygen we signed or the significant nitrogen awards in the electronics business we really are focused using design for Six Sigma and other product-based approaches at driving down the capital cost of our plant which obviously increases our competitiveness but also bodes well for improving and leveraging our return.

And then in the short term frankly we are going to be very, very prudent and pragmatic about adding cost to the P&L in the standpoint of adding resources, we will do some where there is targeted opportunities to sell existing volume off of the existing asset and the appropriate frankly the appropriate control on discretionary cost that you have to consider at all times and we think we do a pretty good job of balancing that but there is always an opportunity in slower times to get at some of that and we are working on that. This is a busy slide, a little bit harder to see, but this really now takes from the enterprise level more to the specific businesses, I’m going to go through this pretty quickly particularly as it relates to the tonnage in LNG area and really focus a little bit more on merchant and on Electronics & Performance Materials and Paul is going to dive into both of those in a little bit more detail as well.

But on the merchant side first and foremost the biggest business that’s effective with the activities from a positive point of view is the merchant business in Europe and we are actively engaged a number of us were in Europe about a week and half ago really working with the team there to make sure that we were on track in delivering those benefits. You’re going to hear over billion dollars of unloaded capacity largely again in the merchant business, just to remind you that type of capacity comes on with very, very nice incremental margins, we are already bearing the fixed cost of those assets if you will typically in the 30% to 40% or more percent leverage from an incremental margin point of view.

Paul talk about some of the new investments we’ve made in tools, one of them being a price tool that we believe really gives us an opportunity even in this environment to really work against segmentation in the different businesses and product lines and utilizing that tool to selectively move pricing up. On the distribution cost side another opportunity to imply some IT tools, again you will hear a little bit more of that. And on the supply shortages side of things we are making progress in North America that was, that it had been an issue with us, tight market, helium is still with us, although the team has been working very effectively on that business in the context of appropriately managing the molecules we have and pricing them appropriately to the market that we are in.

You will hear a lot as I said tomorrow on tonnage so I’ll go to Electronics & Performance Materials. Bottom-line in that businesses and I hope you’d agree with me, if you look at the performance of that business and what is certainly not been a very strong end market for any of those products, that business has really, really done well 3 or 400 basis points above what they were in ‘08, ‘09 on similar volume. So, our challenge here is keep what we have achieved and be positioned as the economy recovers to continue to expand margins. The business for example electronics is just about at its expected margin of 15% for what we had said we would be at this point in the process and in that business is really about focusing on what we have competitive advantage with customers, market niches, technologies and new products. I’ll wrap up here. I guess from a straightforward point of view go back to my opening comments.

We didn’t meet our expectations in ‘12, we know we didn’t meet your expectations in ‘12, but I do believe I strongly believe that we really do have the right actions, we’ve taken the right portfolio actions, we laid out in those last two slides I showed you some of the levers we can pull to improve the overall underlying financial returns that we deliver and we are taking them now and we are not going to sit here and let the economy whichever way it goes impact our ability to achieve improvement in our underlying financials. The challenge that I’ve laid out to the team very simple, we gave you guidance, we are not changing our guidance tonight of 565 to 585, but I’ve challenged them to beat that and to beat that, that would put us on our trajectory to be able to get back to the 20% margin and the 15% return on capital both. So, I’ve been at Air Products a lot of years, I believe in our company, I believe in the people and the discussions that I have had with the team over the last number of months I believe that they are up to the task of delivering improvement, an improvement that should put us back on track to what we said we could be as a company. So, thank you. Paul.

Paul Huck - Senior Vice President and Chief Financial Officer

Thanks so much, John (indiscernible) tomorrow. Before I get started, I would like to give everyone some comments on my retirement, why I chose now, because the general thought process was that I would never retire with things, certainly some people, certainly I mean we told my wife and I told our kids that we can before and they were kind of stunned like what do you mean that’s not going to work. They have grown, they have jobs families and stuff like that but I never pictured and my father not working. So, lot of people aren’t only ones for this but it was a hard decision for me because as you well know I love Air Products, I really do, I love this company, I’ve given my professional career to this company and I love this job, I’ll be kind of surprised, I enjoy going after talking to investors, I enjoy talking to our employees, it’s something that I really have a fun time doing, it’s a lot of people don’t like their job I’ve been blessed, we really should have been blessed by god to have a good job I think, but I also love my family, my wife, my children, my grand children, I have three grand children. And this is going to give me some more time to spend with them I because quite honestly I don’t have that much time to spend with them today because the job the way I want to do it and the way I approach it is I’m going to throw my heart and soul at it.

And that’s what I’m. It is also going to be give me an opportunity to spend more time in community activities. I am active in the area in healthcare and education and probably even more broadly on charities for veterans which I’m one of and I think it’s something that we all need to get back to because they gave a lot. So, it’s going to give me some more opportunity to do those things, for those things. The other thing is my successor I think is very ready, my successor Scott over there. As John said I do have a long history with Scott, I graduated from Cornell in 79 and I recruited there every year since until I turned it over to Scott and found in 2004, but I introduced Scott to Cornell and saw the talent immediately and said there is my successor. He only wished that it was that easy but I think you will be very pleased with Scott he too shares a lot of passion for the company and stuff like that. And so I think you will see, he will be very impressed we think, so I‘m blessed having a very good successor here well thanks.

The other thing we have to comment is I really like this location tonight and not that I‘m in love with Houston or in fact to be out of the Northeast, but when I was growing up guess what I didn’t dreamt of becoming a CFO, I didn’t dream that, that was not in my lifetime career plan like lot young men I dreamt of being a professional athlete from things and here I’m, I’m getting to do my job in the Toyota Center did I, I mean this is like great, so you say well I guess you was a basketball player Paul is you are kind of tall and stuff like that. The answer to that is no, I was not very good at basketball, I grow up in the CYO Leagues which for anyone who is familiar with that on that type of basketball it’s very similar to the biggies the rest of college, a little rough and stuff I guess.

So, on the Freshman Team I was on, I led the team on rebalance, but I also had the distinction of having a much further lead and leading them on this at which point in time at the end of the year my coach introduced me to the wrestling coach and set me on a long career in wrestling for things. He said given your aggression you will play a lot more in wrestling than you will ever play in basketball for that and so he was right and I enjoyed it and everything. So, you never know what sort of things were going to happen in life.

The agenda I’m going to go over today, let me give you a little view of our returns and margins and what sort of things have happened, here it goes. And a recap of our 2013 outlook I’ll go through that quickly and then I spend some time on the actions which we are taking to improve both near term and long-term and some of those are the same actions or just continuations of actions and then a look at what those goals are and what our path forward here. So, let’s now start with the returns and margins slide here and what you see here is the returns and margins for the company overall. 2007 is the point which starts and Jeff you will appreciate some of this because you’ve done some of this analysis of things, I have more numbers though Jeff.

So, but a lot of people – we have gotten lot of questions about this stuff about you certainly are happy. So, what I’m going to do is take the operating margin and the return on capital. And the return on capital is not a return on capital employed, it is our return on net assets and the reason why I use that is you can take it down a level to this segment, We‘re going to take it to merchant and tonnage here in a second here, but that’s why it was done on that, so taxes aren’t a big change from 2007 to 2012, so this does a fairly decent job of doing that. And what you see is margins improve for the company overall from 14.7 to 16, return on capital went down from 12.8 to 11.1. So, what sort of things really cause that? What sort of things cause that? Overall margins have been hurt and the currency have been hurt by volume and that is been the biggest impact that we are seeing, so what happened to our volume is during that time period. During that time period our merchant business to a net overall volume decline, a net overall decline in volumes, two, there are sales and there are profit and those things.

What sort of things happened, we saw the U.S. contract, we saw Europe contract in Liquid Bulk, we saw Europe contract in Packaged Gases, we saw Asia has grown a little bit about 10% from the time period to time period in the Liquid Bulk business but not a whole lot of growth. And so that has been the factors, at that same point in time the other thing which we have been doing is we had a lot of investments which we put into Asia. So, we’ve expanded our capacity in Asia and so what that has done is that it added volume is it added assets down here is a return line with not a lot of profit and in fact basically a lot of cost for the depreciation and the operations and the maintenance factors for those things. And we will talk about that in merchant a little bit further as we go through here. Tonnage, Electronics & Performance Materials and are really the offsets to that. So, the number is much larger for that. And construction in progress is up for the company overall from that and those are assets which we are building.

So, when John talks about that backlog and see that backlog that backlog was a lot lower back in 2007 and so we have more assets sitting on the balance sheet which we haven’t produced any profit yet, but are scheduled to produce profits in the future for us. Now the other thing what you see is price and raw materials really haven’t been a drag on the company. Prices has hurt margins a little bit and but it’s actually because this produced profit has increased returns. So, that’s a good news that’s a much better performance for us than what we had seen in the past and really reflect some progress in which we have made.

Cost as John said we have done a good job here on cost and I will cover some more things as we go through here, the things we plan to do in the future, but cost has been a major impact driver and a big driver there has been on the SG&A cost and so we still have a lot more cost to attack in our cost of sales line to get productivity from, but the expansion in cost has been a big help on margin as you can see and also with the investment for SAP which is stuffed in here also, you can see its actually improved our returns here. So, that’s very good for us. Then if you look at the Petron Energy, Petron Energy has helped margins, we said as gas prices decline, so gas prices were roughly in 2007 about $6.50, they are a little bit lower than $3 in 2012. So, we’ve seen sales decline and profits decline. Why we’ve seen profits declining meanwhile we’ve seen profits decline is that we have efficiencies in our plants.

So as we build the plans and then as we go out and then we improve those plants if we save a million BTUs of natural gas in the production of hydrogen we got 650 in 2007, we get a little less than $3 today. So, the rule of thumb, the rule of thumb everybody get out their pencils write this down as we will give you the rule of thumb is that at today’s level it probably cost about a dollar in gas, the dollar movement in gas price for the full year is about $250 million in sales for us, so hydrogen is a big business for us and it cost about $15 million in operating profit given the efficiencies in which we have achieved, okay.

So, we are going to learn more as we turn to this segment. And so let’s first turn to the merchant area and as I said a big impact on merchant from volume. And so when you look at this and just look at those numbers you see a big impact there on volume and a good favorable impact on price, the price does not exceed the volume, but if you look at that on the volume as I said we had declines in North America, Europe the Liquid Bulk business and European Packaged Gases and then we had the largest capacity build-out. If we look at that we roughly breakdown that impact about a third of that impact is due to the offload in other words the declines in volumes which we’ve seen in that time period, about two thirds of that impact is due to the additional assets which we’ve brought on stream in Asia and which to a large extent are not loaded today from that, so that has been a drag for us.

However going to the future and looking at this it represent a great opportunity for us. And so what you see as a negative here is something which we can turn to be a positive in the future as we build those volumes back up and most of the capacity which we have to sell sits in Asia today, we have some in the U.S. but a lot sits in Asia when you look at those things. So, we can get the bulk of this is in the right portion of the world where we’re going to see the growth for the future I think. Price we’ve done very well and this is something which we spend a lot of time on and really shows how we’ve been able to utilize SAP better, we changed the way we price and how we go about pricing and how quick we can get a price increase out from SAP we get better information on cost to go talk to our customers in this area. And so it’s an example here, I’m not going to say every nickel of price was due to SAP but it’s an example of that investment paying off there. The cost aspect of things is - was something which was not as large as we would have like it, its 1% margin, it’s about equal on cost, I mean it’s about equal on returns I mean the average return, those things we would typically want them to earn more, the reason why it doesn’t because things are offloaded today.

And we are not operating efficiently and that efficiency penalty flows through the cost line. So we were not efficient on power, we were not efficient on gas, we were not efficient on delivery and things like that, it’s going to flow through that line and so that also is an opportunity to us in the future. And the acquisitions you can see are a drag, the factors affecting that are number one is that this is principally indoor and that we had the one-time cost in the fourth quarter and we had the investment added in at that time with the write up for those things. So, those impacts are going to fade over time as we get rid of the one-time cost and as we start to realize the cost savings and grow that business better.

Just to show you some of the volume trends which sit there and so you can see on the graph here is 2007, 2008 was about the peak for us. It depends upon the year and it depends on the year in the business of what it is, 2009 was pretty much a drop, it was the low point for everyone except Europe, Europe Packaged Gas has construction activities have dried up in Europe, investment activities have dried up in Europe, have continued on somewhat of a steady decline. Everyone have seen some form of business due to lack of requirements, we have seen more of that in the U.S. and the reason why we’ve seen more of that in the U.S. is lower prices for natural gas have cost some people to stop using industrial gas because they are used for energy savings and they no longer made sense with the lower price of gas. The other thing is that which happens in the U.S. is the electricity prices have dropped too from some things. And so they haven’t seen that come through for them as a driving force for them to save electricity. Europe never recovered and has been in somewhat of a steady decline and we would think that and that would probably continue in 2013 to be honest with you if you look at we think that Europe is going to be relatively flat.

If we then turn to the actions here so in 2012 we had record signings in North America and in - and in Asia, so that’s been a very positive factor for us. As I have said we have been held up somewhat because of people pulling back from their requirements and by the economy, but we continue to sign new business as we look for the future we’re continuing to bring resources on it, so we are extending to add the sales staff in the right locations around the plants that are offloaded and application step in the right applications for the right products as an example in LIN in the united states we have probably more capacity than in (indiscernible) so we are pushing – we are pushing more of our LIN applications with people. And look 2013 we are looking for double-digit growth in signings for both Asia and North America and we also intend to defend our business very well and we are doing that in services and applications for things and we will talk about some of the tools which we are giving our sales force here a little bit later which I think will also help in this business and things we’re doing with our customers around the world which we think will help us retain business better here.

We turn to the tonnage here tonnage area, tonnage area is also been an area which people had a lot of questions about. And what you can see here is that in the tonnage area our margins went from 14.5 to 16 so they increased by 1.5 but returns came down from 13.4 to 10.8 a drop of 2%, 2.6% for us. So, if you just look at that the volume impact on tonnage, you can see it helped margins so we grew margins for us because it was coming on at a lower natural gas price for the hydrogen basically as a key improvement. However, the volume impacts really are in the construction in process. They are not in the new plant. So one of the things that people look at this. So we added about $300 million in tonnage assets in construction in process in this time period right. And so as we look at this, as we look at this that’s been a big drag on the return. As those plants come on stream all these plants are good as the plants which we brought on stream during that time period have been good for us. And so we would expect that and that our tonnage are as we grow into this impact our tonnage returns are going to, are going to improve from that.

The other thing which you see down here is cost and natural gas pass-through you can see the pass-through has been a positive on the margins that we talked about that about that why because it reduces sales more than reduces profit the roll with them. However, when you look at the pass-through portion of it. So that takes the savings which we had booked up until 2007 in this business and this is those savings roll forward at a lower gas price lowered our return by about a percent. Then on the cost aspect of thing we also have continued to invest in making our plants better and in facility improvements that our plants to gain efficiency and they haven’t paid off as well because we made a lot of those decisions back in the 2007, 2008, 2009 period when gas was $6, $7, $8, $9 a million Btu. And so they will pay off we got gas at all time low price for us and we think that as we go forward in this business the gas actually is somehow gone upside for us going forward.

So let’s talk about the things we’re doing in the tonnage area to improve. One of the things is that we continue to execute our backlog very well. The most important thing which we are going to do is execute that backlog bring those plants on stream, on time, on budget and according to our plan. And so we have that large backlog you can see it, it hasn’t really changed by adding a large amount we do have opportunities to continue add to it and we think that’s a great opportunity for us in the future. On the productivity end where we have to look for things what sort of things you know you’re going to see a lot about the pipeline in the Gulf Coast tomorrow. You can hear both Corning and Wilbur talk about the things that we’re which we’re doing there. With the operating service center, the customer service center which focus on a pipeline. We have opportunities for efficiency for sales volume and price obviously but we say a broad opportunity for us to really improve ourselves capital cost reduction John mentioned that.

So we continue to drive the our capital cost down and as I said natural gas is still at opportunity for us I think is a low point in 2012. So let’s talk about 2013 and our outlook and you’ve heard us talk about this before, if we look at 2013 a lot of uncertainty and we reflected that in our outlook. 2012 growth slowed during the year we haven’t seen the acceleration. So if you’re going to look for an acceleration, I think you’re going to look for an acceleration in the second half you’re not going to see it here in the first half when you look at all the economic statistics so far for things and from that.

You can see what the pluses and the ups and downs for us or in profits there for us it comes out to 565 to 585 capital which we gave at 2 billion to 2.2 billion. We are going to do some things to restrict capital here to the low end of things of that guidance range and so that is very important for us and pass on extensions. So as John said we looked at some things from other areas which we could get into, it would have required us to move out on some capital investment in that point in time about three opportunities which we have, which we just planned to put aside. And so we are not going to do them now because we got to get back to basics for 2013 the bulk of our efforts going to be focused there.

What are the simple things we know we have a load North America and Asia, European cost reductions, pricing improvements there are very important tonnage executing those projects bringing them on stream, on time, on budget productivity broadly across our businesses for particularly in the on-site area is very important and Electronics & Performance materials a very good success story but continue to grow the margins and the business there for us. And lastly the equipment and LNG orders which we have, we are on track there and we think we are in good shape there and we think that we’re going to have another good year and always entered for there which will sets at us up well. On top of that the things which we’re doing what are the other things besides the capital spending. We’re going to put more of the resources on the base so more people are going to on productivity more people are going on loading those assets.

We’re going to talk in a second about the IT tools. We’re also taking and letting the editions to staff reducing the discretionary spending. So things like consultants, travel entertainment and stuff like that we’re holding back on that. When we look at the, at the margin expansion one of the things we already talked about which we had very nice improvement for the company overall margins was our cost aspect of thing and SG&A was a big factor in driving that. And if you look at one of the big factors in that was IT SAP. Richard Boocock who is the room with us today was our leader for that. Richard did a very good job. He reported me at the time and then he came out and really worked on getting the benefits out in IT. He is now moved to be the Head of Operations for us. So, on the next big element across which we really want to focus on. We got Richard who we have a lot of confidence on. We think he can really deliver.

On top of this what we’ve been able to accomplish is we have the best in the industry SG&A. So we are very proud of that. We think we’ve got a good success with our crews when we focused on things and when we put our mind actually we can do these things. And that’s what we look for in the future. On top of this we think IT tools are something which we also have an opportunity to do better on. As an example the price tool which John mentioned here what sort of things does that do? It really enables us to go out and better price the customer tools alternatives. It also enables us to better look at the customer and say how profitable is that customer tools by the demonstration of the tool yesterday and with people we have in the production it’s been used right now but I was amazed by the amount of information which we can put in the hand of a sales manager and a salesman to do their job. This is a lot of powerful information for them to work at the customer level which in our business is the very important way to do it. The way you’re going to get prices up is by working there, you just not going to get it by announcing your price increase for things.

And as you can see we’ve already done, we done a good job on progress in that area. The next thing is increasing the customer focus which we have a number of tools coming on here really they are all designed we’re going to trying to help the customer do business with their product easier. Customer access, self-service which will help us from the cost side too to their only system on answering the phone. They can just look at up anytime they want to real time mobility apps for our drivers so when they get, they do it and they pick a cylinder or they drop a load they can record that automatically it goes right into our system with better ability to track assets improve our accounts receivable collection we already have the best in the industry there also we’re looking to get better and improve tools for the sales force for them to use to be able to track customers to be able to work with them and to gain and sign the business with them.

We have a distribution tool which went live in mid 2012 across our emerging area in the U.S and Europe which gives us ability to do a better solution on routes better less miles driven and better utilization and scheduling of our assets and drivers. Let’s say purchase to pay being able to that tools to work on our suppliers better used to leverage which we get on those things. So all of these things really represent on our product, we’re building on the SAP. The a lot of these tools come directly from SAP their additional modules which we put in and so we think what this sets us up or is they not only lower our continue to lower our cost but increase our revenues and increase our and increase our prices for things. We get a lot of benefits here going forward. If we now turn to the cash priorities as John said I am going to dwell on this slide our priorities are unchanged as we look here we are looking at this thing and one thing is which what we said is a good projects which we can execute well and that’s why we are cutting back. We want to make sure we execute these things well and we deliver the returns which we need to have.

As we look for 2013 run what we have well is our number one priority and then growing the base to low those asset and things like that is our number two priority. Those are the things so loading new projects, productivity growing in energy, electronics, China those are the opportunities which we see for ourselves here, then as we look through the future here we also expanding into new geographies in the emerging markets endure is our example of that. We’ll probably spend most of our time focusing on endure this year but then expanding applications and product offering and then peace valley is an example of that taking our that the model for our business and extending it more broadly for things.

And we as we look for this we’re also looking at how we set ourselves up for our goals of a 20% margin and 50% ROCE going forward. The levers which we have to pull no our, if I take a look at that our loading for us that probably gets us somewhere around 35% to 40% of ROA to our goal. It is a much bigger lever then it was back before because we have more unloaded assets at this time. So the assets are built they are in the right place we’re putting the resources around its own and we’re focused on producing that. New products we’re making sure we have the right resources to do those things and deliver on that productivity.

We’ve made good progress on productivity as John mentioned today but it’s a never ending battle you have to come up with ideas every year it’s just you just can’t have a good year. You have to get back to back good years every year it needs to be a good year for us and so as we look at this the place where we have had the largest shortfall has been unloading. The next area is productivity where we need to improve and then but however overall all these things we still think that the goals are realistic they are achievable and we have the ability to execute for things.

So wrapping up and moving forward here we are taking the actions to turn our performance around now. Our actions are right, they are focused on producing results in 2013 we think our goals are achievable we know what things have to be done, we’re taking the steps to do that and will respond quickly to anything which needs to happen from an economic standpoint at that point in time. So with that John and I will now take your questions. And we have some guys coming around with microphones. And if you didn’t like the green shirts we gave our board the orange shirts when they were down here. Okay, alright. Kevin?

Question-and-Answer Session

Kevin McCarthy - Bank of America/Merrill Lynch

Thanks. Kevin McCarthy, Bank of America/Merrill Lynch. Paul two questions. I guess first on European restructuring as it relates to Merchant Gases. Can you give us before and after picture of that business pre and close restructuring efforts and give us a flavor for what’s changing in terms of assets, head count market focus. How you’re managing that business?

Paul Huck

Sure. If you take a look at that business one of the things which we used to have was the Healthcare business. So we’re taking the stranded cost from the Healthcare business out that’s one portion of the restructuring plus then we are also taking the size of the business down because of the drop in volumes and what you saw. So that involves cost reduction at all levels of the P&L Kevin for us. That but just the cost reduction is not going to get that business through the return which we are going to won it. It’s not just the cost problem. There are issues around prices in that business we’ve did that.

We put a lot of effort on pricing and who else going to help these guys a lot because if you think of Packaged Gas I mean there is a lot of customers and being able to get down to those that stuff quickly and automatically is really a good thing for us then if you take a look at some of the longer term tool the quest tool which I told that the distribution tool that’s going to help a lot of the on the customer tools of the interaction center will reduce our cost in Europe but it will also enable us to enable the agents who sell for us in Packaged Gas to deal with us easier and be their own to look at their information and to get that.

So there is a lot of things which needs to happened. The European business overall in the Merchant area is a little bit less than $2 billion right now it’s got the worst margins on returns of any of the area. North America is the highest but we think we have the path going forward here. It’s not what we can get but it’s not going to get better in one year it’s going to be a number of years it’s going to take a while for us to get that better but we think we’re on the right road and have the actions well defined.

Kevin McCarthy - Bank of America Merrill Lynch

Okay.

John McGlade

Yeah, if I could build on what Paul said probably the other aspect of it is that by integrating the sales and marketing team across the whole breadth of the business. We really have been able to slowly move the mix of the business to a more smaller and medium size for the customers which should which gives the opportunity to improve profitability utilizing some of the tools that Paul has talked about and also that visibility to customers that are going to buy multiple products are going to start upsizing their needs etcetera and so that’s not a cost as much as a revenue opportunity longer term for us as we see a little bit more of an economic rebound there.

Kevin McCarthy - Bank of America Merrill Lynch

And second question if I may relates to your capital budget you’re now hearing towards the low end of your $2 billion to $2.2 billion. So maybe you can just elaborate a bit on what is changing in area their discretionary projects that are being marginalizes it attenuating timelines how are you managing the budget kind of differently now?

John McGlade

Yeah, I so thought it what I think Paul and I were trying to convey is there were some opportunities that we were absolutely looking at that we’re more acquisition in nature. That weren’t in the core if you will of the businesses that were nice projects with very good returns and frankly our thinking was very simply what there are great projects, great opportunities but they would require much more distraction of the organization and droll upon more resources across the organization at a time when we’re really trying to get people to stay focused on the basics within the core business.

Paul Huck

And the other thing which we’re going to do is we’re going to turn the script we’re going to turn down on this to support for capital spending plan, on this support capital this stuff would doesn’t increased revenue for things pull back on those things right. Next?

John Roberts - Buckingham Research

John Roberts, Buckingham Research. Just to reiterate the targets are at 450 natural gas was that remind me that the natural gas assumption wasn’t there?

Paul Huck

You mean the, on the goals.

John Roberts - Buckingham Research

Yeah, the goals.

Paul Huck

Yeah. I, John yeah I think it was somewhere around $4 to $5 for us as you can see it doesn’t have a huge impact on the corporation overall and so we’re not really looking for that to be a variance and we’re not going to say well yes a little bit lower and I get 19, 18 I can give you the list of natural gas now I am sure it would be 20.

John Roberts - Buckingham Research

And then how do you load a $1 billion worth of unloaded liquids without affecting price there?

John McGlade

Well I think so we’re always consistently managing price volume and the cost in a Merchant business like this. You’re going to need some economic recovery but that’s not the only area. I think Paul on his slides that we’re putting in targeted applications capabilities where we have unloaded capacity. We’re looking at so to create new opportunities for utilizing the industrial gases and that’s been a pretty clear focus we’ve been clear in North America driving further into what we call the microbulk or the small liquid side of the business the load capabilities that’s a great story in Asia. The microbulk side or clarity side of our business, and we got a solid business in there so you really are trying to identify specific needs in the market place that you can use your technology, your service or frankly your geographic position relative to what your competitors will have in a particular geographic area. So it’s a heck of a lot of blocking and tackling at a very local level and the solutions are frankly different around each plant, each asset and each fruition of the world.

Paul Huck

John it’s never good to be in an offloaded position obviously I think but when you look at where this capacity sits they said a bulk of this sit in Asia we’re really have it and that’s why we need to want it because the manufacturing growth is going to be in Asia. We know that, we know that they have a lots of lots of growth to observe this going into future and so it’s in the right place for us. (Phil), I think you gave us - I’ll get you in second Mike.

Unidentified Analyst

You gave us a lot of really great data looking backwards by segments breaking out the layer cakes. Can you for slide 13 give us a little more precision looking at how you want to build the layer cake of a 400 basis points improvement in margin and the 350 on return on assets?

Paul Huck

Yeah, so if you look at the about 35% to 40% I think it’s actually go. It’s on loading another 35% to 40% sits in will sit and sits in the new business for us and about 20% to 25% sits in productivity. The new business has an inherent productivity in it because as we look at this the fixed costs around which are included in our capital expenditures as we look at this which get loaded on to these plants. As we look at the SG&A as we look at the operating centers as we look at the SAP, IT, finance and the share service centers which we have is that we’re not going to have to add the same level of fixed costs which included in those as we cause those things out. And so they are going to come out at a higher margin, higher return by doing that. So but those are the things that which drive that.

Unidentified Analyst

Same on the 350 for return on capital?

Paul Huck

Yes. Right and so and the factors changed a little bit more that the loading and productivity have a bigger impact. They accomplish the bulk of that Phil, because if you look at the new plants what they come on with all of the new capital. So the bulk of the return really comes from the loading and that and some so it’s probably about 40% to 45% in loading productivity probably get you about 30 and the remainder from the new business. Mike.

Mike Harrison - First Analysis

Mike Harrison with First Analysis. I have two questions. First of all on the Merchant loading that you talked about having a lot of unloaded capacity in Asia I think you probably have confidence that from a macro and just kind of secular growth standpoint you’re going to eventually get there but in North America and Europe maybe both of those markets have some challenges near term and potentially longer term. Can you maybe just talk about the different challenges that you see in North America versus Europe. The second question is just on the M&A front can you maybe update us on opportunities to acquire some of your minority investment for your joint venture company that you evolved with?

John McGlade

Okay. Yeah, let me start with the later question first which is buying up the minority interest that we have in our partnerships and frankly that’s something we actively are in dialogue all the time with our partners but then in the flip side of it would be as I believed we’ve told you many, many times but we don’t look to asked our partners to execute or to exist excuse me.

And typically what happens is when you have generational changes in those partnerships that’s generally when that minority interest or the majority interest depending on which partnerships we’re talking about tends to go into play if you will and we know those businesses we’ve helped build those businesses we stay actively engage with our partners then I’d spend a lot of my time with our partners around the globe. And so we’ve had a history been able to do that.

So Taiwan, Korea and elsewhere around the globe and I think we’ll have an opportunities we’ll go forward in some of the others but to be able to say it’s going to be tomorrow or next year. The only thing I’d get this wrong, I get it wrong. But they are good businesses and have great emerging markets and have very good profitability. On sort of the loading between the challenges around the globe I appreciate your understanding Asia and I think we’ll win as we start seeing some recovery there.

We do have the resources on the ground. If I would go more broadly across the different geography starting in North America, when you look at any of our businesses in the Merchant side you not only got to look at the broad geography in North America or Asia but then also what assets, what’s the individual assets are loaded there and what are the demand, what’s the competitive dynamic in that area, what are the sort of the key industries in that area. And so we look at a very tactical level adding either applications resources or sales and marketing resources to really follow.

At a foundational level the manufacturing output that’s going on in that region but then using our capabilities to adjust that. Our loadings around the globe U.S are low 70s, Asia is probably was high 70s it’s probably move down a little bit with some of the new capacity that’s come on but as we said a moment ago that will start to come back pretty quickly and Europe’s low 80s, high 70s and there it’s really about in my mind the discussions that we were talking about earlier on do we have the right mix of customers across the spectrum of customers and then applying some of the same techniques from a marketing point of view that we are in North America. Where do we have the unloaded capability. Where do we want to add targeted resources. What particular product lines that we want to focus on.

Paul Huck

Yeah, Mike if you compare Asia and the U.S as far as the opportunity pipeline on signings and stuff like that they are about the same. I mean so there is lots of opportunities within the U.S right now for us to go after signings and we’ve put a lot of effort into really trying to get them and to close on that. So the thing which we have seen which has heard us as far as getting we’ve also seen people leaking out the bottom into this. And we hope that as gas prices start to stabilize and rise that a lot of that force or people to stop and use and not use our products is going to go away. Yeah.

Bob Cole - Goldman Sachs

Bob Cole from Goldman Sachs. Welcome to Houston.

Paul Huck

Thanks, Bob.

John McGlade

Hey, Bob.

Paul Huck

The weather is much nicer here.

Bob Cole - Goldman Sachs

Yeah, you could maybe and retire down here.

Paul Huck

Too far from the grand kids Bob.

Bob Cole - Goldman Sachs

I am wondering and.

Paul Huck

Plus the sports teams aren’t as good I just say.

Bob Cole - Goldman Sachs

Yeah, I’ll take some sign action on the football side of that better.

Paul Huck

I’ll take it.

Bob Cole - Goldman Sachs

The baseball side, yeah. And maybe I should ask Scott but we’re going to continue to see a CFO with a mechanical pencil and an HB12C at meeting. Is that a Cornell thing excellent, excellent.

Paul Huck

And tax a file.

Bob Cole - Goldman Sachs

I got a couple of questions. One on page seven I think you showed the major on-sites that are coming on. Can you tell me how much of your $2 billion or $3 billion backlog is represented on that single page?

Paul Huck

I would say that it’s got to be 75% or so right how much two, so two-thirds.

Bob Cole - Goldman Sachs

And I didn’t see the waster energy on that page is there a reason?

Paul Huck

Because it’s not in the tonnage segment then the other half is Steve is responsible to the Equipment and Energy segment. But that’s the only reason why not.

Bob Cole - Goldman Sachs

But there is, so there is you’re still forging ahead aggressively. Okay.

Paul Huck

Oh, yes yeah there is any change it’s not on that because.

Bob Cole - Goldman Sachs

I understand.

Paul Huck

That they are reporting it.

Bob Cole - Goldman Sachs

Not characterized in that segment how about the billion dollars of sales you talked about in the Merchant. What kind of incremental margin that you expect on that?

Paul Huck

The way which you would look at that is that we can load that probably around 35% or so.

Bob Cole - Goldman Sachs

Okay. And then you gave some numbers just a minute ago which surprised me John about operating rates. When I look at your curves on Merchant volume I would have failed that test about where the U.S was relative to Europe. So why is Europe so much better loaded and why is the U.S so much weaker and then additionally I think Paul you said the margin incremental margin opportunity is greatest in Asia because you’ve added a bunch of assets that hasn’t filed up but I think you gave a lower operating rate in the U.S. So why isn’t that a better place for incremental growth?

Paul Huck

I think and you’re going to have that in the U.S you’re going to have the incremental growth in the U.S I am just saying when you look at the amount of asset size which you have to fill is more in Asia then it is in U.S.

Bob Cole - Goldman Sachs

Yeah.

Paul Huck

As far as opportunities and the other thing for that is when you look at those two things if you’re comparing U.S and Europe we in the U.S in this time period we also in the early portion of this de-bottleneck points and stuff like that and moved our capacity up. We haven’t done that in Europe.

Bob Cole - Goldman Sachs

But that’s the slide you showed is volume right?

Paul Huck

That’s volume.

Bob Cole - Goldman Sachs

Not utilization. Yeah.

Paul Huck

But if you get back to the rates the nominator which John gave to you, the U.S has grown over this time period.

Bob Cole - Goldman Sachs

Sure.

Paul Huck

Where in Europe is actually shrunk a little bit.

Bob Cole - Goldman Sachs

And last question which will be an unkind one but there are couple of opsies in the fourth quarter with the contracts that the affordable tax and I guess the polyurethane. Do we assume all the opsies have been cleaned out looking forward?

John McGlade

We hope so.

Paul Huck

Well any for us

John McGlade

Yeah.

Paul Huck

For those things the answer is yes. For everything that we know. You never know I mean that’s one of the things we have. Bad things can happen and if bad things happen we’re going to tell you, we’re going to tell you the truth about that and we’re not going to try to gloss over

John McGlade

And I think two on the polyurethane that business that’s a business that I think we’ve been very clear. We would never have invested in the environment over the last four or five years. And we were looking frankly for an extra strategy from that business. And finally found one it’s absolutely right thing to do and as you said we use the kind word on affordable tax. I think it was very clear in the earnings call is a terrible decision on our part. We weren’t the only one that invested in heavily in affordable tax market that doesn’t excuse the fact that it was a bad decision for us and for our shareholders and I think the prudent thing was to put it behind us because at least now you can have a clean look at capabilities that the electronics business really had to offer as we go forward.

Paul Huck

Yeah on the polyurethane Bob the thing which we did is we had to write the whole plan on and so the contracts ran out to 2017, 2018 some of those things. And so we’re still going to have some recently have profit which comes in, in that business. So if we had just shut the whole thing down and sold it to somebody we wouldn’t have had a loss with all those profit forward but price solutions we bought the contract, we bought the wine contract we could not have signed the other contracts.

Bob Cole - Goldman Sachs

Paul on your slide 13 you talked about the move from 16% to 20% you kind of gave credit for a third of that being new projects. But when I look at that new projects at least over a one, two, three year period should have a lower margin and those margins are ramping up. Why would new projects get you to 20% or be that higher margin and accretive to that type of brand?

Paul Huck

Yeah and the reasons are two. Number one a lot of that a lot of those projects are of the on-site variety duffy and so what happens is the on-site projects they come up with the load and the margin is good from day one on those projects. Now they had a lot of assets I mean because the assets aren’t depreciated. So that’s why the return impact isn’t as large isn’t large on those. The other factor is as I said is that as we load this thing we’re not going to increase the physics cost of the business here going forward. We’re going to have some savings on that. We’re not going to have to add the same number of on finance, IT, operations and stuff like that it’s not going to be a dollar for dollar as it is now. We’re looking at that and that’s going to help margin. So you’re going to get 2% to 3% savings on sales on those increased margins there.

John McGlade

I think you get a flavor of some of that last point that Paul was talking about tomorrow as you have an opportunity to see the OSP and the CSP and some of the very large assets that we have that we’re able to integrate into our system without adding very much incremental operating labor you’re going to see a plant that’s largely un-offended and one of the larger hydrogen plant in our fleet.

Bob Cole - Goldman Sachs

Okay. And then on the return side if we spend a generic dollar of capital this year, can you walk us through what that return profile would look like over the next five to seven years and how that steps up and when that actually becomes accretive to get to forge your goal?

Paul Huck

On the accounting side of thing, so if I spend a dollar and it comes on stream this year and let’s say it comes right on stream be this way to do that.

Bob Cole - Goldman Sachs

Sure.

Paul Huck

Typically it starts to become accretive to the return somewhere out five say seven years.

Bob Cole - Goldman Sachs

Okay.

Paul Huck - Senior Vice President and Chief Financial Officer

All right. Well thank you very much everybody. We appreciate it. Good questions I am sorry we didn’t have time to get to everybody’s questions but for those of you who are in the room here we’ll be moving to the next phase of our event and I understand it sounds like there is a little bit of basketball getting ready out there. Okay. Thank you very much. Thank you.

John McGlade - Chairman, President, and Chief Executive Officer

Thank you.

Unidentified Company Speaker

Thanks John and Paul.

Paul Huck - Senior Vice President and Chief Financial Officer

Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Air Products and Chemicals' CEO Hosts Houston Investor Conference (Transcript)

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts