Simon R. Moore - Director-Investor Relations Seifollah Ghasemi - Chairman, President & Chief Executive Officer Michael Scott Crocco - Chief Financial Officer & Senior Vice President Corning F. Painter - Executive Vice President Industrial Gases Guillermo Novo - Executive Vice President-Materials Technology.

Patrick Duffy Fischer - Barclays Capital, Inc. Jeffrey J. Zekauskas - JPMorgan Securities LLC P.J. Juvekar - Citigroup Global Markets, Inc. (Broker) David I. Begleiter - Deutsche Bank Securities, Inc. Robert Andrew Koort - Goldman Sachs & Co. Don Carson - Susquehanna Financial Group John E. Roberts - UBS Securities LLC Jim M.

Sheehan - SunTrust Robinson Humphrey, Inc. David J. Manthey - Robert W. Baird & Co., Inc. (Broker) Vincent Stephen Andrews - Morgan Stanley & Co. LLC Michael Joseph Harrison - Seaport Global Securities LLC.

Good morning, and welcome to Air Products and Chemicals Fourth Quarter Earnings Release Conference Call. Today's call is being recorded at the request of Air Products. Please note that this presentation and the comments made on behalf of Air Products are subject to copyright by Air Products and all rights are reserved. Beginning today's call is Mr.

Simon Moore, Director of Investor Relations. Please go ahead..

Thank you, Sandra. Good morning, everyone. Welcome to Air Products fourth quarter 2015 earnings results teleconference. This is Simon Moore, Director of Investor Relations. I'm pleased to be joined today by Seifi Ghasemi, our Chairman, President and CEO; Scott Crocco, our CFO; and our senior business leaders.

After our comments, we will be pleased to take your questions. Please limit yourself to one question and a follow-up. Our earnings release and the slides for this call are available on our website at airproducts.com. Please refer to the forward-looking statement disclosure on page 2 of the slides and at the end of today's earnings release.

Now, I'm pleased to turn the call over to Seifi..

Thank you, Simon, and good morning to everyone. Thank you for taking time from your busy schedule to be on our call today. We do appreciate your interest in our company. First, let me introduce the members of our team who are on the call today. In addition to Simon, I have Mr. Scott Crocco, our Senior Vice President and Chief Financial Officer; Mr.

Corning Painter, Air Products Executive Vice President responsible for Industrial Gases; and Mr. Guillermo Novo, Air Products Executive Vice President in charge of Materials Technologies. All of us will be participating in the call and in answering your questions.

A year ago, we promised our investors we would deliver earnings of $6.30 to $6.55 per share in fiscal year 2015.

I am very proud to announce that despite weaker than forecasted economic activity and a headwind of more than $0.40 per share due to currency translation, the people of Air Products delivered earning per share of $6.57, which is higher than the top end of our forecast and a 14% improvement versus last year.

We owe this excellent performance to the tireless and focused efforts of Air Products 20,000 talented, committed and motivated employees.

I want to thank the people of Air Products for coming together to prove that they have the determination and the capability to deliver outstanding results and move our company forward to be best industrial gas company in the world. Now, please turn to slide number 3.

We always start our internal and external presentations with a discussion of our safety performance. We are making progress and, as you will note, our lost time injury rate improved by 17% and our recordable injury rate was 16% better than last year.

We believe that excellence in safety performance requires focus, discipline, process orientation and execution. These are the same characteristics that drive excellence in business performance. The improvement in our safety results is encouraging but our ultimate goal remains zero accidents and zero incidents. Now, please turn to slide number 4.

Our goal for the company has not changed. We are determined to become the safest and most profitable industrial gas company in the world, providing excellent service to our customers. We have made great progress in the past year by improving our profit margins by 350 basis points. And we are all committed to work hard to achieve our stated goal.

Now, please turn to slide number 5, our overall management philosophy. Again, no change here. But I would like to reiterate our fundamental management philosophy in our approach to running Air Products. We believe strongly that cash generation is what drives long-term value.

We believe that what counts in the long term is the increase in per share value of our stock, not the size of our company or our growth rate. In addition, Air Products generates a significant amount of cash and the effective deployment of that cash is one of my most responsibilities as the CEO of the company.

Finally, a decentralized organization releases entrepreneurial energy and keeps costs down. Now, please turn to slide number 6. A year ago, we announced the five-point strategic plan to transform Air Products. I would like to take a few minutes and let you know where we are in the implementation of this plan.

The first point of the plan was to get Air Products focused on its core business, our core competency that is Industrial Gases. We have done this and recently announced that we will spin off our Materials Technologies business tax-free to our U.S. shareholders and set it up as a separate stand-alone public company.

Materials Technologies is a great business and our people have significantly improved the performance of this business in the last year.

We believe that Materials Technologies as specialty material business will be able to grow and expand and be more profitable as a separate company since its drivers for growth, capital requirement and optimal organizational structure is different from that of our core Industrial Gases business.

So with the separation of Materials Technologies by September of 2016, we will be done with the first point of our plan. The second point of our plan was to recognize that our Industrial Gases business is a local business. We do have a global presence, but we should run the business in a decentralized manner, focused on specific geographies.

Therefore, we embarked on the largest organizational restructuring that Air Products has ever undertaken in its 75-year history. We have created over 40 profit centers and a focused decentralized structure and eliminated the global organizational superstructure that that did not add much value. I am pleased to say that we are done.

The new organization structure is in place. The key people are in the proper jobs and the organization is functioning and delivering results as you can see.

The third point of our plan was to change the culture so that we can get everyone focused on safety, simplifying of our work processes, execution with speed and creating the organizational self-confidence that Air Products has the people and the portfolio to be the best in the industry.

As you all know, changing the culture in a large company is not an easy task. We have and are making progress but we are not there.

This is an area that we will continuously focus on until we have all of our 20,000 people committed to acting as if they are the CEO of the company and every day each one of them comes to work and looks for ways to improve our business, our business processes, and take actions that are necessary to move us forward with an eye to our safety, simplicity, speed and self-confidence so that we can achieve our goal of being the most profitable industrial gas company in the world.

The fourth point of our plan was the responsible use of cash and controlling our cost. In this area, we have made excellent progress.

We have a very robust and agile process for reviewing every capital investment of more than $3 million at the corporate level and we have established a minimum hurdle rate of 10% internal rate of return for all new projects.

In the area of cost savings, we have reduced our overhead costs by $300 million a year already and have a detailed plan to achieve an additional $300 million of operational cost savings in the next four years.

Improving productivity and efficiency is a necessary and never-ending process that we are committed to continue as we move forward so then we can stay at the leading edge of our industry. The fifth point of our plan was to properly align our incentive reward program. We have totally restructured and changed this plan from what it was before.

We now have over 40 profit and loss centers. Their performance is based on EBITDA results and people are rewarded for what they achieve in their specific business unit. This has created differentiation. And for example, in 2015, we have units that will get no incentive award to units that will get 200% of their targeted awards.

And our long-term incentive plan is now very focused on total shareholder return. In summary, we have done what we said we would do.

I'm thankful to all of the people of Air Products not only for implementing all of the major changes but, at the same time, staying focused and still delivering an excellent performance for the year while winning new projects. Now, please turn to slide number 7, our annual results.

Scott will take you through the details later, but I want to point out that in 2015, we improved our margins by 360 basis points and we delivered positive free cash flow despite a weak worldwide economy and a $0.40 negative impact from currency exchange translation.

And if you turn to slide number 8 now, which is my favorite slide, you will see our progress in the last seven quarters where we have improved our margins by more than 700 basis points. We are determined to continue to improve our margins until we become the best in the industry.

In slide number 9, we show you our distributed cash flow of more than $10 a share. We believe this measure, more than earnings per share, is the true measure of the wealth we are creating for our shareholders. Up to now, I've been focused on mentioning our efforts on improving our cost structure and delivering the financial targets.

But at the same time, we have been very focused on winning projects to ensure future growth. Please turn to slide number 10. As I mentioned earlier, we announced our intention to spin off Materials Technologies.

Also in 2015, we were successful in bringing onstream some of our key large projects in China, such as PCEC, ZY [Zhengyuan] and YK [Yankuang] with over 20,000 per day of additional oxygen capacity onstream. Our customers are running their facilities. They are using the oxygen we produce. And most importantly, we are getting paid.

We were successful and honored to have Saudi Aramco, the world's largest oil company, award us the right to build the world's largest industrial gas complex with an investment of more than $2 billion. Once built, this facility will supply almost 75,000 tons per day of oxygen and nitrogen to Aramco based on a long-term 20-year supply contract.

We have also won a significant contract to build a world scale facility for a major semiconductor company in South Korea and an oxygen supply contract for Big River Steel in the United States.

And as we announced on Monday, we are building a world-class hydrogen plant with an investment of around $400 million to supply hydrogen and CO to our pipeline system in Texas.

It's also important to note that we are now celebrating 75th anniversary of being in the business of serving our customers and we look forward to serving them the distinction for the next 75 years. Now, I would like to turn the call over to Mr.

Scott Crocco, our Senior Vice President and Chief Financial Officer, to go through the details of the year and discuss our very strong quarterly results. Then, I will come back after comments from Corning, Guillermo and Simon to make some closing remarks. And then we will be delighted to answer your questions.

Scott?.

Thank you very much, Seifi. I would like to make a few additional comments on our fiscal 2015 results. Please turn to slide 11. For the year, underlying sales growth increased by 3% with 2% coming from higher volumes driven by Gases-Asia new plant onstreams and Materials Technologies.

And 1% coming from higher pricing in Gases-Americas and Materials Technologies. Operating margin was up 310 basis points to 19% and EBITDA margin was up 360 basis points to 30.1%. This reflects balanced volume, pricing and cost performance. Only 40 basis points of the operating margin increase came from lower energy pass-through.

Now, please turn to slide 12 for some full-year EPS comments. Year-on-year EPS growth of 14% was fairly well distributed across higher volumes, improved pricing and lower costs. Combined, these added about $1.20 per share to our FY 2015 results versus prior year.

Key drivers included volume growth in Gases-Asia, Materials Technologies and LNG, price mix improvement in Gases-Americas and Materials Technologies, and better cost performance across all of our segments as our cost actions more than offset incentive comp and inflation headwinds.

This was more than enough to offset unfavorable currency and foreign exchange headwinds of about $0.40. Interest expense was $0.08 lower primarily due to higher capitalized interest. And this more than offset the $0.06 impact of higher shares outstanding. Now, please turn to slide 13 for a more detailed review of our Q4 results.

Sales of $2.4 billion decreased 9% versus last year on unfavorable currency of 7% and a lower energy pass-through impact of 3%. Volumes were flat as Gases-Asia growth continued, and our LNG business posted another solid quarter while Materials Technologies and Gases-Americas volumes were down. Corning and Guillermo will comment more on this later.

Pricing was 1% higher for the fourth consecutive quarter and again driven by price increases in Gases-Americas and Gases-Europe, and both price increases and mix in Materials Technologies. We delivered significant operating leverage again this quarter as EBITDA improved by 2% and operating income improved by 9% despite the lower sales.

EBITDA margin improved 350 basis points to 32.1% while our operating margin improved 340 basis points to 21%. We saw margin improvements across all of our segments. Lower energy pass-through only contributed about 40 basis points to the operating margin improvement.

The rest of the operating margin improvement of about 300 basis points resulted primarily from higher prices and lower costs. Better cost performance including lower incentive comp also contributed to our sequential margin improvement.

We continue to improve our performance and this quarter is another new record for the highest quarterly operating margin in over 25 years. Versus prior year, net income increased 11% and earnings per share grew 10% and we continued to improve our return on capital employed, which increased 140 basis points to 12.4% this quarter.

Now, please turn to slide 14. You've heard Seifi and I talk about our focus on cash flow and that we do not want to borrow money to pay dividends. As you can see, distributable cash flow decreased this quarter due to the timing of cash tax payments. However, free cash flow was positive $40 million which is the strongest quarter this year.

We remain focused on spending the right amount at the right time and properly supporting the base business to ensure long-term success. From a timing perspective, it is not unusual for items to move around quarter-to-quarter, particularly maintenance capital and cash taxes.

Turning to slide 15, you can see an overview of this quarter's performance in terms of earnings per share. Before I comment on our Q4 operating performance, I'd like to spend a moment on the non-GAAP items that totaled $0.24 per share or $59 million pre-tax.

This includes $49 million for position eliminations and pension settlements, and $20 million for asset actions, primarily related to a plant shutdown. Included in the other income and expense P&L line is a $34 million gain on land sales.

This is an example of our very strong focus on optimizing all of our assets including property that was not providing value for Air Products. We also saw Materials Technologies separation costs of $7.5 million for legal and advisory fees.

And finally, we recorded a loss on early debt retirement of $17 million as we redeemed some high-interest rate bonds in Chile. We expect to see restructuring and pension settlement costs continue through next year. We have essentially completed the actions associated with our first $300 million of overhead reductions.

Further actions will be part of the second $300 million of operational improvements. Further details on all non-GAAP items can be found in an appendix slide and in the footnotes to our earnings release.

Excluding these items, our Q4 continuing operations EPS of $1.82 increased $0.16 per share or 10% versus last year despite the significant currency headwinds. Volumes increased EPS by $0.02 per share. Pricing, energy and raw materials taken together contributed $0.12.

Net cost performance was $0.16 favorable as higher incentive compensation partially offset the $0.23 benefit from our cost reduction actions.

These cost reduction benefits consist of lower personnel costs as well as actions enabled by our new more disciplined organization, including reducing contractors, consultants, travel and other discretionary spending. Unfavorable currency in FX was $0.16 as almost all currencies weakened against the dollar.

As a reminder, for gases, our currency exposure is primarily translation as the vast majority of our products are made and sold in the same currency. Interest expense was $0.02 lower, due to higher capitalized interest and the remaining items are small and net to zero.

As we mentioned on the Q3 call, we completed the buy-up of the remaining shares of the Indura business in Chile during the fourth quarter. Because we previously owned a majority if Indura and were already consolidating results, there was no impact to our reported sales, EBITDA or operating income.

This purchase is reflected in the financing activity section of our cash flow statement and the redeemable non-controlling interest that was shown on our balance sheet is now eliminated. Now, to begin the review of our business segment results, I'll turn the call over to Corning..

Thanks, Scott. Please turn to slide 16. First, I would like to thank the entire Industrial Gases team for delivering a very strong FY 2015. Implementing the five-point plan was our key focus this year. We decentralized the organization to create greater local authority and accountability and more of an entrepreneurial spirit.

This allowed us to significantly reduce our cost structure. Our new incentive system, which energizes and rewards local teams for their EBITDA performance, focuses us on cash flow and reinforces the cultural changes we are driving. We have more to do in terms of safety, speed, simplicity and self-confidence, but we are excited to be on our way.

The hard work of our people combined with our streamlined and faster organization produced tremendous results in every region. For the full fiscal 2015, Americas' EBITDA margin was up 450 basis points despite modest economic growth. EMEA's EBITDA margin was up 180 basis points despite weak economic growth.

And Asia's EBITDA margin was 210 basis points despite the merchant overcapacity and slowing economy in China. Our people delivered these results by staying focused on what we control, namely, working safely and driving costs out with the new and simpler organization, and we stay focused on customers.

As Seifi has mentioned, we are very excited to be awarded a number of key projects this year that will support profitable growth into the future. We had a pair of announcements in the last two weeks on our U.S. Gulf Coast pipeline system.

First is a new agreement to supply 44 million standard cubic feet a day of hydrogen from our pipeline system to Pallas for ammonia production in Pasadena, Texas. Pallas will enjoy the speed, simplicity and reliability that comes from the world's largest hydrogen pipeline network.

Second is a new world-class steam methane reformer we will build in Baytown, Texas. This plant will provide 125 million standard cubic feet a day of hydrogen to support the growth on our U.S. Gulf Coast system, and it will provide additional reliable supply of carbon monoxide to our petrochemical customers.

Great examples of Air Products wining in the marketplace while creating value for shareholders. The team is excited about the opportunity to further improve the business. Having completed our reorganization, we are very focused on operational productivity to drive additional P&L improvement regardless of the economic environment.

With that, please turn to slide 17 for a review of our Gases-Americas, which includes Latin America, fourth quarter results. Despite currency headwinds and weaker volumes, our continued focus on cost expanded our margins.

Sales of $902 million were down 13% versus last year as the pass-through of lower energy prices reduced sales by 9% and currency reduced sales by 4%. Underlying sales were flat as higher pricing offset lower volumes. We continue to see lower demand in Latin America helium and the oilfield services market.

We also saw a further weakening of steel demand that impacts our oxygen sales and argon co-production. And as I mentioned last quarter, wholesale pipeline oxygen sales are down, and we will replace that volume with retail business. HyCO volumes were essentially flat as refiners continue to run hard.

Pricing was up 2% with continued strength in helium, and we worked hard to cover inflationary and power cost increases in Latin America Operating income of $209 million was down 5% and EBITDA of $330 million was down 3% as profit headwinds from currency, higher incentive compensation and lower energy pass-through more than offset the benefits of our restructuring actions and lower maintenance costs.

Record operating margin was up 190 basis points with about three-quarters of that coming from lower energy pass-through. Record EBITDA margin was up about 370 basis points. As I said, the team is excited about driving further business improvement in 2016 despite an uncertain economic environment and more scheduled maintenance outages.

Now, please turn to slide 18. For the Europe, Middle East and Africa regional business, we saw the benefit of our cost restructuring actions as both EBITDA and operating margin set new records, both up about 200 basis points. Versus last year, sales of $460 million were reduced 14% due to currency, primarily the euro and the British pound.

Underlying sales were up 2% with volumes up 1% and pricing up 1%. Our liquid bulk volumes were positive while we continue to see volume weakness in the packaged gases business, in part due to weakness in the offshore oil and gas market.

And as I said last quarter, we continue to see some negative volume impacts on our Rotterdam hydrogen pipeline, in part due to transportation fuel imports from the U.S. negatively impacting European refinery operations and in part due to the closure of a hydrogen plant there. We are pleased to see another quarter of positive pricing.

Operating margin was up 190 basis points while operating income was down 2% as the positive contribution from pricing and our cost reduction actions was more than offset by the currency impact and higher incentive compensation. EBITDA margin was up 220 basis points while EBITDA was down 5%. On a constant currency basis, operating income was up 11%.

We will continue to prove the business in 2016, but expect seasonally weak volumes and planned maintenance outages to impact Q1. Please turn to slide 19. Gases-Asia delivered another strong quarter with new plants driving both volume and profit growth.

Versus last year, sales were up 7% to $428 million with volumes up 15% primarily from the new plants, partially offset by a negative 7% impact from currency primarily in Korea, Taiwan and China. Overall merchant volumes were up mid-single digits across Asia.

Our China retail LOX/LIN business was up low-mid-single digits, while overall China LOX/LIN was down as we focused on increasing our retail business while reducing wholesale volume. We still see end market demand growth in China but excess capacity continues to impact merchant pricing.

As I mentioned last quarter, the majority of our plants in China are protected by secure take-or-pay terms. And with the large on-site plants coming onstream, this proportion of our business is only growing. The first phases of the largest oxygen on-site complex Air Products has ever built started up in Yulin.

As our customer brings their gasifiers fully online, we will bring on additional phases through the first half of FY 2016. As I also mentioned last quarter, occasionally we will see swings in the energy pass-through around customer startups. This has no impact on profit, but it can impact sales and margins.

Once again, most importantly, customers are executing their projects, operating their gasifiers, taking oxygen and we are getting paid. Our reported profitability was very strong, with operating income up 40% and operating margin up 620 basis points, while EBITDA was up 17% and EBITDA margin was up 330 basis points.

Our underlying business remains strong and we are seeing the benefits of the new projects coming onstream and our cost reduction actions. In addition, this quarter's comparison benefited from some one-time cost items last year and a positive catch-up payments from on-site customers this quarter.

As we look to 2016, the Asia team is focused on driving business improvement and continuing to start up the large projects in our backlog. We would expect Q1 FY 2016 to be closer to Q1 FY 2015 due to some of the one-time benefits I mentioned. I'll close with a few words about the Global gases segment.

You'll recall that this segment includes most of our Air Separation Unit sale of equipment business as well as costs associated with the Industrial Gas business which are not regional specific. Our overall sales were flat with last year, although the business mix was different, with lower small equipment sales and higher ASU sales.

This significant profit improvement versus last year was driven by our cost reduction actions and positive project performance and closeouts. Now, I will turn the call over to Guillermo for a review of our Materials Technologies segment results..

safety, top line growth and margin enhancement. Equally important, we're committed to meeting or exceeding our timeline for the spin-off of Materials Technologies as a stand-alone company. This is the second year of strong performance improvement for Materials Technologies.

I'm certain that I can speak for the entire team that we are committed to adding value to our customers, to the success of our business and to creating an exciting and profitable future for all stakeholders. Again, I look forward to spending time with you to discuss our business in more details.

I provided you details on how our business is performing this year, this quarter and into next year. But let me summarize and re-emphasize that we expect to deliver higher profits from Materials Technologies in fiscal year 2016 than we did in fiscal year 2015.

The improvements we've made over the last two years have fundamentally changed and strengthened the Materials Technologies business and positioned us well to continue to deliver profitable growth. Now, I'll turn the call back over to Simon for quick comments on the Corporate segment..

Thanks, Guillermo. Our Corporate segment consists of our LNG and helium container businesses as well as corporate costs which are not business-specific. Sales were up this quarter versus last year as we continue to see higher LNG sales more than offsetting lower helium container sales.

The LNG projects in our backlog continue with no delays or cancellations. However, we have seen a slowdown in customer decision-making on new projects that will likely impact our FY 2016 results. The improved profitability this quarter was primarily driven by the higher LNG activity and the benefit of reduced corporate costs.

Now, I'll turn the call back over to Seifi..

Thank you again, Simon. Now, please turn to slide number 22 for a discussion of our outlook. The Air Products team continues to stay focused on our goal of becoming the safest and most profitable industrial gas company in the world. We have made great progress in fiscal year 2015 and delivered a 14% improvement in our operating profit.

And we expect to continue our journey during fiscal year 2016. Our guidance for fiscal year 2016 is to actually deliver earnings per share of $7.25 to $7.50 per share. At mid point, this will be an increase of $0.81 or 12% over our very strong fiscal year 2015 performance.

Our guidance for the first quarter of fiscal year 2016 is for earnings per share of $1.65 to $1.75. At mid point, this will be an increase of $0.15 or 10% over the fiscal first quarter of last year. The full year and quarterly guidance obviously includes Materials Technologies.

We expect our CapEx expense to be about $1.5 billion to $1.6 billion in 2016 which is down slightly from this year. As you have seen from our recent project announcements, we see great opportunities to invest Air Products substantial cash flow into good high-return projects in our core Industrial Gases business.

Despite an uncertain economic environment, the Air Products team will stay focused, as they did this year, to take actions that we control to actually deliver the results that we promise despite economic conditions or currency exchange rates. I would like to add that I have now been Chairman and CEO of Air Products for the past 16 months.

I am now convinced more than ever that Air Products has a great future ahead of it. We do have an outstanding team of talented, dedicated and motivated people who are driving change, and we are blessed with having the great portfolio of businesses around the world with more than 700,000 outstanding customers to serve.

I'm proud of our people and considered it an honor and a privilege to be part of this winning team. Now, we are delighted to answer your questions..

And we'll go first to Duffy Fischer of Barclays. Mr. Fischer, your line is open. Please go ahead..

Yes. Good morning, fellows..

Hi, Duffy.

How are you?.

Good. Thanks. Maybe start on Seifi's favorite slide, slide 8. Very impressive performance in the margin there.

Can you break out into buckets where the big chunks of that have come from? How much has been from the cost savings? How much has been from new plants coming online? And then maybe talk about how that would have been different than what you would have thought day one that you took the job where that was going to come from?.

Well, approximately half of that 700 basis points is cost savings and the other half is related to price increases, volumes and the new plants coming onstream.

And in terms of my expectations the day that I started, I thought that it would take us three years to get that 300 basis points improvement and it has been accomplished in one year and I'm very proud of that..

Great. And then from your slide 9 where you walked through the cash flow there, maintenance capital last year was $311 million, maintenance capital this year $250 million. When you think about maintenance capital, I would have thought there isn't that much variation from year to year.

How should we think about a normalized maintenance cap level for you guys?.

We have always said that order of magnitude around $300 million..

Okay. Great..

Yeah. Sure. Thank you..

Thank you, guys..

Thank you..

Thanks, Duffy..

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

Hi. Good morning..

Good morning, Jeff..

Hi. You said that your CapEx next year would be, I don't know, $1.5 billion or $1.6 billion.

Is that also your non-GAAP CapEx or is your non-GAAP CapEx different?.

Scott, you want to....

Yeah. Hi, Jeff. That is both our GAAP and non-GAAP CapEx. We haven't been doing – the adjustment that you're referring to is the capital leases in the 2001-2008. We haven't been doing those lately, so that's both GAAP and non-GAAP..

And you were kind enough to give an indication of what you thought you would earn next year. Your GAAP earnings have been lower than your adjusted earnings.

Do you have an idea of what your GAAP range would be for next year?.

I don't expect too many so called one-off items. The biggest one-off items we have had this year has been the restructuring, which has been about $212 million, $213 million. And next year, there will be some restructuring charge, but I don't expect the magnitude to be as big, Jeff..

Okay. Good. Thank you so much..

Thank you..

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

Yes. Hi, good morning..

Good morning, P.J..

Couple of questions on China. First, three major projects you're starting up with 20,000 tons per day of oxygen. What is the EPS impact of these projects? And then secondly, you mentioned that you have this new strategy of increasing your retail sales in China and reducing your wholesale volumes in China.

Can you just talk a little bit more about that strategy?.

Sure. I think Corning would be delighted to answer the questions..

So I'm not sure that we've given out specific guidance on specific projects, but I think, in general, we would expect them to come in with the profitability that you would expect from the guidelines we put out.

I think the key point is this is a question of exactly what's the timing and when are they on and fully onstream but, again, we see all of our customers progressing their plants, building them to construction. They don't operate without oxygen, so they need us and they pay us for it. I don't expect big surprises there.

In terms of retail versus wholesale, so I think it's common when people first bring on a new liquefier that in terms of getting loading, a lot of that volume may go into a wholesale sort of environment. We don't have new liquid to bring on at this point. All of our liquid is currently on.

And so we're naturally in the process of preferentially signing and selling to retail customers and, to a large extent, that's about application sales, helping customers to be more efficient and more productive in their own operations and that's something you can do in any economic environment, right, because you're helping them to be more competitive.

And when you think an emerging market, right, they're not typically as, let's say, industrial gas intensive or developed as a more mature economy and that's another reason we're able to push that in China today even in the current economic environment..

Thank you. And my second question is on your free cash flow. Can you talk about sort of if you have any growth, long term growth for free cash flow? And Scott, maybe a rationale for buying out Indura now? Thank you..

Go ahead..

Sure. So in terms of free cash flow, as we've talked in the past, we're going to make sure that we maintain our A rating.

We're going to drive EBITDA up, generating as much cash out of the existing assets we have and then we're going to evaluate the growth opportunities with organic growth opportunities being the ones that we're going to be able to create the most value for our shareholder.

That's what we done under Seifi over the last 16 months and that's what we're going to continue going forward. In terms of Indura, that was exercised by our minority partner per the contract, and so that was a put that he put to us.

And now that we own that, we have the opportunities to take control and drive improvements across the business that we weren't able to do previously. By the way, you'll see that also in a variety of forms, including the fact that we paid down some high cost debt, about $147 million bond that was out there at roughly 10%.

And so, we're going to see some improvement in interest expense as part of what we did here this quarter. So, another example of the things that we're doing in Indura to drive improvement..

Thank you..

Thank you, P.J..

And we'll go next to David Begleiter of Deutsche Bank..

Thank you. Good morning..

Good morning, David..

Hi, David..

Seifi, very impressive margins in Gases-Americas, EBITDA of 34.9% in 2015.

How much higher can it go in 2016 do you think?.

Well, obviously, some of that is dependent, David, on what the economy will do and what kind of a leverage we get. But at the same time, we have said that we are going to have another $75 million of cost savings in 2016. A lot of that is in the Americas, so I expect those margins to continue to improve..

Very good.

And just on Tees Valley, Seifi, do you have an update? And what should we think about the impact from a earnings standpoint from Tees Valley to be in 2016?.

There will be no income from Tees Valley in 2016. In our forecast that we have given you, there is no consideration for any contribution from Tees Valley..

Will it be a loss-making entity in 2016?.

I'm sorry?.

Will it lose money in 2016?.

No. I don't expect it to lose money..

Thank you very much..

Thank you..

And we'll go next to Bob Koort of Goldman Sachs..

Thanks. Good morning, guys..

Good morning, Bob..

Seifi, I want to follow up on Tees. I recognize your desire to be pretty cautious and conservative on that. But you guys are plunking down $1 billion. And at the time the contracts were written, I thought they were fixed price.

Has something changed about the revenue base that you'd previously contracted for that would put it into a breakeven position instead of a moneymaker?.

Well, the Tees Valley, Bob, we are in the process of starting up that plant. So we don't expect that plant to really be in commercial operation in 2016. So that's why we have assumed that it would not be contributing to the bottom line..

Sorry. Just to be clear, so the contract terms you had on the waste fee, power fee, renewables, none of that's changed? It's just the ability to get it into commercialization and it's....

Yes..

...I guess it's at least three years behind.

Is that an indictment of the technology or is there some other issue at work?.

No. It's just related to the technology. We have always said that there is a chance that the technology will not work, Bob, so we are still working to figure out whether it does work or not..

Okay. Thanks..

There's a good chance that it doesn't work, so we have to be aware of that and I have been mentioning that for the past year..

Yes. And then, let me ask you more broadly, Seifi, I mean, from your prior tenure in the gases industry, it seems like the world has gotten much tougher for industrial gas companies. I know your volumes in the last year are up about 2%. I think your friends at Praxair, they're down 1% or 2% so far this year. I think the packaged guys in the U.S.

Airgas are down a little bit. But the globe hasn't been in a recession.

So is there something fundamentally broken about the old multipliers between gases demand and economic growth?.

Bob, I don't really see that. I think that what we are facing with right now in terms of the growth in volume is just that the LOX/LIN volumes are down. But when you look at our on-site facilities, the volumes are not that far down.

We are making significant progress in China and I think in the long term there is a lot of opportunities for industrial gases. And I think all of the industrial gas companies in time will enjoy about 1.5 times GDP growth rates. I don't see any fundamental change in that..

Great. Thanks for the help..

Thank you very much, Bob..

Take care, Bob..

And we'll go next to Don Carson of Susquehanna Financial..

Yes. Thank you. Seifi, just wondering, in next year's guidance, how much greater is the contribution from new projects? And as you look at the backlog, I notice you indicated your new Baytown facility was sold out the day you announced it. So should we assume more announcements on U.S.

Gulf Coast hydrogen, and could that be offset by sort of the end of the Chinese coal gasification opportunity?.

Well, first of all, I don't expect that the Chinese coal gasification would – that it is the end. I think there's still a lot of opportunity there, and we will appropriately participate on that. We have gotten off of the habit of giving you a specific forecast about new projects because that is too much competitive information to give away.

So I apologize for not giving you that. But we are very optimistic. You have seen the projects that we have announced. And we are saying that next year, our forecast right now is that we will increase our profits by 15% as compared to other people. So I think that's a good indication that we will see additional volumes..

Okay. And then as a follow-up on price, I notice your October 1st price increase initiative. It seems pretty aggressive for North America, given where operating rates are, I think 20% on liquid argon, 15% LIN/LOX.

And I know these take time to roll through, but are conditions in the North American merchant market improving to the point where you think you can get a lot of this price?.

Well, obviously, we hope that that would be the case. And then what happens in the real world, it remains to be seen but it certainly is our intent to implement the price increases..

Okay. Thank you..

Thank you..

And we'll go next to John Roberts of UBS..

Thank you. 2016 will be the fourth year of lower capital spending.

Based on these new wins and so forth you've been having recently, do you think this is the bottom in 2016?.

I wouldn't want – well, you have to consider that Air Products spent a significant amount of money on the waste to energy project. Obviously, we are not going to invest in waste to energy projects in the future. So if you take that out, then I think we will continue to see a growth in the investment in the gases business..

Okay.

So, the total number might decline but gases would be turning around?.

Yes, sir..

And then, in the Materials segment, the dispensing equipment part of the business has always had greater cyclicality. I don't believe that you manufacture the equipment.

So, is there a different business model you might take in that business that would make it more variabilized so that you reduce the cyclicality on the total business?.

That's a very good question. I'm going to have Guillermo address that question..

the equipment side and the turnkey projects. The equipment side, we actually do manufacture all the delivery equipment both for the specialty gases, the specialty materials and we also have a business for slurry delivery in part of the portfolio. So those we do manufacture and we do sell.

There is some volatility in that part of it, but it's pretty steady. Where we get the majority of the volatility is in the turnkey projects, and those are really project-driven activities. And those are just going to be the nature of when the projects come. But the turnkey projects is not the majority of the business..

Thank you..

Thanks..

And we'll go next to Jim Sheehan of SunTrust Robinson Humphrey..

Morning, Seifi..

Hey, Jim.

How are you?.

Great.

Say, on your 2016 outlook, what are you incorporating there as your assumption for FX headwinds, and how much of the growth is going to be attributable to organic growth, please?.

In the forecast that we have given you, we have assumed that we will have a hit of about $0.10 for exchange rate translation. That's the assumption that is in there. In terms of organic growth versus – we have assumed not much of a organic growth because we don't believe that the economic conditions around the world will be that robust next year.

So, most of our growth is going to – the growth in EPS is going to come from cost reduction and from our on-site businesses..

Thank you very much..

Thank you, Jim..

Thanks, Jim..

And we'll go next to David Manthey of Robert W. Baird..

Hi. Good morning. Seifi, it looks like you achieved the first $300 million of cost improvement about three months ahead of your recent plan, so you're on to the next $300 million.

Can you outline some of the examples of operational improvement that you hope to achieve over this four-year period?.

Sure. I think I'd like to have Corning kind of address this because he is in charge of the delivering the other $300 million.

Corning?.

Thank you, Seifi. So, the reality is in this business, the nature of our business, this is the 10,000 little things that we talk about. And even if I was going to say improving spec power, well, it's spec power over many different plants, all of whom have their own operating situation.

So I think the thing I'd really like to stress here is what enables you to drive 10,000 things better than you used to? And it heavily goes to the organizational changes that we've made, right? So, we've gone to a much more decentralized and empowered field organization where those production assets are.

Number two, we have one owner for these assets. It used to be there might be someone who had the tonnage business or electronics business and then the merchant business, different debates about how to optimize the use of that. That's over. That's done. That's behind us.

And then, we've got the incentive plan, right, which motivates every one of these local teams to think about their EBITDA, how do they drive productivity, every one of them each day. And I think those three drivers are a very powerful move that's moving us through to optimize those 10,000 and to hit these productivity targets..

Okay.

And your confidence level there, I would imagine you have folks that have run these types of facilities for you that have also run them at other companies and roughly 300 basis points of the overall you think is a reasonable estimate for how inefficient your operations are relative to what something would be running it if it's optimal today?.

So, I think I'd rather not get into is it optimal, unoptimal today, this and that. I think a couple of things here. Number one, there is something going on in this company and we are absolutely, positively committed to being the safest and most profitable company while giving our customers excellent service. That's what this is about.

And if other companies move up, then we just need to do more. We are committed to that. We're motivated for that. We've kind of unleashed the productivity with this new organization. And do we see opportunities to do things better in line with what we're doing? Yes. Do we have plans in place for this? Yes, we do..

Okay. Thank you..

And we'll go next to Vincent Andrews of Morgan Stanley..

Thanks. Just a quick one for you, Scott. In Asia, you mentioned there were these catch-up payments. I'm just wondering if you could give a little bit more detail on what they were, whether there are any more to come going forward and whether they were 100% margin in the quarter? That'd be helpful..

Yeah.

Corning?.

Yeah. Thank you. So these are, of course, specific to an individual or a set of customers, so it's very difficult to go into the specifics about them. I think the key point is associated typically with a start-up and which products they want and where are we in terms of the start-up process at different points in time.

And perhaps the other really key point is we've collected everything. So it's all in the P&L and it's all been in. And so I don't see that repeating in a significant way going forward..

Okay. Great. Thanks very much, guys..

All right Vince. Okay.

Why don't we take one more question?.

And we'll take our final question from Mike Harrison of Seaport Global..

Hi. Good morning. Thanks for squeezing me in..

Good morning. We knew you were on the line, so go ahead, Mike..

Thanks very much.

Was curious if you could delineate what the split is between your retail and wholesale merchant volumes in China now and how has that changed over time?.

Sure. Well, I think Corning can answer that question easily. Go ahead, Corning..

Yeah. Because of the competitive nature, I think we would rather not go into the specifics of this other than to say that, let's say, in LOX/LIN, we are, at this point, certainly predominantly retail direct to customers, and we see a slow but steady improvement. With a large basis like that, it doesn't change overnight.

But I'd rather not get into exact specifics just for competitive reasons..

Okay. And then, looking at the Industrial Gases- Global segment, there was much better profitability this quarter.

You called out some lower costs, but are we starting to see the Jazan ASU sales trickle in there and can you give any guidance for that segment for next year?.

There isn't much of Jazan in the numbers that we have for 2015. And for 2016, I think Jazan is a project that is a 20-year project and the profits will come after the plant starts up four years from now. For 2016, we are going to be very cautious in recognizing any profit in terms of the sales from the plant because these plants need to come onstream.

You had a lot of obligations in terms of performance guarantees and all of that. So one has to be cautious and there is a lot of accounting rules that we have to follow on that. So there isn't a lot of projections for a lot of profit for that in 2016..

All right. Thank you very much..

Thank you..

And so with that, I'd like to thank everybody. Thank you for taking the time again to be on our call. We appreciate that and we look forward to discussing our results with you in the next quarter..

And this does conclude today's conference. We thank you for your participation. You may now disconnect..