Simon R. Moore - Vice President, 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.

Steve Byrne - Bank of America Merrill Lynch Vincent Stephen Andrews - Morgan Stanley & Co. LLC Christopher S. Parkinson - Credit Suisse Securities (USA) LLC (Broker) Duffy Fischer - Barclays Capital, Inc. Robert Andrew Koort - Goldman Sachs & Co. John Roberts - UBS Securities LLC Jeffrey Michael Schnell - Jefferies LLC P.J.

Juvekar - Citigroup Global Markets, Inc. (Broker) Michael Joseph Harrison - Seaport Global Securities LLC Nils-Bertil Wallin - CLSA Americas LLC James Sheehan - SunTrust Robinson Humphrey, Inc. Michael J. Sison - KeyBanc Capital Markets, Inc. Jeffrey J. Zekauskas - JPMorgan Securities LLC Emily Wagner - Susquehanna Financial Group LLLP.

Good morning and welcome to the Air Products & Chemicals' Second 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, Vice President of Investor Relations..

Thank you, Angela. Good morning, everyone. Welcome to Air Products' second quarter 2016 earnings results teleconference. This is Simon Moore, Vice President of Investor Relations. I am pleased to be joined today by Seifi Ghasemi, our Chairman, President & CEO; Scott Crocco, our CFO; and our senior business leaders.

After our comments, we'll be pleased to take your questions. 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 two of the slides and at the end of today's earnings release.

Seifi and Scott will talk more about the decision to exit Energy-from-Waste, which we announced a few weeks ago. The quarterly results we are sharing today and the prior-period comparisons have been restated to reflect moving the Energy-from-Waste segment to discontinued operations. 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 schedules to be on our call today. We do appreciate your interest in Air Products. 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 our Materials Technology business now called Versum. All of us will be participating in the call and in answering your questions.

I am very pleased to report that Air Products delivered another set of excellent results this quarter.

Despite sluggish economic growth worldwide and currency headwinds, our team stayed focused on our five-point strategic plan and delivered $1.82 per share of earnings, which is up 17% over last year and on a constant currency basis, our EPS is up 20% versus last year.

Another quarter of outstanding performance is due entirely to the tireless and focused efforts of Air Products' talented, committed, and motivated employees around the world.

I once again 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, so that they can be the best industrial gas company in the world. That is our goal.

Please go to slide number three, we always start our internal meetings with a discussion on safety. And I want to do the same today in our presentation to you. Our quarter two performance in safety was better than last year and did improve relative to our disappointing first quarter performance. So I'm pleased that we are moving in the right direction.

However, the only acceptable goal is zero accidents, and we have a responsibility to our employees and their families to ensure that everybody goes home every day with no injuries or accidents. At Air Products, safety is the responsibility of every single employee.

Now, please turn to slide number four, which is the restatement of our overall goal for the company. 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 on the profitability side, and I'm confident we can focus and improve our performance on the safety side. Now, please turn to slide number five, our overall management philosophy that we have shared with you many times before, but I would like to emphasize it again.

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 growth rates.

In addition, Air Products generates a significant amount of cash and the effective deployment of that cash is one of my most important responsibilities as the CEO of the company. Now, please turn to slide number six, our five-point plan.

Our strong performance this quarter and in the previous quarters is a direct result of our focus on our five-point strategic plan that we announced a year-and-a-half ago. I reviewed our progress last quarter and I would like to just make a few more comments. The first point of this plan was to focus on industrial gases, our core business.

And therefore, divest of our non-core businesses. In September 2015, we announced plans to spin-off our Material Technology business tax-free to our shareholders and set it up as a separate public company called Versum Materials.

We submitted our initial draft Form 10 in December to the Securities and Exchange Commission, and have since updated that and the team is making great progress on the significant amount of work necessary to implement this plan. But most importantly, Guillermo and the Material Technologies team are delivering very strong results quarter after quarter.

We are on track to complete the separation of this business from our core by the end of September 2016 and will continue to evaluate whether debt and equity market conditions are favorable for a spin-off. The second non-core business is Energy-from-Waste, Scott will take you through the details.

But as a result of the decision to exit this business last month, we have taken a pre-tax charge of almost $1 billion this quarter primarily to write-down assets associated with the Energy-from-Waste business to their realizable value. The fourth-point of our plan is the responsible use of cash and eliminating unnecessary work.

We have a very robust process to review every capital investment of more than $3 million and have established a minimum hurdle rate of 10% internal rate of return for all new projects. We also have a strong backlog of projects that will deliver volume, revenue, and earnings growth over the next few years.

Our backlog is down this quarter because we successfully brought on-stream the new hydrogen plant in Canada serving Shell and the local pipeline system there.

As I have mentioned previously, I remain very optimistic about the growth potential of our core Industrial Gases business, especially opportunities in larger scale on-site oxygen and hydrogen plants.

In the area of restructuring, the actions we took last year to eliminate unnecessary work have already reduced our overhead by $300 million a year and you're seeing the benefits of these efforts in our results.

We are making great progress on our plan to achieve an additional $300 million of operational savings in the next four years through self-help measures, including plant operations, distribution, sourcing and overhead costs.

Corning will share with you some examples of the great work the organization has been doing to begin to deliver on the second $300 million. Improving productivity and efficiency is a necessary and never-ending process that we are all committed to as we move forward so that we can stay at the leading edge of our industry.

Now, please turn to slide number seven for a summary of our results for the quarter.

Scott will take you through the details, but I wanted to emphasize that we improved EBITDA margin by over 500 basis points versus last year, increased our earning per share by 17%, and, most importantly, our return on capital employed is now up 200 basis points to 13%.

Our restructuring actions enabled us to deliver these strong results despite the weak worldwide economy and continued currency headwind. Also, please note that this is the seventh consecutive quarter that we have delivered double-digit earnings per share growth.

And now, if you please turn to my very favorite slide, slide number eight, you will see our progress over the last two years where we have improved our margins by 1,000 basis points. Yes, 1,000 basis points. And during this same two years timeframe, our earning per share is up 37%.

This single chart is a great demonstration of how focused the Air Products team is and we are determined to continue to improve our profitability. Now, I would like to turn the call over to Mr. Scott Crocco, our Vice President and Chief Financial Officer, to discuss our quarterly results in detail.

Then, I will come back after comments from Corning, Guillermo and Simon to make some closing remarks, and then we will be pleased to answer your questions.

Scott?.

Thank you very much, Seifi. For our second quarter, sales of $2.3 billion decreased 6% versus last year on unfavorable currency and lower energy pass-through impacts of 3% each. Volumes were unchanged as Gases-Asia growth continued, while other segment volumes were lower. Corning and Guillermo will discuss more on that later.

Pricing rounded down to zero but was just slightly positive driven by price increases in Gases-Americas and Gases-Europe. We delivered significant operating leverage again this quarter as EBITDA of $797 million improved by 12%, and operating income of $532 million improved by 20% despite the lower sales.

EBITDA margin improved 560 basis points to 35.1%, while our operating margin improved 500 basis points to 23.4%. We saw margin improvements across all 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 460 basis points resulted primarily from the benefit of the restructuring actions we have taken and a smaller benefit from price versus raw materials. Our actions continue to show results, and this is another new record for the highest quarterly operating margin in over 25 years.

Versus prior year, net income and earnings per share grew 18% and 17%, respectively. And we continue to improve our return on capital employed, which increased 200 basis points to 13% on our higher profitability. As Simon mentioned previously, Energy-from-Waste has been moved to discontinued operations and is not included in these numbers.

Now please turn to slide 10. 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 increased by about $50 million this quarter due to higher EBITDA.

I want to point out that for consistency, we've restated the prior year's growth CapEx to exclude Energy-from-Waste. As a result of the higher EBITDA and the lower growth capital spending, free cash flow was $220 million this quarter and $121 million higher than last year.

Just as a reminder, 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 number 11, we've included some additional information regarding our decision to exit the Energy-from-Waste business that we announced earlier this month.

The decision to exit the business and stop efforts to startup and operate our Energy-from-Waste projects was based on continued difficulties encountered in starting up the first project.

Based on extended testing and analysis completed this past quarter, significant additional time and resources would've been required to make the projects operational. In addition, the decision allows us to execute our strategy of focusing resources on our core Industrial Gases business.

As a result of this decision, the Energy-from-Waste segment has been moved to discontinued operations, and prior year information has been restated for comparison purposes. We recorded a pre-tax charge of $946 million during fiscal Q2. This loss includes $914 million to write down the plant assets to their estimated salvage value of $20 million.

The charge also includes $32 million for plant disposition and severance costs. The projects are located on leased land that requires removal of the facility. It is expected that dismantlement of the facility will be completed in fiscal 2017.

As a result of removing this asset value from the denominator, ROCE increases by approximately 100 basis points. Additional exit costs estimated at $50 million to $100 million may be recorded in future periods to wind down the plant and settle the remaining purchase contracts.

We are also still evaluating an ASU built primarily to serve the Energy-from-Waste site. Its current book value is approximately $60 million and is in our Gases-EMEA segment. There is no change to our continuing operations book effective tax rate.

There will be a modest cash tax benefit totaling about $75 million to $100 million that we expect to recognize over the next 10-plus years. In terms of future uses of cash, we see a potential net cash cost of $60 million to $110 million for the various items mentioned above.

However, as we've said, we are working to optimize the cash value of our investment. Turning now to slide number 12, you can see an overview of this quarter's performance in terms of earnings per share.

Before I comment on our Q2 operating performance, I'd like to spend a moment on the non-GAAP items that totaled $0.08 per share, or $19 million pre-tax. We incurred Materials Technologies' separation costs of $7 million, or $0.04 per share primarily for legal and other advisory fees.

As I mentioned last quarter, we have completed the actions associated with our first $300 million of overhead reductions. We are now focused on the second $300 million of operational improvements. In Q2, we incurred a $9 million, or $0.03 per share charge associated with these actions.

We also recorded a $3 million or $0.01 per share pension settlement charge. Further details on all non-GAAP items can be found in the appendix slide and the footnotes to our earnings release. Excluding these items, our Q2 continuing operations EPS of $1.82 increased $0.26 per share, or 17% versus last year.

The impact from lower volumes decreased EPS by $0.10 per share primarily due to a positive prior year contract wrap up in global gases and a lower LNG sale of equipment activity. Pricing versus raw materials taken together contributed $0.08, primarily driven by lower raw material costs.

Net cost performance was $0.36 per share favorable, primarily due to the benefit of our restructuring actions taken last year and good progress on our operational improvements. Cost performance also benefited by about $0.15 from lower incentive compensation, lower pension costs, and other income and expense.

Unfavorable currency was $0.05 as many currencies besides the euro 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. Equity affiliate income was unchanged.

Interest expense of $0.01 was $0.01 higher primarily due to lower capitalized interest from lower capital spending. Taxes were $0.02 unfavorable due to higher earnings. For the year, we still expect our effective tax rate to be in the 24% to 25% range, likely closer to 25%.

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

Thanks, Scott. Let me start by thanking the entire Industrial Gases team around the world for delivering another very strong quarter. Despite continuing currency headwinds and challenging economic conditions, each of the regional teams delivered EBITDA margins that were up more than 500 basis points.

We are focused on the things we can control, primarily driving operational productivity, and we also improved our safety performance this quarter. We have described our operational productivity opportunity as 10,000 little things, meaning we have many opportunities to act and drive improvement.

As an example, we have a large network of plants that produce liquid oxygen, nitrogen and argon; LOX, LIN and LAR. Many of them also serve pipeline customers like steel mills. As pipeline customer demand swings and local power rates shift, the availability and cost of liquid product changes, too.

We are working with third-party providers including outside distribution experts to modernize our sales and operations planning process and tools to help us to reliably serve our customers for the lowest cost every day. With that, please turn to slide 13 for a review of our Gases-Americas' first quarter results.

Despite currency headwinds and weaker volumes, our continued focus on restructuring actions and self-help measures drove the significant margin expansion. Sales of $798 million were down 10% versus last year, as the pass-through of lower energy prices reduced sales by 6%, and currency reduced sales by 3%.

Volumes were down 2% primarily driven by weakness in Latin America. We also continued to see lower oilfield service demand versus last year, although we'll begin to lap that decline next quarter. Steel remains weak. We haven't yet seen any improvement to speak of in our customers' operations.

Although HyCO volumes were down slightly on modest customer outages, underlying demand remained strong. Pricing was up versus prior year for the sixth consecutive quarter with a key focus on recovering inflation in South America. Volumes were down sequentially primarily in South America seasonality.

Operating income of $224 million was up 23%, and EBITDA of $341 million was up 14% versus last year, as the benefits of our restructuring actions and lower maintenance costs more than overcame headwinds from lower volumes, currency and lower energy pass-through.

Record operating margin of 28.1% was up 770 basis points, and record EBITDA margin of 42.8% was up over 900 basis points. Lower energy pass-through, accounted for only about 100 basis points of that, meaning that the operating margin was up 670 basis points excluding lower energy pass-through.

Finally, we are pleased to bring onstream our newest 150 million standard-cubic-foot-a-day hydrogen plant located in Scotford, Northeast of Edmonton in Alberta. This new steam methane reformer provides hydrogen and steam to Shell Canada's Scotford facility and will supply hydrogen to Northwest's refinery.

The plant is connected to our Heartland Hydrogen Pipeline system that is also fed by two hydrogen plants in Edmonton and supplies refiners, upgraders, chemical processors and other industries. As this plant came onstream right at the end of the quarter, it did not contribute to our Q2 results. Now please turn to slide 14.

For the Europe, Middle East and Africa business, we continue to see our restructuring and pricing actions more than offsetting volume weaknesses as EBITDA and operating margins again set new records, both up over 500 basis points.

Versus last year, sales of $420 million were down 6% due to a negative currency impact of 3% and a negative 4% impact from lower energy pass-through. Underlying sales were up 1%, as 2% higher prices more than offset 1% lower volumes.

We have not really seen much demand improvement in Europe, but continue to work hard on price increases, delivering our fifth consecutive quarter of positive pricings. Operating income of $89 million was up 26%, and EBITDA of $145 million was up 14%, as our restructuring and price actions more than offset headwinds from currency and lower volumes.

Record operating margin of 21.3% was up over 500 basis points, and record EBITDA margin of 34.5% was up over 600 basis points. Lower energy pass-through accounted for about 50 basis points of that, meaning that the operating margin was up 500 basis points, excluding lower energy pass-through. Please turn to slide 15, Gases-Asia.

Volume growth and the benefits of our restructuring actions drove significant margin improvement over last year. Sales of $406 million were up 3%, primarily driven by volumes up 10%, partially offset by a negative 6% impact from currency primarily from China, Korea, and Taiwan.

Overall merchant volumes were up high-single digits both across Asia and in China specifically. We continue to see the benefits of large, on-site plan projects we brought onstream over the last year, as well as an increase in energy pass-through revenue at a few of these recently started up plants.

Our coal gasification customers in China continue to operate their facilities at high rates. Our plants continue to run well. And most importantly, we continue to get paid. Pricing was down 1%, reflecting a reduced rate of decline in LOX, LIN and LAR pricing despite the substantial overcapacity in China.

Operating income of $104 million was up 23%, and EBITDA of $170 million was up 18%, as our restructuring actions and stronger volumes more than offset the headwinds from currency and price. Operating margin of 25.7% was up over 400 basis points. And EBITDA margin of 41.9% was up over 500 basis points.

We did see a sequential decline in profits driven by about $5 million of positive non-recurring items last quarter, currency, and the expected lower merchant volumes during the Lunar New Year.

I would add that it seems that our customers' Lunar New Year outages this year were fairly typical relative to previous years, and we didn't see them taking extended outages. I'll close with a brief comment on 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 region specific.

Sales were up as we recognized about $30 million of revenue from the Jazan ASU sale of equipment and that more than offset weakness in small equipment and other ASU sales. However, we did not recognize any profits this quarter from Jazan as we are still early in the project.

Costs in this segment were down, but profits were down as the prior-year quarter had a non-recurring benefit from a contract wrap-up. Now, please turn to slide 16, and I'll turn the call over to Guillermo for a review of our Materials Technologies segment results..

safety, top line growth and margin enhancement. And now, I'll turn the call back over to Simon for a quick comment on our 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 down versus last year on lower LNG project activity. The LNG projects in our backlog continue with no delays or cancelations this quarter.

However, we have seen a slowdown in customer decision-making on new projects that will likely impact our FY 2016 and FY 2017 results. Profits were up despite lower sales driven by lower costs. Now, I'll turn the call back over to Seifi..

number one, maintaining our A credit rating; number two, investing in good projects and accretive acquisitions; number three, continuing to increase our dividends; and number four, finally, if and only if there is excess cash available, we are very comfortable returning money to our shareholders in the form of share buybacks.

At the end of the day, the cash that we generate belongs to the shareholders and we will only spend our cash if we have enough high return projects or good acquisitions. And now, we will be delighted to answer your questions..

And we'll take our first question from Steve Byrne with Bank of America Merrill Lynch..

I was curious in the margin improvement chart over the last couple of years.

Can you tease out of that how much was just simply from lower electricity costs?.

Probably hardly anything. Almost nothing..

Okay. Thank you..

Thank you, Steve..

And we'll now go to Vincent Andrews with Morgan Stanley..

Thanks and good morning, everyone. Just curious to how much your FX headwind has changed for the full year this quarter versus last quarter..

Scott will answer the question, please..

Yes. Hi, Vincent. Good morning. When we came out of last quarter and we always just project currencies to stay where they were. At the end of last quarter, we would have said that for the year, FY 2016 versus prior year, our currency headwinds would have been $0.20, maybe $0.25.

Now as we close this quarter and again move the currency sideways, our current view is that year-on-year, FY 2016 versus 2015, is about a $0.15 headwind. So, net-net, we've got about another $0.05 less year-on-year headwind from currency. So hopefully I was clear on that. I'll point out also that the driver of that is all the various currencies.

The euro now has mitigated a little bit, so when you look at our rules of thumb, it's also been, not only the major ones like the euro and the RMB that we've given you in the past, but also areas where we're smaller but we've seen quite a bit of movement in the currencies like the real, Korean won and Canadian dollar and so forth..

Okay.

Just as a quick follow-up, could you then – if FX is about $0.05 better off to bottom, what's the balance of the guidance increase? Is it broad-based or is it coming from particular regions?.

It is broad based, but it is primarily driven by our delivering the second $300 million of self-help measures that we have planned for..

Excellent. Thank you very much. Very helpful..

Thank you, Vincent..

Thanks, Vincent..

We will now go to David Begleiter with Deutsche Bank..

Thank you. Good morning..

Good morning, David..

Excellent job on the margins. Just on the pricing component there, you've announced a series of price increases over the past year.

How would you rate the success of those price increases and what's the impact do you think going forward?.

I would like to have both Corning and Guillermo comment on that with their respective businesses.

Corning?.

Yes. Thank you. So I think you can see kind of in our results the progress that we've made thus far in our pricing. We typically only announce pricing increases in North America that affect some contracts more than others. But you can see we've had broad-based success in pricing, particularly in Europe, South America as well.

So if you come down to it, if you ask me, this really turns on if you go back to the concept of focus on the core. So that we focus on gases, we give the customers good service, we earn the right to raise the price increases, and we've got a self-confident and motivated team that goes out and gets it, and I see that trend continuing for us..

Guillermo?.

Yes. If you look at pricing in the materials space, the three big drivers that we focus on is one is value pricing. That's about technology and innovation and how we improve the overall mix of our business, and that's been going very well.

Our innovation engine is doing well, and mix improvement has been a good driver of our margin improvement and growth. I think the second driver is just competitive dynamics.

Where we are in different markets, if you look at all the actions we've taken on the portfolio side and our cost actions, we are in a much more competitive position and that's allowed us to play a much more offensive game in terms of both volumes and pricing in those kinds of segments.

And the last segment for us is mostly around our functional surfactants, and that's more formula-based pricing where the raw materials do have a component. So we've had a favorable lag effect as we look through that pricing overall, but all three of those areas have been performing very well for us..

Thank you....

Very good.

And just last thing, Seifi, in Gases – Americas on volume, when do you think volume can turn positive in this segment? Is it Q3, is it Q4, or is it even later?.

Look, David, the famous saying is that it's very difficult to make predictions if it is about the future. So we do not have that kind of a visibility to be able to predict that. That's why in our forecast and the guidance, we are assuming flat volumes. I don't want to venture into predicting that because we really don't know..

Understood. Thank you very much..

Thank you..

Thanks, David..

We will now go to Christopher Parkinson with Credit Suisse..

Perfect. Thank you very much. Just turning back to the Industrial Gas side, can you just comment on your current expectations on industry price discipline actually particularly in Europe and then in the U.S. and whether or not you've seen any improvements over the last six to 12 months. Just any expectations going forward would be appreciated.

Thank you..

Sure.

Corning?.

So I'm sorry but no, I really cannot comment on what I think discipline would be in this industry. I could really only talk about our own actions on pricing, which I've already really shared..

Guys, you know we don't comment on pricing. It's not appropriate..

Sorry. Thanks..

Thank you..

Thanks, Chris..

We will now go to Duffy Fischer with Barclays..

Yes. Good morning..

Good morning, Duffy..

Hi, Duffy..

Wanted to ask a couple questions on China. They've come out and talked about the oversupply that they have in the steel industry and about potentially moving to some consolidation there.

Obviously as a big supplier into that industry, are you seeing that? Do you think there's a chance that they take off meaningful capacity in steel?.

Duffy, we are beginning to see that and we are seeing that people are taking it off. I'd like – Corning is closer to this thing day to day. Both of us were in China. So we can give you some comments on this.

Corning?.

Yes. So I think, overall, our exposure to the China end-market is relatively small, our steel end-market that is. And there's really a potential upside in this. So for a long time, the CPC, the Communist Party of China, has talked about rationalizing the steel mills.

And many of these smaller regional steel mills have their own captive air separation plants. They make liquid product. They basically dump that into the market space. So more recently, there's been more serious talk out of Beijing about this, and there's been more talk of setting up funds aside to help the social transition associated with this.

And I would say we begin to see that happening right now and our steel prices are now up a little bit, so we'll have to see. But, all in all, I see this as a rational and positive development..

Thanks, Corning..

Great, thanks. And then, Seifi, a question for you. We've seen some noise out of the Middle East about players there wanting to raise capital, whether it's Aramco talking about potentially an IPO. One way for them to raise capital would be if they're willing to dispose of their either hydrogen plants or air separation units to a western player.

Is that an opportunity for the industrial gas industry to buy assets away from the big Middle Eastern players who are trying to raise capital..

Duffy, that's an excellent question. I don't want to speak for the industry, but that is an excellent opportunity for Air Products. They have identified that as an area that we are going to be very aggressive about, and I think that would be a very positive development in our growth. That's one of the reasons we are optimistic about our growth.

And as you know, we have organized ourselves now, we have a President for that part of the world. We have strengthened our team there, and we are very active in that area. Yes..

Great. Thank you..

Thank you..

Thanks, Duffy..

We will now to go Bob Koort with Goldman Sachs..

Good morning. Seifi..

Good morning..

I appreciate your unwillingness to forecast things, so I'll ask you to look far enough out that you can't be held to it. But I'm trying to get a sense; volumes have been pretty pathetic in the industry for a while here. Obviously, your earnings growth has been spectacular, mainly a function of self-help.

When you get to a steady-state, what do you see as sort of the waterfall between sustainable revenue growth, EBIT growth and then ultimately EPS growth, let's say, on a three-year, five-year, seven-year or longer time horizon that takes out the near-term noise?.

Well, Bob, thanks very much for the question. I can certainly make some comments on that. Number one, you know our industry very well. I'd like to distinguish between two parts. One is our merchants and packaged gases business and our onsite business.

The merchant and packaged gas businesses in this industry has always and will continue to grow with industrial production. There is no change on that. There is no change in the industry.

If you are focused on packaged gases and liquids and you try to move your portfolio towards that as some of our competitors are doing, you're going to be stuck with growth with industrial production, whatever it is. So there's no change in the industry.

Where we see significant opportunities for Air Products, because that is our core competency and that is the biggest part of our portfolio, it is on the big onsite plants. And on that front, both for hydrogen and for oxygen, we see significant opportunities for growth.

That is why I think for the long term, Bob, our overall goal for Air Products is to continue to grow our earnings per share 10% a year. That's our goal. And we have delivered in the last two years and that would be our goal to continue to deliver that. And we see that as a good possibility..

And could I ask maybe Scott why the CapEx number came down a little bit and the definition of your backlog? It seems like a couple of second half projects were delineated into the fourth quarter more specifically.

Could you just give us an update there?.

Yes, sure, Bob. The reason why the CapEx came down projected for this year is really just spending for the projects that we already have in the backlog. So as we project out for the year, we get close to the end of the year, what's the spending going to be for those projects, that's why we moved it down.

The other thing in terms of the backlog, you'll note that we did bring on, as we mentioned, a big project up in Canada. And that's the biggest reason why our backlog has come down from $2.4 billion down to $2.1 billion..

Okay..

If I may just add, the project that you're talking about in Canada is not a small project. It's about $400 million. So that has a significant effect on reducing that backlog..

Terrific. Thanks for the help..

Thank you, Bob..

Thanks, Bob..

We will now go to John Roberts with UBS..

Thanks, guys.

If you're able to reach an agreement with Evonik on Performance Materials, what would you do with Electronic Materials?.

I'm not sure what you're talking about. We haven't reached any agreement with anybody and I do not want to speculate about market rumors. So, sorry John, I can't comment on that..

Okay. Maybe I'll try one for Scott.

Scott, now that you give us quarterly maintenance capital, is there a way that we can connect that to the EBITDA impact from maintenance? I would assume that the effect would at least be directionally similar that if you spend less CapEx in a quarter on maintenance, the EBITDA impact from the maintenance activity would probably be less..

No. There is no connection there. This is Seifi..

Okay..

What we are disclosing to you is maintenance CapEx that is totally different than maintenance expense. Our maintenance expense is to upkeep our plant so that they keep running and serve our customers. We have not had any cutback on that. We are totally focused on that.

The maintenance CapEx is basically a function of replacing old assets that need to be replaced, and that is what we are reporting. So there is no real connection between the two..

Okay. Thank you..

Thanks, John..

We will now go to Laurence Alexander with Jefferies..

Hi. This is Jeff Schnell on for Laurence.

Can you give a longer-term view of the backlog? That is do you think that this is a good run rate that will be stable over the next three to four years or should it continue to decline? And then when you look at the the biz (53:09) you're working on now, has there been any shift in regional trends?.

With respect to our projections, obviously, it depends on the projects. But we can certainly see a situation there. Our capital expenditure will be somewhere between $1.0 billion to $1.5 billion a year.

In terms of regions, the areas with the greatest opportunity is the United States Gulf Coast because of low natural gas and significant potential in China. In addition to that, there is opportunities on the area that I was asked a question about in the Middle East and all of that. That's an additional opportunity. So that's where we see that.

There are projects in other parts of the world, like people wanting to replace an old ASU in Europe and so on. But the major projects are definitely in China and in the U.S. Gulf Coast..

Thank you..

Thank you..

Thanks, Jeff..

P.J. Juvekar with Citigroup..

Yes. Good morning, Seifi..

Good morning..

In EMEA, your underlying price is up and that was encouraging to see.

Can you talk about utilization in Europe and other areas, other regions of the world?.

I'm sorry. I didn't quite sure I understood.

You observed the pricing trend in Europe and your question was?.

The question was, can you talk about utilization in Europe and also in other parts of the world where the margin utilization is?.

Yes. Either one of us can answer that. That's easy. It is about the same. We are still at around 77%, 78% utilization in the U.S., Europe and in China. I don't think there's any significant difference.

Corning, do you want to add to that?.

No. I would just say if you're talking about where there's a little more momentum towards loading, obviously that's in China where you can see the volume movement..

Okay. And then Seifi, you talked about accelerating your cost-cutting plans if the economy slowed down. And from your phase two of the cost cutting, can you talk about what is your latest thinking on that cost-cutting program and the cadence of that cost cutting? Thank you..

Well, thank you very much for the question. We still believe that we are on track to deliver that second $300 million in the four years. This will be the first year.

Therefore, by the end of the year, we'll be at a run rate of $75 million which means that this year, we'll deliver at least $35 million, $36 million, $40 million, half of that, and we are well on our way in doing that. We are doing actually better than we thought we will be doing, and that's one of the reasons we increased our guidance for the year..

Thank you..

Thank you..

Thanks, P.J..

We will now go to Mike Harrison with Seaport Global Securities..

Hi. Good morning..

Hi, Mike..

Good morning, Mike..

Corning, you mentioned that maintenance cost in the Americas was lower this quarter.

How much lower was it year-on-year, and what's your expectations for Q3 and Q4 compared to this quarter?.

Yeah. So, the maintenance reduction for us in this quarter was about $0.04 for us. Going forward, we're going to expect that to trend up, and that's in our forecast for the next – that we've put out for the next quarter and the full year..

And then, I guess, I was a little bit surprised to hear you say that North America was still weak in terms of steel market.

Are you starting to see any change with the impact of the tariffs that were put in place in the U.S.? And can you also comment on whether any change there would lead to potential loosening of supply and demand in argon supply?.

Yeah. Good question. So, a couple of things. Number one, I think, it's sort of hard to talk about regional economic trends. It is so specific what's happening in one segment versus another. And even in North America steel, if you're making steel that goes into a car, you're doing great. If you're making tube, you're not doing well.

So, we, in fact, have two mills that are down. I mean, they pay their BFC (57:51), but they're down. If they were to restart, right, and the economy picked up, that would be positive. Yes, it would make more argon. But probably, in that same environment, we'd see demand for stainless steel increase. And stainless steel takes a lot of argon.

So, I personally think the argon market in the U.S. is going to remain relatively tight through this transition here..

All right. And if I can just sneak one last one in. On the equity affiliates income in Americas, it seemed to have come quite a bit lower from where it generally is.

Is there a reason for that?.

Scott?.

Sure. We just had some maintenance in one of our equity affiliates in Americas. So that's all, it's just timing items, nothing substantive and underlying..

All right. Thanks very much..

We'll now go to Nils Wallin with CLSA..

Yes. Good morning, and thanks for taking my question. I was wondering if you would give us your view on the outlook for hydrogen over the next couple of years. Obviously, you're one of the biggest producers there is. With the amount of ethylene capacity coming online in the U.S.

Gulf Coast that should increase hydrogen supply, but then of course there's perhaps limited refinery, limited refinery growth.

So, I was just curious what your supply demand outlook is for hydrogen?.

It is very positive. We see growth around the world, not just the U.S. and we are a global supplier. We are number one. We are the leader in this area. And therefore, as you see, we are bringing on big plans onstream, so we are very positive.

And Corning, you want to make any additional comments?.

Yeah, maybe just to acknowledge. So even today on our large pipeline system, we have some hydrogen sources where we're off taking for a customer. And so to the extent hydrogen is available, that's an opportunity for us to bring it in.

I think another reality is that a lot of this hydrogen is going to be consumed at that customer and a lot of it's going to be used for fuel value..

Understood.

And so given this positive outlook on hydrogen, would you expect that to be a greater proportion of your backlog going forward?.

I don't think that's going to significantly change the picture..

Understood. Thanks very much..

Thank you..

We will now go to Jim Sheehan with SunTrust Robinson Humphrey..

Good morning. On your comments on Versum timing, you said that you're watching the credit and equity markets closely.

What alternatives have you explored in case markets are unfavorable for a spin at the end of September?.

I would have to say just about any option that you can imagine. We have looked at everything. That's our job, to look at these options..

Okay. And then, Seifi, on your comments on the growth potential of industrial gases, you're very optimistic.

Can you talk about the sentiment of your customers right now? Are any of them as optimistic as you are? Are they getting closer to pulling the trigger?.

Well, the customers that I'm talking about in terms of growth are the very large demand for oxygen and hydrogen. Those customers we have talked to, I told you I was just in China in the last two weeks with Corning and the rest of our people. Those customers have big plans. I'm very optimistic about what they want to do..

Thank you..

Sure..

We will now go to Mike Sison with KeyBanc..

Hey, guys. Nice quarter..

Thank you..

I wanted to include Guillermo a little bit. When you think about your volume growth here for Electronic Materials, you said it was flat ex-delivery.

So are you seeing growth in all the key products of Advanced Materials, and any growth in Processed Materials as well?.

By the way, thank you for grilling him. I appreciate that. Go ahead, Guillermo..

Thanks for the question. Now, if you look at our Advanced Materials, we're seeing – obviously it varies by segment. The memory market has continued to be very strong and our projections are that that is still going to continue to be a growth area for us. Volumes are holding up.

Obviously that segment is getting impacted more on pricing from our – on our customer side, the pricing of DRAM and NAND, but overall volumes are still good, and we're very well-positioned with a lot of the new technologies, process of record for the next generation. So, that's doing very well. On the Process Materials, our volumes are holding up.

We've been capacity-constrained, so some of the fluctuations in the markets haven't been as big of an impact to us, although we did see a slowdown in the early part of the quarter and a pickup in the backend of the quarter because of the Taiwan earthquake and just softness in the foundry market.

But we're bringing on new capacity, and as the memory market continues to grow, we expect the demand to continue..

Okay. And then one long-term question is, and I think you kind of mentioned is, OEMs consider moving from 14-nanometer to 10-nanometer sometime in 2017.

How much of an opportunity is that for you? What does your products do to help them move down that node?.

Well, two comments I would make. One is it's not just that they're going to smaller nodes and higher technology. In general, that requires new materials, new processes, and that is what's driving our formula for growth traditionally. So that's something that has not changed. What is changing now is also that a lot of the structures are going vertical.

And so you can think about if they had 25 layers before, now you have 50 layers – had 50 layers. They have 100 layers. So the amount of material used and the steps are getting much more complex, and you just use a lot more. So if you think NF3 as an example in the clean business, now you have more steps.

You have more cleaning steps, demand is going up, and that's what's driven a lot of the volume growth on the material side. So from a materials perspective, the next-generation nodes, materials are going to be a much bigger driver and enabler for the newer technologies, and that's a good thing for our space..

Great. Thank you..

We will now go to Jeff Zekauskas with JPMorgan..

Thanks very much. In general, industrial production in the United States has moved down from the fourth calendar quarter of 2015, and it keeps dropping. And Europe is a little bit different where there's some upward movement in industrial production. So, is it the case in general that your U.S.

industrial gas business on the margin going into the next quarter is weakening a little bit and the European business is strengthening a little bit?.

So, it's Corning. A couple of – let me kind of speak to each one of those separately..

Sure..

I would say in the Americas, if you strip out oilfield services, you strip out steel and you try to look at the core customers, right, the customers who were with you a year ago, are they with you now? Do those customers have volume momentum? Yes, they do. And that's kind of my point. I think, it's hard to talk about a global macro statement.

I think it's much more useful to think about individual segments. In Europe, I'd say in general, it's a weak environment. It's a little hard to say in that this quarter included Easter and a year ago, it was in the third quarter. It was in April. So, I think, we're going to have to see what the actual trend turns out to be for us in Europe..

Okay.

And then as my follow-up, in terms of Versum, order of magnitude, is the probability that it's 75% that you'll spin it and 25% that you'll sell the individual pieces, or is there a different probability?.

Jeff, you need to let me off the hook on trying to answer that question, please. I mean, I cannot speculate on that. I think that would be very premature. Sorry about that..

Okay. Thanks very much..

Thank you..

Thanks, Jeff..

We'll now go with Don Carson with Susquehanna Financial Group..

Good morning. This is Emily Wagner on for Don. We had a question on coal gasification units you mentioned were running well in the quarter.

In terms of future coal gasification projects in China, do you see the government allowing more projects, or might they limit that opportunity due to coal emissions?.

Well, from what I see, there are significant number of these projects on the drawing board, and some of them are getting approval from the government. So, from where we are, it looks very positive..

Thank you..

Thank you..

I think with that I would like to thank everybody for being on the call. Once again, thank you for taking time from your very busy schedule to listen to our presentation. We do appreciate your interest, and we look forward to discussing our results with you in the next quarter. I hope you have a very nice day, and all the best..

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation and you may now disconnect..