Oct 21, 2009
Executives
Nelson Squires -- Director, IR Paul Huck -- SVP and CFO
Analysts
Kevin McCarthy -- Merrill Lynch David Begleiter -- Deutsche Bank Sergey Vasnetsov -- Barclays Capital John Roberts -- Buckingham Research Fred Seymour -- Seymour Management Don Carson -- UBS Mike Sison -- KeyBanc Steve Shuman -- Lafayette Research Jeff Zekauskas -- J.P. Morgan Mike Harrison -- First Analysis David Manthey -- Robert W.
Baird Mark Gulley -- Soleil Securities P.J. Juvekar -- Citi Edward Yang -- Oppenheimer Laurence Alexander -- Jefferies
Operator
Good morning and welcome to Air Products & Chemicals fourth quarter 2009 earnings results conference call. Just a reminder that you will be in a listen-only mode until the question-and-answer segment of today’s call.
(Operator instructions). Also, this telephone conference presentation and the comments made on behalf of Air Products are subject to copyright by Air Products and all rights are reserved.
Air Products will be recording this teleconference and may publish all or a portion of the teleconference. No other recording or redistribution of this telephone conference by any other party are permitted without the expressed written permission of Air Products.
Your participation indicates your agreement. Beginning today’s call is Mr.
Nelson Squires, Director of Investor Relations. Mr.
Squires, you may begin.
Nelson Squires
Thank you, Carey. Good morning, and welcome to Air Products fiscal year-end earnings teleconference.
This is Nelson Squires. Today, our CFO Paul Huck and I will review our fiscal 2009 results and provide our initial fiscal 2010 outlook.
We issued our earnings release this morning and it is available on our website, along with the slides for this teleconference. Please go to www.airproducts.com and click on the scrolling red banner to access the materials.
Instructions for accessing the replay of this call, beginning at 2:00 pm Eastern Time are also available on the website. Please turn to slide two.
As always, today’s teleconference will contain forward-looking statements based on current expectations regarding important risk factors. Please review the Safe Harbor language on this slide and at the end of today’s earnings release.
Now, I’ll turn the call over to Paul.
Paul Huck
Thanks, Nelson. Please turn to slide number three.
Good morning, and thanks for joining us today. Before we look at this quarter's results, I would like to spend a few moments reviewing fiscal 2009.
Certainly, the world has changed significantly over the past 12 months. In our plans for fiscal 2009, we expected modest global growth.
On slide number three, you can see the severity of the worldwide manufacturing downturn. Globally, manufacturing was down about 11%.
In Electronics, we expected a modest decline in silicon process, and it now looks like for fiscal 2009, MSI will end up down about 35%. Both of these headwinds had a major impact on our financial performance during fiscal 2009.
Let me take you through the numbers. Turning to slide number four, sales of $8.3 billion declined $2.2 billion or 21%.
Underlying sales declined 8%, with volumes of 9% and price gains of 1%. Energy cost pass-through accounted for 7% of the decline and currency translation reduced sales by 6%.
Our operating margin fell only modestly, due to the weak demand, as the cost actions we took accounted to the weak volume increased margins significantly in the second half of the year. If you compare the first half versus the second half of fiscal 2009, our operating margin increased by more than 200 basis points to 15.5%.
For the year, earnings per share fell 20%, slightly less than sales did, and our return on capital employed declined to 10.6%, above our cost to capital by about 200 basis points. In summary, 2009 was a challenging year due to the impact of the global recession, but we continued to make progress towards our goal.
We continued to improve our portfolio, completing the sale of our US Home Care business this quarter, and we made progress through the year to improve both margins and returns. Our entire team remains committed to continuing this progress.
Now turning to slide number five for a review of this quarter's consolidated financial results from continuing operations. For the quarter, sales decreased 22% versus the prior year.
The major factor was lower natural gas prices, which lowered our contractual pass-through of energy-related costs, reducing sales by 12%. Underlying sales declined 7% on lower volumes in Merchant and the Electronics and Performance Materials segments, and lower pricing in Electronics and Performance Materials.
A stronger dollar reduced sales by 3%. Sequentially, sales increased 8%, primarily on volume growth across all business segments.
Underlying sales were up 7%, an encouraging sign that the global economy continues to improve. Operating income of $328 million declined 12% from prior year, again due to lower volumes and unfavorable currency.
This decline was partially offset by our cost reduction efforts. Our operating margin of 15.4% improved by 170 basis points versus last year, due to productivity and energy cost pass-through impacts, despite the decreased volumes.
For the quarter, net income and diluted earnings per share decreased by 10% each, versus the prior year. Turning to slide six for a review of the factors that affected the quarter's performance in terms of earnings per share.
Our continuing operations earnings per share decreased by $0.12. Lower volumes reduced EPS by $0.41 year on year.
Pricing in energy and raw materials together were favorable, adding $0.02. And lower costs contributed $0.18.
The unfavorable impact to operating income from currency translation and foreign exchange was $0.05. In last year's quarter four earnings release, we footnoted two civic events, a plant fire and hurricanes, which each were a drag of $0.05 on our prior year operating results.
Interest expense declined on lower rates, adding $0.05. This was mostly offset by a higher tax rate this year, which subtracted $0.04.
Lower minority interests and fewer shares outstanding together contributed about $0.03. Now, I will turn the call over to Nelson to review our business segment results.
Nelson?
Nelson Squires
Thanks, Paul. Please turn to slide seven, Merchant Gases.
Merchant Gases posted sales of $932 million, down 15% versus prior year. Underlying sales declined 10%, with volumes down 11% and pricing adding 1%.
Currency reduced sales by 5%. Sequentially, Merchant Gases sales increased 6%, volumes were up 3%, pricing was flat, and currency increased sales by 3%.
Higher volumes were seen in all regions, resulting in improved LOX, LIN system loadings versus prior quarter. Pricing was better than expected for the quarter, despite the negative impact of lower liquid hydrogen pricing.
The lower pricing was due to significantly lower natural gas costs, both sequentially and versus prior year. Merchant Gases operating income of $166 million was down 16% versus prior year and down 2% sequentially.
The sequential drop in operating income and margins was primarily due to asset disposals, bad debt expense, and maintenance timing. Let me now provide a few comments by region; please turn to slide eight.
In North America, sales fell 16% versus prior year, driven by the slow manufacturing climate. Volumes were down 15% versus prior year, with pricing down 1%.
Ex-liquid hydrogen, pricing was positive year on year. Signings in the second half of the fiscal year improved versus the first half.
In Europe, sales decreased 14% versus prior year. Underlying sales declined 6%, with volumes down 9% and pricing adding 3%.
Currency reduced sales by 8%. Sales were impacted by the weak manufacturing environment, but helped by increased healthcare volumes and pricing.
Signings in Europe finished the year ahead of plan and reflect continued demand in food, cement, and small manufacturing. In Asia, Merchant sales were down 10% versus last year, with currency reducing sales by 5%.
Underlying sales declined 5%. Volumes continued to improve sequentially across the region.
Q4 signings improved over Q3. Please turn to slide nine, Tonnage Gases.
Sales of $640 million decreased 32% compared to last year. Energy and raw material pass-through decreased sales by 33%.
Currency reduced sales by an additional 3%. Refinery hydrogen volumes continued to be up versus prior year.
Excluding refinery hydrogen, Tonnage volumes versus prior year continued to be impacted by the operating rates of our steel and chemical customers. Sequentially, sales were up 13%, due to higher chemical refining and steel demand.
Operating income of $105 million was down 22% versus prior year, primarily due to better operating efficiencies in the prior year. Operating income was up 20% sequentially, mainly due to higher customer operating rates.
Operating margin of 16.4% increased versus prior year, primarily due to lower energy and raw material pass-through. Looking to the future, we announced significant awards in the quarter from MarkWest Energy, Sheng Tai Steel, and PetroChina.
Please turn to slide 10, Electronics and Performance Materials. Segment sales of $434 million were down 22% compared to last year.
Volumes reduced sales by 16%, price reduced sales by 5%, and currency was 1% lower. Electronics sales were down 27% compared to last year, due to lower operating rates, but increased 3% sequentially, which was in line with our expectations.
As Paul mentioned earlier, lanes and square inches of silicon processed were down about 35% in our fiscal year. Electronics specialty materials sales declined 24% versus prior year, but increased 14% sequentially.
Performance Materials volumes declined 10% versus last year, but improved 9% sequentially, reflecting seasonal improvement and stronger Asian sales. Segment operating income of $49 million was up 17% versus prior year, with prior-year income reduced due to the fire at our Ulsan, Korea manufacturing facility.
Income was up 26% sequentially, due to higher customer operating rates and good cost performance. The Electronics business continued to recover in the quarter.
We saw new order activity in both flat panel and thin-film solar. In this quarter, we started up a new plant in Nanjing, China to support our Performance Materials business.
This facility will enable us to manufacture closer to our customers, as well as reduce our costs. Please turn to slide 11, Equipment and Energy.
Sales of $123 million decreased 3% versus last year. Operating income of $6 million declined versus prior year due to lower sales and higher energy development spending.
Our backlog in this segment now totals $239 million. We won an order with Samsung Engineering in the quarter for a plant, where we will supply the largest cold box ever built by the company.
We continue to work on various projects in LNG and expect to see a new order in the next quarter or two. Now, I will turn the call back over to Paul.
Paul Huck
Thanks, Nelson. Now, if you will turn to slide 12, I would like to share my thoughts on our 2010 outlook.
For our fiscal 2010, we are currently projecting a gradual and modest recovery, driven by weak private sector spending growth. We don't foresee a significant improvement in consumer confidence or consumer spending, so we believe growth will likely continue to be subdued.
Globally, we saw manufacturing retract by about 11% in fiscal 2009. Over the past two quarters, we have seen Asia growth turn sequentially positive.
North America has improved modestly from Q3 to Q4, and Europe's rate of decline has slowed. We are planning for global manufacturing growth of 1% to 2% for our fiscal 2010.
Our current thinking is that the US will see flat to slightly positive growth of 1% in manufacturing. Europe should be about flat, and we expect Asia will continue to be the strongest region, growing 6% to 7%, led by China.
While the economic outlook is not robust, we do believe that there are significant factors driving earnings improvement in fiscal 2010 for us. New plant on streams in 2009 and 2010 should add $0.35 to EPS.
Our significant cost reduction actions in the year will have their full-year impact in 2010, adding $0.35. Partially offsetting this will be about $0.15 of higher pension expense, due to the significant drop in interest rates from September 2008 to September 2009.
We also expect that based upon current rates, currency should be a modest tailwind for us next year. However, this will likely be offset by ongoing restructuring costs.
Based on these factors and our economic outlook, we are forecasting our fiscal 2010 earnings from continuing operations to be between $4.65 and $4.90 per share, which represents a year on year earnings growth of 15% to 21%. Now turning to our outlook by business segment.
In Merchant Gases, capacity utilization has begun to recover globally, and our efforts to raise and maintain prices and increase productivity should generate continued improvement next year. For fiscal 2010, we are targeting a 1% improvement in our Merchant Gases operating margins to above 19%.
20% margins or above should be achievable in 2011. In the US, we are currently operating in the mid-70s, so we have capacity available to serve volume growth as the domestic economy continues to recover.
In Europe, we are operating right around 80%, and we're continuing to focus on improving our margins by raising prices, streamlining business operations, and driving our shared services model into this region. In Asia, capacity utilization is in the low 80%.
We continue to expand our technology applications and that along with solid manufacturing growth will continue to increase demand loading on our facilities. In our Tonnage Gases segment, we will see some benefit from loading as chemical and steel plants continue to recover, along with 10 large plants and contracts coming on stream this year.
On the new order front, we announced three new projects in September, the MarkWest hydrogen plant acquisition should contribute to growth in mid-year 2010. The Sheng Tai Steel air separation unit acquisitions in 2010, plus a new plant order from them, which is slated to start up in mid 2011, and our joint venture with PetroChina will follow in 2012.
In Equipment and Energy, we expect results similar to last year's level. We do anticipate signing two to three LNG orders this coming year.
Within Electronics, silicon process declined significantly in early 2009. Market sentiment is now positive, particularly in Asia.
We project the MSI index to be up 10% to 15% in 2010. As we look at fiscal 2010, we also expect demand from flat-panel producers to be significantly higher.
We will also see growth accelerate in thin-film photo-voltaic in 2010. And while electronics industry CapEx is expected to increase as well next year, we don't anticipate that it will significantly increase our electronics equipment business results in fiscal 2010.
Our Electronics business repositioning efforts will result in additional ongoing restructuring costs as we have mentioned in the past. Electronic specialty materials pricing will likely remain in depression next year as well.
Our growth expectations are high in Performance Materials, as the economic stimulus packages continue to bolster the economy and we continue to benefit from new market and application successes and new product introductions. For the Electronics and Performance Materials segment, we continue to target improvement in our operating margins, with a goal of delivering 15% margins in 2011.
In any economic environment, cost control and cost reduction are important drivers of earnings, margin, and return improvement. For fiscal 2010, we remain diligent on discretionary spending, new programs, and staffing.
We will also continue to see the impact of a number of structural cost reductions that we are making to reach our 2011 goal of 17% operating margins. At this time, our tax rate guidance is for a rate similar to 2009, approximately 25% to 26%.
While we faced a difficult economy in 2009, the actions we took positioned us well to withstand the storm and take advantage of the recovery. We remain committed to delivering consistent, strong earnings growth, along with improved margins and returns throughout the economic cycle.
Turning to slide number 13. Our guidance for quarter one for earnings per share of $1.07 to $1.15 is based on the following factors On the positive side, we expect to see increased earnings sequentially from the following areas; new plant on-streams, including our new SMR to serve Marathon in Garryville, Louisiana and a steel on-site in Asia should contribute to next quarter's results.
We expect the manufacturing economy globally to continue its gradual recovery. And finally, we expect continued benefit from our cost reduction actions.
Offsetting these sequential improvements are a few seasonal impacts in our business. In Merchant Gases and Electronics and Performance Materials, we will see lower seasonal demand.
Last year, we did see a number of extended holiday shutdowns. We currently are not forecasting for this to recur.
In Tonnage Gases, we expect significantly higher maintenance spending, as a number of customers have planned maintenance turnarounds on their facilities. This will result in lower volumes in quarter one and higher maintenance spending on our part, as we time our maintenance to correspond with our customer shutdowns.
And pension expense, as previously mentioned, will be a headwind. Please turn to slide 14 for our capital spending outlook.
Our capital spending for 2009 was $1.5 billion. For 2010, we expect that our capital spending will be between $1.3 billion to $1.5 billion.
We also continue to work on the acquisition of captive plants from customers, as we did with the MarkWest and Sheng Tai Steel projects. The majority of our spending remains in the Tonnage area and about $1 billion is associated with new plants.
Now, let me wrap up. 2009 was a year none of us will forget and none of us want to experience again.
As we enter 2010, we believe that we are extremely well positioned to take advantage of the growth opportunities before us. We continue to work on opportunities to the future, focused on energy, environment, and emerging markets.
These include oxygen for clean and efficient combustion, hydrogen for clean fuels, oxygen for gasification, oxygen for capturing carbon emissions, electronic gases for thin-film solar, and we remain committed to our goals of improving margins and returns, while pursuing these opportunities. While the global economy is still not out of the woods, we are excited about the opportunities and challenges we face in 2010.
Thank you, and now I'll turn the call over to Carey to take your questions.
Operator
(Operator instructions). And we will take our first question from Kevin McCarthy of Merrill Lynch.
Kevin McCarthy -- Merrill Lynch
Yes, good morning.
Paul Huck
Good morning.
Nelson Squires
Good morning, Kevin.
Kevin McCarthy -- Merrill Lynch
Yes, on the joint ventures, Paul, it looks like you are seeing continued improvement there based on quarterly numbers. Can you comment on whether your outlook for the non-consolidated financials is similar to your remarks for the consolidated results?
Paul Huck
Yes, they are, Kevin, pretty much, yes. It goes according to regions there, but we have all the regions of the world, so yes.
Kevin McCarthy -- Merrill Lynch
Okay. Then on Merchant Gases, can you comment on the price outlook there, in particular it looks like Asia led slightly off about 2% year-over-year.
How would that look on a sequential basis and perhaps you could comment on your recent price increases and what kind of success you might be seeing there.
Paul Huck
Nelson, do you want to take that?
Nelson Squires
Yes, hi, Kevin, this is Nelson. Let me maybe walk through region by region to cover that.
In North America, we did launch a price increase effective October 1, and we are pleased with the results so far. Obviously, it is still early, but the early returns are favorable there.
And so we expect pricing to be probably flat to up a bit in North America for the fiscal year. In Europe, we actually do expect pricing to be up.
We're taking a number of actions there on a country by country basis, some of it tied to higher power, but we are trying to take advantage of certain situations to get price up and so we expect price to be positive in 2010 in Europe as well. In Asia, and by the way, on a sequential basis, probably flat this on a price basis.
We probably will see pricing be flat to slightly down as assets continue to get loaded in the region. Now, we're not too concerned about that, but net on that, we expect pricing to be a slight positive in Merchant in fiscal 2010.
Kevin McCarthy -- Merrill Lynch
Okay, and the final question, if I may. On Electronics and Performance Materials.
Did I hear you right, Paul, that you are targeting a 15% operating margin there in 2011, and if that is correct, maybe you could elaborate on how much of the incremental improvement might be derived from cyclical recovery versus your restructuring actions and other factors?
Paul Huck
Yes, Kevin, and we are targeting for the margin to be at 15% and 2011. If we look at sales in that area from a volume basis, we do not expect our volumes to recover to the 2008 levels until 2012.
So there is a portion of this which depends upon the cycle coming back, but they do not need to get fully back as far as volume is concerned. So the majority, when you look at the numbers here, for our margin improvement from the restructuring actions which we are taking.
Kevin McCarthy -- Merrill Lynch
Thank you very much.
Operator
We will take our next question from David Begleiter with Deutsche Bank.
David Begleiter -- Deutsche Bank
Thank you, good morning.
Paul Huck
Hi, Dave.
David Begleiter -- Deutsche Bank
Hey, Paul, can you discuss your leverage to a stronger-than-expected recovery in global manufacturing, perhaps every 1% change and how that impacts your earnings?
Paul Huck
Sure. If we take a look at the leverage on our manufacturing from a company standpoint, Dave, you have to look at the right segments there.
So the equipment and energy segment really doesn't have a lot of exposure to that, it is going to be more on the capital cycle. On the Tonnage business, I don't have a lot there either.
So it really gets down into the Merchant and the Electronics and Performance Materials business. And if you look at just the way those volumes are going to grow in those areas, they are going to grow two times the underlying growth rate in those sectors in the manufacturing sectors there.
So I would anticipate that we have -- you know, we have about $5.5 billion in sales there and you can do that at a 35% margin or so and you will come up with for every 1% growth, probably somewhere between $0.08 to $0.10.
David Begleiter -- Deutsche Bank
That was very helpful. Thank you.
And just in Electronics, what is the 2011 operating margin you believe will occur in Electronics?
Paul Huck
15%.
David Begleiter -- Deutsche Bank
I am sorry, I meant 2010.
Paul Huck
2010? 2010 is going to be held down a little on the restructuring costs side with those things.
So I think that we will not see as big of a recovery as far as the overall operating margin is concerned in that. If you take a look for the year, we finished in operating margins in Electronics and Performance Materials, Dave, at about 11.3% and so we might get up to -- in the 12.5% range in 2011.
David Begleiter -- Deutsche Bank
And Paul, how would you characterize the levels current bid activity in the Tonnage business?
Paul Huck
Level activity is still strong. We continue to work on a number of projects.
The one thing which I will say and I have said this before is that the award activity is not as strong as the bid activity. So there is a lot of people out there, but the final awards continue to be delayed and pushed out a little bit.
But people are still working on them, so the basic drivers, which are energy, are people looking for the same energy costs or improve energy efficiency, improve performance, those things are still there. It is just the people being sure that they can go out and spend the capital.
David Begleiter -- Deutsche Bank
Thank you very much.
Paul Huck
Yes.
Operator
The next question comes from Sergey Vasnetsov with Barclays Capital.
Sergey Vasnetsov -- Barclays Capital
Good morning.
Paul Huck
Good morning, Sergey.
Sergey Vasnetsov -- Barclays Capital
Your volumes declines impacted your results negatively by in 2009. Hence I'm just curious, what kind of expectation of recovery of this lost profit do you expect in 2010 and 2001?
How soon do you expect to catch up all of this loss?
Paul Huck
As far as volume declines, as far as overall, Sergey, it depends upon the region. I think in Asia we are going to see us back by 2011, pretty much in volume.
Late 2012 for the US and North America and in Europe, well out there. It may be 2013, 2014, as we look at the growth here.
Sergey Vasnetsov -- Barclays Capital
Okay. Secondly, what I didn't see in this press release, in the past week you have mentioned your 17% margin goal.
Is it still out there for the ?
Paul Huck
Yes, it is still out there. I'm sorry, I didn't mean to cut you off.
It is still out there, it is out there for 2011, we are not backing that off and when we talk about our goal. And that, really as you know, that is really, as we are looking at this, we -- our actual goal here is to get our return on capital, keep improving our return on capital, we realize we invest a lot of money, we got to earn a good return on it.
Sergey Vasnetsov -- Barclays Capital
Of course, okay. And lastly, you talked about pension headwind a couple of times, but I don't think you have quantified it.
Could you give us some range of impact?
Paul Huck
Yes, I did. In the pension headwind, it is about $0.15 a share year on year.
And that really comes from -- just so everyone knows, it comes from the -- on the discount rate. The discount rate which we are going to use this year is probably around 5.7%, last year was about 7.5% and the liability just grew and so the way the economy works, the pension expense goes up.
Sergey Vasnetsov -- Barclays Capital
Good. Thank you.
Operator
Our next question comes from John Roberts with Buckingham Research.
John Roberts -- Buckingham Research
Good morning, guys.
Paul Huck
Hi, John.
John Roberts -- Buckingham Research
When you look at the quarter to date releases that you had back in July and August, Merchant gases look like they were down 8% and 10% back in July and August, but you were down more than that for the quarter, so it looked like the comparison at least was lower in September. Did the comps get more difficult or --?
Paul Huck
Well, a thing which you always have to look at that, you have to get to the underlying factors here, as far those are concerned. And September was a good month for us against prior year, I do not think that it got worse underlying there.
I know it did not get worse underlying.
John Roberts -- Buckingham Research
Because again, I think the numbers were down 8% and 10% July and August, you were down 15% for the year -- full quarter versus a year ago, but we will go back and look at the numbers I guess.
Paul Huck
Yes.
John Roberts -- Buckingham Research
Nothing deteriorated as you said in the quarter.
Paul Huck
Yes, the other factor which gets in there is what was happening to the dollar on that thing too, and so that is the other factor which I would like to take a look at there.
John Roberts -- Buckingham Research
Okay, thank you.
Operator
We'll take our next question from Fred Seymour with Seymour Management.
Fred Seymour -- Seymour Management
Yes, hi, fellows. I was wondering about if you were -- productivity gains in the merchant gas business given the very difficult operating environment in the last year.
I wonder, what was your improvement year to year in Merchant Gases for the variable margin and how much of that was due to positive selling prices, how much do lower electric power costs and natural gas costs and when you net net this all out, did you achieve any productivity gain?
Paul Huck
Yes, Fred, we achieved a significant amount of savings on our fixed cost base on things.
Fred Seymour -- Seymour Management
I am talking a variable margin.
Paul Huck
You are talking variable margins and productivity there. We did not -- I'll tell you honestly, we saw some on the distribution end, on the operations end as far as electric power costs and where we had to operate, no, we didn't see a loss on that area, because of the way the plants operate and you are familiar with that, of the turnouts of the things, but we did not -- so we got a little squeezed there.
We did see savings on how much product we ran around and how we used our fleet. We did see significant savings on the cost base also, which we would not anticipate having to add back to as we load the plants.
Fred Seymour -- Seymour Management
And just one other little minor thing. What is the capacity in single tray capacity, you say you have the largest cold box you ever built, what are you up to, 3,300 tons per day?
Nelson Squires
It is even bigger than that, Fred, this is Nelson. This is about 3,700 tons.
Fred Seymour -- Seymour Management
Thank you.
Operator
Moving on to Don Carson with UBS.
Don Carson -- UBS
Thank you. Paul, a question on currency.
It seems just again and looking at the quarter results with the currency, moving your favor in September just based on where you were in July, August, but you seem to have a rather conservative outlook for what impact it might have next year when you see -- traded through 150 today for example. Are you just take a more cautious view on the dollar or is it -- more offsetting expenses?
Paul Huck
And Don, no. And what I do is I tend to be conservative on these things, as far as the currency is concerned, we kind of use a rate that exists at the end of the quarter and we use that for our forecast.
Trying to forecast this stuff is that you know very hard for that thing. So obviously, if the dollar strengthens, as we all know, and that is going to help us, that helps our earnings.
Don Carson -- UBS
You mean be offset if the dollar weakens?
Paul Huck
You know, I am sorry. Yes, offset if the dollar weakens, yes, I misspoke, Don, thanks.
Thanks for catching that.
Don Carson -- UBS
A couple of questions on Tonnage. What was the PUI impact in the quarter and what is the outlook for that business in 2010 and what are your overall dark scan loadings.
I would think you could get quite a pick-up there from higher industrial production.
Paul Huck
Yes, if you take a look at the PUI business, the PUI business operated well in this quarter, so we had -- and good results from that. Probably the one thing which it gets offset throughout the whole company is at the end of the year, as you know, we are on LIFO and we take and we value our inventory.
The PUI business took a pretty big hit on inventory. You know, on the revaluation, which took the results of that business down, but the volumes were solid.
Now, for the whole world company, it is a zero impact on the inventory revaluations. But that was a thing which held down the results in that area.
If we look at things like -- if we look at dock scan loading, yes, there is still some upside to that -- particularly in steel and chemicals for us. On the refinery hydrogen side, obviously there isn't, but that is not boxed in.
Don Carson -- UBS
Thank you.
Operator
Our next question is from Mike Sison with KeyBanc.
Mike Sison -- KeyBanc
Hey, guys. Paul, you were somewhat cautious in your commentary for the economic recovery, I understand that.
As to some degree is adjusting the consumer could be a little bit sluggish. I'm just curious, you know the outlook for the silicon process to be up 15% next year, can you give us a little bit of help, sort of in the low growth scenario, why that would rebound pretty strongly?
Paul Huck
Well, I think it would and the reason why is that if we look at a drop somewhat, so if you go to that from start on the third slide, Mike, you see how much he dropped, and then it comes back up. It has been a couple of quarters, and pretty low.
And so, with those couple of quarters pretty low, you don't have to have a lot of growth sequentially to really make that -- and to get to the kind of 15%. The other thing is inventory, yes.
And that big drop which was there was actually the inventory correction which occurred. It occurred in a couple of quarters.
I mean, and we think that that -- and that is worked through. So I don't think that they're going to sell all that much more, I don't think the consumer is going to buy all that much more.
But one of the things is that they did it in our fiscal year, and this may not be true if you went to a 2009 calendar year 2010 calendar year, but in our fiscal year, we saw the corrections hit us a lot there.
Nelson Squires
One other comment, Mike, is on inventory. As we would also suggest that based on the date that we are looking at is levels are actually still dropping.
So there still appears to be the ability to rebuild over the next couple of quarters.
Mike Sison -- KeyBanc
Okay, so you do see some restocking efforts and so you're sort of feeling that from customers heading into the fourth quarter and may be the first quarter of 2010.
Nelson Squires
I don't know if I am -- I think that is an upside. For me, I think people -- what they are trying to do here and my comment here I don't think is cautious as prudent, is that people are trying to match -- I tried to take -- and take the demand and match production to demand.
They are trying to figure out what their demand is and match production to demand and once they get the level of inventory for them at the level that they want to. They're not looking to rebuild inventories a lot.
I would not expect to see that.
Mike Sison -- KeyBanc
So, shifting gears a little bit, when I think about your guidance for 2010 and sort of walk through that earnings walk that you gave us, you sort of get to the bottom end of the guidance with cost savings on-site and I am assuming that the on-site or the tonnage project coming on stream represent 3% to 4% type of top line growth, right, and then, to get to the high end of 490, you need another 3% to 4% sort of top line growth to get there. Is that how the demand sort of works?
Paul Huck
Yes, I think that you know, it is probably 3% to 4% would be a reasonable number. It might be up to 5%.
Mike Sison -- KeyBanc
To get to the high-end?
Paul Huck
To get to the high end, right, Mike.
Mike Sison -- KeyBanc
Okay, and then, last question. In terms of where your refinery business, I think Nelson you suggested it was better sequentially and tonnage.
You know, I just want a little bit of color what you thought about that heading into 2010 on the basis, its not new stuff coming on stream. You see refinery margins and operating rates in the US, really not that great, so I just wanted to get a little bit of color of how it did and the outlook.
Nelson Squires
Yes, Mike, I will add some more comment to that. This is Nelson.
They did continue to stay positive in the fourth quarter versus prior year. So we really saw that in all four quarters.
We think ex the new capacity that is coming on and if you look at just the base business as you suggested, we think things are awfully stable next year in that business. I don't think we're going to see a tremendous amount of growth.
We are not anticipating miles driven to go up substantially next year, you know, as the economy does improve, the expectation would be that there is more diesel fuel or maybe more gasoline consumed, but I think it is only incremental. You know, one of the things we continue to see though and this is a positive thing for us and for the hydrogen supply is that the refineries that have done the conversion to a high conversion refinery, so focus on our transportation fuel are the refineries that are running the hardest.
The ones that have not done the conversion are the ones that are dragging down the overall rates and we think that trend will continue going forward.
Paul Huck
And that is because the margins of the high conversion refineries are better than the margins of the low conversion refineries for every barrel of input.
Mike Sison -- KeyBanc
Got you. Great, thank you.
Operator
We will take our next question from Steve Shuman from Lafayette Research.
Steve Shuman -- Lafayette Research
Good morning, guys. John alluded to some comments in the press release, particularly about how you have got a new low cost structure that enables you to go faster than competition.
Could you talk about that a little bit?
Paul Huck
Yes. It gets and the reductions in cost which was done this year, the reductions which was done in fixed costs, the reductions which we are making in our structure of management around here, we have made some significant cuts there, taken a number of people out, we're also making cuts in our capital expenditures as far as how much it costs to produce a ton of oxygen or a ton of nitrogen with capital and then the costs aren't variable.
The whole goal of us being low cost really is to beat the competition and that is why we are doing it.
Steve Shuman -- Lafayette Research
(inaudible) been some technology breakthrough that would everybody out (inaudible).
Paul Huck
It has been a journey in which we have been on for a long time. John has emphasized it a lot with the management team around here and so it is a constant theme which we talk to our employees about, how it gives us a competitive advantage.
Steve Shuman -- Lafayette Research
Great. And are there any contracts on take or pay minimum or have you moved off all those?
Paul Huck
And there are still some, yes.
Steve Shuman -- Lafayette Research
Do you have a many percentage or a dollar value?
Paul Huck
I don't have a percentage. I never had that many to begin with because of the refinery comment, which you just made because two thirds of our business is refinery in the Talladega and so those where stayed above.
Steve Shuman -- Lafayette Research
Great, thank you.
Paul Huck
yes.
Operator
Our next question comes from Jeff Zekauskas with J.P. Morgan.
Jeff Zekauskas -- J.P. Morgan
Hi, good morning. A few questions.
Your depreciation in the fourth quarter was 225 and in the second quarter was 197. Why does it bounce around so much and what is the D&A number for next year?
Paul Huck
The D&A number for next year is probably going to be somewhere around 900 or so for us here. One of the things which bounces around is currency for us and new plants coming on stream.
So you have to look at the currency rates, because a lot of the stuff around there. And so that decides the factor.
Jeff Zekauskas -- J.P. Morgan
Secondly, you are supposed to pull out $110 million in costs, and this year your SG&A was about 943. So is the 943 grew at -- I don't know, 3%, that is $28 million.
So, all things being equal, should your SG&A be down in absolute terms next year?
Paul Huck
And once again, you have to pay attention to what happens on the currency rates of that. That does influence GAAP over -- 60% of my business overseas for us here.
I think the way in which I try to look at SG&A is take it as a percent of sales, Jeff, and that is the best way and so we continue to drive it down. We drove it down this quarter.
So as we go and reload, my whole goal is to get it right now below 10%.
Jeff Zekauskas -- J.P. Morgan
Okay. Are there any nonrecurring charges that you will take next year, and if so, what is the magnitude?
Paul Huck
There are not any large charges for things we do have some costs on the restructuring site, which are really accruals which we will be making for -- on plant closures by accelerating the depreciation and incurring the cost of the people for that. It is not a huge impact for us, as far that is going forward.
Operator
Our next question comes from Mike Harrison with First Analysis.
Mike Harrison -- First Analysis
Hi, good morning. In the Tonnage business, you were showing a year-over-year decline in volume as of the August sales update that you guys and now you are showing a 4% year-over-year increase for the quarter.
I was wondering if you could walk through how much of that improvement in the month of September was related to prior year weakness and obviously you also had some hurricane impact in there. And then how much maybe was related to new projects that came on stream during September and how much was related to other underlying economic improvement?
Paul Huck
Mike, the big factor there was the -- and was on the hurricane there in September. I had an easy comp in that period for us.
If we look at -- if we take the hurricane -- and the hurricane out, we were about even as far as the volumes overall.
Mike Harrison -- First Analysis
Okay. And in terms of sort of the longer term outlook on the Tonnage business, one of your competitors at one point voiced some concerns about commodity weakness and maybe some over capacity in areas like metals, chemicals, and refining, and talked about that potentially being a drag on longer term growth in Tonnage projects.
Since then they suggested that on their end those concerns may have waned a little bit. And I was wondering to the extent that your Tonnage business is dependant on growth in those markets.
Paul Huck
Well, I think the factor which you need to consider is the way industrial -- and gases are used. They save energy in the processes of these making these commodities, they improve the environmental performance.
So I think that’s the driver which a lot of people have missed on that thing. So, yes, there are going to be some changes and maybe commodities don’t grow as quick, but there is always those -- but those things are the things, which we want to do.
Mike Harrison -- First Analysis
And then I was also wondering if you could comment on the minority interest line this quarter being zero. That seems unusual for you guys.
Paul Huck
Yes it was. We had a couple of -- if you take a look at the ventures in some of the ventures the profits were -- and were not as good.
And these are things which are consolidated, so some of the -- some other things are there. The other factor is we had a few adjustments in things like in the -- in some of the ventures there.
But it normally goes between $3 million to $5 million a quarter.
Mike Harrison -- First Analysis
And that’s a good run rate going forward?
Paul Huck
Yes, it’s a good run rate.
Mike Harrison -- First Analysis
Alright, thanks, Paul.
Paul Huck
Yes.
Operator
Our next question comes from David Manthey with Robert W. Baird.
David Manthey -- Robert W. Baird
Hi, good morning. I was wondering in terms of the revenue sequentially, it looked like they were up about 8%, driven entirely by volume for the most part with a contribution margin that was approximately 20% versus I think you had given guidance or at least a goal of sort of 30% to 40% as your volumes ramp up.
Could you talk little about if there was mix impacting that contribution margin (inaudible)?
Paul Huck
Sure I can, yes. And if I look at the contribution margin for the fourth quarter, as we look at this, if I look at it on a volume basis, I had a contribution margin which was in the mid-30%.
I did see some other things that were offsetting that and holding down, which lowered those things, such as the pricing in the Electronics specialty materials area. If you look at the -- on the Tonnage area, the bonuses I received in the fourth quarter were not as large as the bonuses I received in quarter three for these.
So those things cut back on my contribution margins. Plus I had some -- a few issues on cost in the Merchant Gas area, which held down margins in that area so that overall the gains were not as large, overall, as what you would typically see.
But I think a lot of those cost issues are one-time when we look at it and the issue on bonuses are up and down.
Operator
Our next question comes from Mark Gulley with Soleil Securities.
Mark Gulley -- Soleil Securities
Hey guys. I hesitate to pretend I'm an economist, but I can't resist.
If I take a look at those very useful slides on page three, only a 1% gain in industrial activity next year would be 200 [ph] or thereabouts and clearly we saw a much better growth historically, running into the 2008 bubble. So, is it possible maybe you guys are being a bit too conservative on the bounce back from very depressed levels in 2009?
Nelson Squires
You know, Mark, and what I hope is that I hope I am right. You know, actually, I hope you are right on that.
I am going to be prudent at this point in time I think on that and I don’t want to go out and say well I think the economy is going to go -- is going to be -- and real, real strong for that because I have the capacity to serve all this. It doesn’t serve the purpose of the Company to put plans in place for a stronger bounce back at this point in time.
Mark Gulley -- Soleil Securities
Okay, secondly, you were talking about Tonnage trends before overall and you talked about ex-hydrogen. If we take a look at steel and chemicals, what kind of reductions in Tonnage volumes did you see there when you exclude hydrogen?
Paul Huck
You are talking year-over-year?
Mark Gulley -- Soleil Securities
Year-over-year, principally in your Tonnage business--
Paul Huck
About -- and 10% or so.
Mark Gulley -- Soleil Securities
Okay. Makes sense.
And the finally, talking about the streamlining, restructuring that has begun some years ago, I would have thought that maybe you would be done by now with Electronics, but it sounds like some of the restructuring activities continue to leak into fiscal 2010. What is holding back your ability to kind of get that behind us and so we can get these restructuring charges behind us as well?
Paul Huck
Well, as you know, we have a large Electronics business, it touches a lot of -- we have a lot of facilities in this company, we are making a lot of changes in that business. And those involve the products, which go to the customers, so it takes us some time to make sure the quals get all in for the customers.
We don’t leave -- want to leave our customers hanging out on that. And that’s the thing, which really, and paces the changes here.
Mark Gulley -- Soleil Securities
That’s helpful. Thank you.
Paul Huck
Yes.
Operator
The next question comes from P.J. Juvekar from Citi.
P.J. Juvekar -- Citi
Yes, good morning.
Paul Huck
Good morning, P.J.
P.J. Juvekar -- Citi
You know given the solid recovery in Electronics based on your chart on page three here or slide three, I was surprised to see that your Electronics revenues were up only 3% sequentially. Is there a lag, can you talk about that?
Paul Huck
What you don’t have is you don’t have quarter four on there yet as far as that. We did talk about the specialty materials sales, which were up 14% quarter-to-quarter, which is the big thing, which is going to vary with production, P.
J. So there -- it’s on there.
So the -- and then the thing which was down from quarter three to quarter four was the equipment sales. They continue to go down.
P.J. Juvekar -- Citi
Or when you look at your NF3, WF6, and other specialty products, how much were the sales up in the quarter sequentially?
Paul Huck
14%. From quarter three to quarter four, they were up 14%.
P.J. Juvekar – Citi
And so when you say your Electronics volumes were -- or sales were up 3%, what are you talking about there?
Paul Huck
I am talking about -- no, no, no. No, what I am talking about are the specialty material sales, which are about 60% of the business, and the Tonnage Gas area, which is about a quarter of the business, and the other 15% of the business is the Equipment.
P.J. Juvekar -- Citi
Okay.
Paul Huck
And so you have to blend them all together. The Tonnage was about flat.
P.J. Juvekar -- Citi
Okay.
Paul Huck
Alright.
P.J. Juvekar -- Citi
And then sequentially, your organic sales were up 7% for the entire company and operating income was also up 7%, so we didn’t see much operating leverage going from 2Q to 3Q -- sorry, 3Q to 4Q in your case.
Paul Huck
Right. And that was the comment in which I gave before on that is that we did see the operating leverage, we had some things which offset that as far as things are concerned.
I saw the operating leverage which I was expecting to see. It was offset by some unfavorable cost things in the Merchant Gas area, which we hope will reverse and not recur.
About two-thirds of them we think are one-time. And then we had some -- in the Tonnage Gas area we saw a drop in -- on the bonuses.
And those are lumpy, anyway.
P.J. Juvekar -- Citi
Okay.
Paul Huck
Okay.
P.J. Juvekar -- Citi
And then one last thing. Given that your CapEx is going up in 2010, what are your expectations for free cash flow next year?
Paul Huck
My -- P. J., my CapEx is about flat to slightly down is what I am predicting now, $1.3 billion to $1.5 billion compared to $1.5 billion.
You have to go to our non-GAAP measure on that because of the capital lease treatment, which some of our on-sites get. But the -- and the free cash flow should improve in 2010.
Operator
The next question comes from Edward Yang from Oppenheimer.
Edward Yang -- Oppenheimer
Hi, good morning.
Nelson Squires
Hi.
Paul Huck
Hi, Ed.
Edward Yang -- Oppenheimer
Just to clarify, the 2010 EPS guidance, does that include the -- some of the restructuring costs you mentioned--?
Paul Huck
Yes it does. Yes it does.
Edward Yang -- Oppenheimer
And lastly on -- when I look at your Merchant Gases business, European volumes were down 9% year-over-year this quarter and in the third quarter they were down 8%. So it looked like European volumes actually got worse and I wanted to understand that better.
Nelson Squires
Most of that, Ed -- this is Nelson -- is really tied to the summer slowdown in August. The trends were actually probably good through the quarter and so nothing really unusual happened beyond the typical August shutdowns.
Edward Yang -- Oppenheimer
Okay. But wouldn’t the year-over-year numbers strip out the seasonality, Nelson?
Nelson Squires
No -- yes, they would. And that was a sequential comment.
A sequential --
Edward Yang – Oppenheimer
Right. Yes, year-over-year it looked like was down 9% versus 8% last quarter.
Was that just a matter of comparisons?
Nelson Squires
Yes, I don’t think there was anything unusual going on there. Part of that might be Healthcare volumes that were a bit higher, but nothing unusual from a (inaudible) standpoint.
Edward Yang – Oppenheimer
Alright. Thank you very much.
Nelson Squires
Yes.
Operator
Our next question comes from Laurence Alexander with Jefferies.
Laurence Alexander -- Jefferies
Good morning.
Paul Huck
Good morning.
Laurence Alexander -- Jefferies
Two quick questions, one is on the Tonnage, the $0.35 from Tonnage in 2010, if you look at the timing of when those contracts come on stream, what is the contribution in 2011, is it really more around $0.50?
Paul Huck
No, it’s not. And we take a look at this, it’s over -- all of the segments on those things.
It also includes some things, which came on stream in 2009. So there is a full year impact of that stuff also in there.
And the thing which we are looking at is we are going to see an improvement in 2010 right now, which is probably -- which is -- excuse me, an improvement in 2011 right now from these, which probably goes somewhere in the $0.25 to $0.35 range.
Laurence Alexander -- Jefferies
Okay, perfect. And on pension, what was your funding status at the end of the year and what’s your long term strategy for fixing that?
Paul Huck
Well the -- and the strategy here is obviously is we are going to have to make some contributions. We have already made a contribution of $200 million to the -- and to the plans in October to (inaudible) that.
Our funding status, it depends upon the way in which we look at this, because if you take the accounting definition, we believe that that always overstates that as we look at that and so the PDO right now is about $500 million of a liability for us.
Laurence Alexander -- Jefferies
Okay, and finally on--
Paul Huck
A net liability.
Laurence Alexander -- Jefferies
And finally you made your comment about how the holiday shutdowns weren’t going to be as severe this year. Are there particular end markets where you are seeing that or is that just across the board comment?
Paul Huck
That is a judgment on our part that people are being prudent in the production of their goods and services, right now. So we think that it goes across everybody and it is our judgment of how this plays out going forward.
Laurence Alexander -- Jefferies
Thank you.
Paul Huck
Yes.
Operator
That does conclude the question-and-answer session. I would like to turn the call back over to Mr.
Squires for closing remarks.
Nelson Squires
Thanks, Carey. Please go to our website to access a replay of this call beginning at 2:00 PM today.
Thank you for joining us and have a nice day.
Operator
Once again, ladies and gentlemen, that does conclude today’s conference. We thank you for your participation.