Oct 21, 2011
Executives
Paul E. Huck - Chief Financial Officer and Senior Vice President Simon R.
Moore - Director of Investor Relations
Analysts
P.J. Juvekar - Citigroup Inc, Research Division David L.
Begleiter - Deutsche Bank AG, Research Division Robert Koort - Goldman Sachs Group Inc., Research Division Mark R. Gulley - Ticonderoga Securities LLC, Research Division Michael J.
Sison - KeyBanc Capital Markets Inc., Research Division Donald Carson - Susquehanna Financial Group, LLLP, Research Division Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division David J.
Manthey - Robert W. Baird & Co.
Incorporated, Research Division Michael J. Harrison - First Analysis Securities Corporation, Research Division Kevin W.
McCarthy - BofA Merrill Lynch, Research Division John P. McNulty - Crédit Suisse AG, Research Division
Operator
Good morning, and welcome to the Air Products & Chemicals Fourth Quarter Earnings Release Conference Call. [Operator Instructions] Also, this telephone conference presentation and the comments made on behalf of Air Products are subject to copyright by Air Products and all rights are reserved.
Air Products will be recording this teleconference and may publish all or a portion of the teleconference. No other recording or redistribution of this telephone conference by any other party are permitted without the express written permission of Air Products.
Your participation indicates your agreement. Beginning today's call is Mr.
Simon Moore, Director of Investor Relations. Mr.
Moore, you may begin.
Simon R. Moore
Thank you, David. Good morning, and welcome to Air Products' Fourth Quarter Earnings Teleconference.
This is Simon Moore. Today, our CFO, Paul Huck, and I, will review our fiscal 2011 results and outlook for fiscal 2012.
We issued our earnings release this morning. It's available on our website along with the slides for this teleconference.
Please go to airproducts.com to access the materials. Instructions for accessing a replay of this call beginning at 2 p.m.
Eastern Time are also available on our website. Please turn to Slide 2.
As always, today's teleconference will contain forward-looking statements based on current expectations and assumptions. Please review the information on these slides and at the end of today's earnings release explaining factors that may affect these expectations.
Now, I'll turn the call over to Paul for a review of our financials.
Paul E. Huck
Thanks, Simon. Good day, everyone, and thanks for joining us.
Please turn to Slide #3 for a review of the key highlights from our fiscal year 2011. Clearly, the top highlight for us in 2011 was the number of new projects we announced over the last 12 months.
Some of the larger ones are shown at the top of this slide. For some time, we have been sharing with you that bidding activity for new project remains high and as a validation of that point, our capital project backlog continues to rise and now stands at $2.5 billion.
For this year, our capital spending was $1.6 billion, up 22% from 2010 and our outlook is now for this to grow to $1.9 billion to $2.2 billion in 2012. You can see that these projects are aligned with the key growth drivers we discussed at our Investor Conference.
Hydrogen and oxygen for energy and environmental markets, nitrogen for electronics and merchant capacity for emerging markets. Now some financial highlights.
We had a strong year, with significant improvement in operating cash flow, up 15%. We increased our dividend for the 29th consecutive year, an increase of 18%.
We repurchased $649 million of stock during fiscal year 2011 and announced a new $1 billion share repurchase authorization. And our adjusted earnings per share of $5.73 was up 14%, just above the high end of our original guidance range.
On the sustainability front, we renamed the both the Carbon Disclosure Project and Dow Jones Sustainable indices, reflecting the results and leadership we are delivering in this important area. Turning to Slide #4, sales of $10.1 billion increased 12% as we delivered strong gains across our Merchant Gases, Tonnage Gases and our Electronics and Performance Materials segments.
Our underlying sales grew 10%, with volumes up 9% and price up 1%. We delivered good volume growth in a period of modest economic growth driven by strong performance on our Electronics and Performance Materials segment, which posted its second consecutive year of over 20% growth.
Volume growth of 11% in Tonnage Gases, principally from new investments and contracts. And in our Merchant segment, growth in Asia was well above 20% with much more modest growth experienced in the U.S.
and Europe. Operating income of $1.7 billion grew 13% mainly from better performance in Electronics and Performance Materials and Tonnage Gases segments.
Our operating margin for the year was 16.6%, a modest improvement from last year. While we attained the highest operating margin in more than a decade, our operating leverage was partially offset by a number of product supply and cost issues in the second half of the year.
As a result, we finished short of our 17% target. Looking forward, margin should continue to expand.
We have operating leverage in the United States and Europe and we have solutions to our product supply and cost issues. And we remain committed to continuing to drive our cost reductions as we expand our business.
Equity affiliates income increased 22% to $154 million this year, due to better results across a number of our joint ventures. The largest improvement came from Mexico, where volumes were significantly higher on strong LOX/LIN and packaged gas sales driven by glass, oil field services, refining and general manufacturing.
And most importantly, our annual after-tax return on capital employed improved to 13.3%, 80 basis points above last year. Please turn to Slide 5.
For the quarter, sales of $2.6 billion were 11% higher versus prior year. Underlying sales increased 6% year-on-year due to 4% higher volumes driven by Tonnage Gases, Electronics, Performance Materials and Merchant Gases segments and 2% higher pricing.
Operating income of $425 million increased 6% from prior year due primarily to volume growth. Our operating margin declined to 16.3%, down 80 basis points versus prior year with 50 basis points due to currency and higher raw material pass-through and the rest due to price under recovery of cost inflation.
For the quarter, net income increased 11% and diluted earnings per share increased by 12%, each versus prior year. Our return on capital employed on an instantaneous, our run rate basis improved to 13.5%.
Turning to Slide 6 for a review of the factors that affected the quarter's performance in terms of earnings per share. Our adjusted continuing operations earnings per share increased by $0.16.
Higher volumes increased earnings per share by $0.07 year-on-year. Pricing, energy and raw materials taken together, were flat and costs were about $0.01 unfavorable as our productivity gains were more than offset by cost inflation.
Currency translation in foreign exchange netted to a $0.02 favorable impact. Equity affiliate income was $0.07 higher, partially due to better results in Mexico, India, Thailand and South Africa.
Equity affiliate income also included a positive of $0.04 of good news from nonoperational items, which was offset by an accounting adjustment of a similar amount in non-controlling interest. Lower interest expense, a lower tax rate and fewer shares outstanding altogether were $0.05 positive.
Now I'll turn the call over to Simon to review our business segment results. Simon?
Simon R. Moore
Thanks, Paul. Please turn to Slide 7, Merchant Gases.
Merchant Gases sales of just over $1 billion were up 10% versus prior year. Underlying sales improved by 5% on 4% higher volumes with growth in Asia and U.S./Canada and 1% higher pricing, again, driven by Asia and U.S./Canada.
Currency increased sales by 5%. Sequentially, sales were up 2% with 3% positive volume, flat pricing and a minus 1% currency impact.
Just to note, we are now using the term U.S./Canada rather than North America to more accurately reflect the countries we are reporting. Our strong business in Mexico is reported as an equity affiliate so it's not included in these results.
Merchant Gases' operating income of $192 million was up 4% versus prior year and 6% sequentially. Segment operating margin of 18.4% was down one 110 basis points versus prior year, but up 70 basis points sequentially.
Versus last year, volume and price increased operating income, but the price increases were not enough to fully recover raw material cost increases, particularly in Europe. Versus prior quarter, positive volume combined with better operating and distribution cost performance drove the margin expansion.
Let me now provide a few additional comments by region. Please turn to Slide 8.
In U.S./Canada, sales improved 8% versus prior year. Volumes were up 5% with particular strength in both argon and hydrogen.
Pricing was 3% positive with improvement across the product lines as we took actions to recover higher costs. LOX/LIN capacity utilization improved to the mid-70s.
Consistent with our plans, contract signings were very strong again this quarter above the good Q3 results. This will translate into positive volume momentum through next year.
In Europe, sales increased 8% versus last year all due to currency. Volumes were relatively flat across the businesses, pricing was positive in liquid/bulk and packaged gases, but offset by continued negative price pressure in healthcare.
The positive liquid/bulk price was an improvement over last quarter but still do not fully recover cost increases. LOX/LIN plant loadings were in the low 80s.
In Asia, sales were up 30% versus last year with underlying sales up 23% and a 7% positive impact from currency. Volumes were up 20% with growth across the product lines, LOX/LIN volumes were up 22% in China.
Pricing continued to be strong, up 3% with the LOX/LIN prices up 5%. Plant loadings are around 80% as we continue to add capacity and sales to the system.
Signings for the quarter were well above last year. This quarter, we continue to demonstrate our focus on, and success, in emerging markets.
In August, we announced a new contract to supply our fully integrated Oxy fuel combustion solution to Guangzhou Chung Sung century Fiber Glass in Nansha, China to reduce emissions and improve productivity in glass filament production. We will supply our clean fire oxy fuel burners and flow control skid and we will install a prism BSA unit for on-site oxygen generation.
Last month, we announced an agreement to acquire a 25% stake in the gases and equipment businesses of Abdula Hashin Industrial Gases and Equipment Co., the largest industrial gas company in the Kingdom of Saudi Arabia. We are excited about using our successful joint venture strategy in the Middle East.
This strategy of combing our partners' local market and country knowledge with our skills and engineering, operations, applications and finance, has led to our leadership positions in Taiwan, Korea, Spain and other countries. Deepening our relationship with AHG gives us the opportunity to participate in the strong Merchant Gases growth in Saudi Arabia and is a significant new platform from which to pursue Tonnage Gas opportunities throughout the Middle East.
Please turn to Slide 9, Tonnage Gases. Tonnage Gases sales of $883 million increased 17% versus last year with volumes up 11%, energy and raw material pass-through increasing sales by 3% and a positive 3% currency affect.
Sequentially, sales were up 2% on 3% higher volumes and 1% lower energy and raw material pass-through. The volume increase is relative to both prior year and prior quarter, were primarily driven by new projects.
Operating income of $152 million was up 30% from prior year and 32% sequentially on higher volumes, improved operating efficiency and reduced maintenance costs. We also had a net gain from contract modifications of a about $0.05 in the quarter.
As expected, after a number of scheduled maintenance outages in Q2 and Q3, Q4 maintenance spending was lower. Operating margin of 17.2% increased to 160 basis points versus prior year and 400 basis points sequentially on the higher operating income.
Moving to new business. We were pleased to announce the long-term hydrogen supply agreement for Shell Oil's Deer Park, Texas refinery and for Motiva Enterprise's Convent, Louisiana refinery.
Both contracts will be supported by Air Products' industry-leading Gulf Coast hydrogen pipeline supply network that will serve multiple refinery and petrochemical companies from New Orleans on the east to the Houston ship channel on the West. We also, on our third long-term contract to supply oxygen and nitrogen to Wison and Clean Energy Limited's coal classification facility in Nanjing, China.
We will build, own and operate our third air separation unit and integrate a liquefier to supply Wison and produce liquid oxygen, nitrogen and argon for the growing regional Merchant industrial gas market. These awards are concrete examples of the key market growth drivers we shared at our Investor Conference in June.
Please turn to Slide 10, Electronics and Performance Materials. Segment sales of $587 million were up 12% compared to last year on 5% higher volumes, 4% higher pricing and 3% currency.
Sequentially, sales were down 3% on lower volumes. Electronics sales were up 17% compared to last year and up 2% sequentially as industry growth slowed as we expected.
Electronic materials sales were up modestly versus last year, while Tonnage and equipment continued to show strong growth. Electronics specialty materials pricing remained stable.
Performance material sales increased 7% versus last year with 9% higher prices and a 3% positive currency affect, offsetting a 5% volume decline. Sequentially, sales were down 9% primarily on the volume declines.
The softness in PMD reflects slowdowns in key markets, including housing, construction and autos. Operating income of $92 million was up 9% versus prior year, primarily due to Electronics volumes and Performance Materials pricing and was down 16% sequentially due to lower Performance Materials volumes.
Segment operating margin of 15.6% was down 50 basis points versus prior year due to higher costs, down 250 basis points sequentially due to lower volumes and higher costs. Margins exceeded the FY '11 target of 15% by 80 basis points for the year.
In new projects, we announced the new nitrogen plant at our site in the Chonan Industrial Complex in Korea and a second contract with Samsung mobile display to supply gaseous nitrogen and oxygen and liquid argon for their active matrix organic light-emitting diode production in Tanjeong, Korea. Finally, earlier this quarter, we announced plans to more than double our nitrogen trifluoride or NF3 capacity at our Ulsan, Korea site.
NF3 remains the chamber cleaning gas of choice for semiconductor display and photovoltaic manufacturers. This plan will leverage our existing site infrastructure to expand our reliable and cost-effective NF3 supply.
Now please turn to Slide 11, Equipment and Energy. Sales of $96 million were down 25% versus prior year on lower ASU and LNG sales and up 21% sequentially on higher ASU sales.
Operating income of $12 million was down 43% versus prior year due to lower sales and up 34% sequentially due primarily to favorable year-end cost absorption. Our backlog is up versus prior year and sequentially on several new large ASU orders.
Now, I'll turn the call back over to Paul.
Paul E. Huck
Thanks, Simon. Now if you'll turn to Slide #12, I'd like to share our thoughts on our outlook.
After a fairly good start during the first half of fiscal 2011, we saw economic growth decline as uncertainty grew. Because of this uncertainty, our fiscal 2012 forecast for economic growth has a wider range than in past years.
Globally, for the regions we operate in, we see economic growth of 2% to 5%. On the pessimistic side of this range, we would see the following scenarios: for the U.S., if the current fiscal and policy uncertainties continue, this would likely keep consumer confidence low; automobile production slow; housing at its current low level and the investment climate depressed, resulting in about 1% manufacturing growth.
Asia would see the contraction of consumer markets in the U.S. and Europe and we would not expect Chinese consumer spending to significantly offset this.
Investment activity would be held down by overcapacity concerns and we would expect regional growth to drop to 4%. For Europe, while we are not forecasting a full-fledged financial crisis, we are forecasting that current negative trends continue and the region would have a modest manufacturing recession with an expected 2% contraction.
On the optimistic side of this range, we would see the following scenarios: in the U.S., we would start to see a consensus form in advance of the election, which leads to improved consumer confidence and business investment, starting a virtuous cycle of growth in the second half of our fiscal year; we would expect 5% economic growth; in Asia, the attempts to drive greater consumer spending in China would succeeded and demand would grow across the region, along with better export markets to the U.S. and Europe; expected growth would rise to 9%; in Europe, the negative trends would start to reverse as the governments made progress on their fiscal problems, however, expected growth would still be weak at 1%.
This broad range of economic scenarios results in a wider range for earnings of $5.90 to $6.30 per share for 2012. While the outcomes could vary, we are prepared to execute our business plans and adapt to whatever economic environment emerges.
Walking from our 2011 earnings per share of $5.73, we have the following factors. New plant on-streams in 2011 and 2012 should add $0.30 to $0.35.
These are projects that are either onstream now, or will be on stream soon and our backed by contract contractual commitments to buy. We should see this growth independent of global economic conditions.
Loading existing assets should add $0.10 to $0.40 to earnings per share. This is the factor most influenced by the economy.
In Equipment and Energy, we expect fiscal 2012 operating results will be down due to less LNG activity, a $0.05 to $0.10 headwind. Pension expense will be about a $0.05 headwind due to the drop in interest rates from 2010 to 2011 and lower asset returns.
And we see a $0.10 headwind from a higher tax rate, approximately 26%. In any economic environment, cost control and cost reductions are important factors that drive earnings, margin and return improvement.
For 2012, our bottom line should also improve from our productivity efforts and we will remain diligent on discretionary spending, new programs and staffing. Now, turning to our outlook by business segment.
In Merchant Gases, we are continuing to add selling resources in the U.S. to drive volume growth as we focus on new applications and expand our micro bulk offering.
We continue to expand our Merchant capacity in Asia, manufacturing growth along with our new applications efforts should lead to strong volume growth. In Europe, we will continue to derive prices higher to offset higher energy costs and take actions to reduce operating costs.
In our Tonnage Gases segment, we will see the benefit from the full year loading of our fiscal 2011 startups along with a number of investments due to come onstream this year. A list of our major projects is in the appendix slide.
On the new order front, we have announced and expect to continue to announce, a significant number of new projects, which will provide growth in 2013 and beyond. For Electronics, we are forecasting modest silicon growth of 0% to 5% for 2012.
We expect that our position with the industry leaders should help us grow faster than the industry as they are making the majority of new capital investments. Electronics industry capital expenditures after 2 very strong years, is forecasted to decline 15% to 20% in 2012.
Our Electronics Equipment business results are expected to slow accordingly. However, this would still make 2012 the second highest capital spending year for the industry.
For Performance Materials, we expect the current volume softness to continue through Q1. But when economic conditions improve, volume growth should return, as we benefit from our low-cost production facilities and our new product, market and application successes.
Before we turn to the next quarter, I want to briefly address a question we have heard. What if 2012 turns into a re-run of 2009 and the world goes back into a recession?
First, we believe the world is different from both an economic and an Air Product standpoint. With regard to the economy, autos and housing, which were hit hard, have not fully recovered.
Therefore, they have less relative exposure. Electronics had a massive inventory correction, but today, inventories are at a much lower level.
And both corporations and consumers have delevered their balance sheets and are financially stronger. With regard to Air Products, we're also much stronger, our margins are 200 basis points higher than in 2008 and our Tonnage segment in 2009, we experienced a significant drop in the value of our operating efficiencies due to the large drop in natural gas prices.
With already low natural gas prices, our operating results should be more stable. And Electronics has restructured its business, strengthened its position with the industry leaders, improved its product portfolio and increased segment margins by over 450 basis points.
So if we do go into a global recession, we don't see 2012 being as bad as 2009. Turning to Slide #13.
Our guidance for quarter 1 is for earnings per share of $1.31 to $1.39 based on the following factors. On the positive side, we expect to see increased earnings sequentially from new plant onstreams, including our new hydrogen plant in Rotterdam and the Weihe oxygen on-site and Merchant plant.
Offsetting this sequential improvement, in Merchant Gases and Electronics and Performance Materials, we expect flat economic growth along with the lower seasonal demand. In Tonnage Gases, profits are expected to decline due to higher maintenance spending, financial difficulties with a particular customer in our polyurethane intermediates business and the quarter 4 contract modifications.
So we expect our quarter 1 operating profit level in the Tonnage segment to be similar to the level delivered in quarter 1 last year. Consistent with the full year guidance, we will see lower Equipment and Energy profits.
Equity affiliates, pension and currency will be negative, but they will be roughly offset by lower non-controlling interest on lower taxes. As I said, we believe there is a chance that Europe goes into a recession and at best, we'll have flat to very slight growth.
Therefore, regardless of the economy during Q1, we will begin to take actions to reduce our costs across the region. These actions are not yet fully defined and any cost or benefits from these actions are not included in our guidance.
Please turn to Slide #14 for our capital spending outlook. Our capital spending for 2011 was $1.6 billion.
For 2012, we expect that our capital spending will be between $1.9 billion and $2.2 billion, an increase of 20% to 40%. This includes a maintenance capital expenditure of $300 million to $350 million, in line with prior year.
The majority of our spending is in the Tonnage area with about $1 billion associated with new large plants and pipelines. When you look across all 4 business segments, over 75% of our growth capital expenditures is under long-term take or pay contracts.
You can also see that the majority of our spending is in the Americas and Asia. We continue to work on acquisition opportunities, including captive plans from customers and we also continue to look for focused opportunities that complement our existing positions, such as our investment in Saudi Arabia.
Now, let me wrap up. We had a good 2011, growing sales and earnings double digits while continuing to make improvements in our operating margin and most importantly, our return on capital.
The increase in capital spending we announced today, plus the bidding activity we are seeing, gives us a number of excellent opportunities for the future beyond 2012. As we move forward, our priority is to deliver the growth, margin improvement and higher returns that'll make us the best investment choice in the industry for our shareholders.
2012 will certainly offer its challenges as we work through the economic uncertainties. However, we believe we are well positioned to make the progress we need to deliver our 2015 goals.
Thank you and now, I'll turn the call over to David to take your questions.
Operator
[Operator Instructions] And we'll take our first question from P.J. Juvekar with Citi.
P.J. Juvekar - Citigroup Inc, Research Division
Just quickly, I wanted to talk about the Saudi Arabia opportunity. How big can this investment become given the install base of petrochemicals in that country and sort of the future growth with projects like Dow's Saudi Arabia [ph] project?
Paul E. Huck
Yes. And P.J., you're right.
In Saudi and the Middle East in general, offers a very big opportunity for us. Our investment on AHG is to get us a foothold and an operating base within the country, which we think is very important.
From there, we think of many of the opportunities for this growth come on the on-site area for very large plants. And we see this going out.
And so we could have, in the future, billions of dollars invested in the Middle East. It will be primarily as we look forward a market, which is built on on-sites, yes, you're right.
P.J. Juvekar - Citigroup Inc, Research Division
And just quickly on Electronics. You talked about the slowdown there in core Electronics business.
Can you tell us what's happening with semiconductor fabs in Taiwan and if that slowdown that you talked about continue in 4Q? And then just remind us your exposure on LCDs?
Paul E. Huck
And Simon?
Simon R. Moore
Yes. Thanks, Paul.
Thanks, P.J., good question. So obviously, as we talked about last quarter, we had seen some slowing in certain segments in the Electronics market.
I think that has continued and we see that being fairly flat going through the first half of next year with an expected pick up in the second half of the year. But as Paul mentioned, we see MSI for the year, in a range of 0% to 5%.
I would just also make the point though, that while that's fairly modest growth, we saw sequential sales in Electronics up 2% and we see the number of our customers make comments this week that certainly would clarify that we're in no danger of seeing any significant downturn like we have seen in the past. I mean, Intel talked about inventories being tightly managed and obviously, Apple reported very strong sequential sales increases in their units.
So again, I think we see flat but no sign of any significant downturn.
Operator
And next we'll go to Jeff Zekauskas with J.P. Morgan.
Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division
It looks like your Merchant gas profitability still hasn't recovered in that your revenues in the quarter are lower than they were in the first quarter when you weren't roughly $200 million. So what's delaying the recovery of the margin, recovery of that business?
And how do you see that next year in terms of being able to throw off the factors that are depressing your profitability?
Paul E. Huck
Okay, Jeff, and that's a good question and I'll update everybody on our progress on -- in the margins in the Merchant area. Because we did make progress this quarter.
And we outlined a number of actions last quarter in which we said we're going to take. The first of those actions was within the U.S.
to improve our volumes there. We made good progress.
We had 5% growth in volumes. We are working to get that better obviously.
I think the good news, which Simon reported is quarter 4 was that the signings were up from quarter 3 and when we just compare our signings for the second half, when our actions and post-Airgas started to take some effect to the first half, our signings our 2x in the second half what they were in the first half. So we're still hiring salespeople.
That effort, I believe, is on track and will accomplish the goals, which we have. As we said it's going to take some time for us to see this.
It will take probably through the next year as we see these customers brought on stream, because it takes 6 to 9 months to marry a customer on stream. With regard to Europe and the prices which we talked about, the Europe pricing as you heard was flat, that was healthcare being down.
Improved pricing in Europe on the liquid/bulk side. However, we're not recovering the increased power there and we need to do that.
So we did more actions on pricing and we need to be better there. So I'd like the trend of pricing starting to move up but it's not fixed yet and we need to get more things going there.
Operational issues, which we had. We had less this quarter.
So we are improving in those things. You can see that in the cost performance.
We still have some other things, which we've got to do to bring plants onstream to end the distribution cost. We talked about the LaPorte plant and the Riley Ridge helium plant, which help in our supply of argon and helium, which will lower our distribution costs in those areas.
And they come onstream in quarter 1 of this year and we'll likely -- we'll see the effect in quarter 2. Helium supply is still short and the Riley Ridge plant will help us there to come on stream.
So overall, we think that we like the improvement. But we still think that there is more.
Prior year was higher, but we intend to go there. So first quarter, we're not going to have everything in.
There is a seasonal volume decline, so it's going probably tough, but we look towards the second, third and fourth quarters for that getting a lot better.
Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division
Okay. Thank you for that.
And for my follow-up, your equity income was $55 million in the fourth quarter and normally, you report about $35 million in equity income. So you are up $20 million.
So is that a one-time item? And I suppose if it's not a one-time item, do you expect to grow off that number in 2012, or what's the normalized level of your equity income given this sharp increase in the quarter?
Paul E. Huck
Yes, Jeff. And the thing, which I talked about was that on the equity income was that we did have a one-time item of about $0.04 a share.
So if you take that and that number out, the $0.04, about $10 million to $12 million or so. If you take that out, then you go to the performance for this quarter.
Realize that all of this is income which comes from overseas, principally. And so a lot of it is subject to the fluctuations on currency also.
So giving a normalized level is tough when the currency fluctuate about a lot. But otherwise, the one-time items, take that out, and you got a good level there.
Operator
And next we'll go to John McNulty with Crédit Suisse.
John P. McNulty - Crédit Suisse AG, Research Division
Just 2 quick questions. Paul, when I look at the upper end of what you're guiding to and some of the assumptions, so global manufacturing up 5% with the U.S.
up 5% and Asia up 9%. They seem like pretty decent kind of outlooks and yet you're calling for about 10% EPS growth, which is kind, which is below your long-term target of what looks to be 15% to 16% to get to that 2015 goal.
So I guess, I'm wondering why isn't -- why wouldn't the EPS be higher if you kind of hit this high-end of the range in terms of global manufacturing growth? And how should we think about that growth, maybe, potentially accelerating in the out years for you to hit your target?
Paul E. Huck
And John, I think a couple of things in which people should understand about the guidance here is that a lot of the pickup, which we talked about, occurs in the second half of the year. So we see regardless of the economic scenario, a slow first half.
The other aspect of these things is that we do tend to lag a little bit, a quarter or 2 in a number of areas in responding to what happens in the economy with things. And so, I could see a delay where the economies pickup, but we don't follow directly in that particular quarter.
And so that is really what happens, which would then say, that yes, 2013 growth would be stronger than what you would expect to see from the economy.
John P. McNulty - Crédit Suisse AG, Research Division
Okay, fair enough. And then just a question on your Electronics.
You had relatively decent pricing this year and in the past, that was never the case. What's your pricing outlook for 2012?
Can we see further price increases or was this kind of a one-time ratchet up and we kind of stay level from this point forward?
Paul E. Huck
And the goal of Electronics here, as we said, are the key prices flat to up for us going forward. So we think that, and that we can continue the price improvement here.
If you broke the 2 businesses apart, the price performance in Performance Materials was better than price performance in Electronics for the year on that. But Electronics previously had been one which had been declining, and so over the past 2 years, and we have seen our price performance be a lot better.
Operator
And next we'll go to Kevin McCarthy with Bank of America Merrill Lynch.
Kevin W. McCarthy - BofA Merrill Lynch, Research Division
A question on Tonnage. You mentioned that you had about $0.05 of gains there related to some contract modifications.
I was wondering if you could give us a sense of what was modified? Whether it was in Tonnage per se or, Paul, the polyurethane intermediates, what the nature of the modifications might have been?
And whether we should consider those modifications to be a source of durable gains or is it more transitory in nature?
Paul E. Huck
Yes. And Kevin, and it was contract mods in the on-site area, not in the polyurethane business.
So it gets around as we have events, as we change contracts, as we move volume around and commitments of volume around. As we roll contracts, very often we have events which lead to an accounting gain or loss on those things.
And typically those things are not all that large. In this quarter, we had a couple of them, which when you combine them, and they made to a large gain for us in this quarter.
So we decided to guide you because it doesn't repeat. But we do have sources of gains and losses, which put a little noise and the Tonnage business just get's it, it is the nature of the business, but normally it's not big enough to spike out or to see.
Kevin W. McCarthy - BofA Merrill Lynch, Research Division
Okay. And then as a follow-up Paul, in Merchant, what was the magnitude of the pressure that you saw in healthcare-related pricing and on the positive side?
It sounded like LOX/LIN would would've been up regionally in Europe, and maybe you could size that for us?
Paul E. Huck
Yes. And LOX/LIN pricing was up, I'm recalling now, I think LOX/LIN was about 3% for that.
The healthcare pricing, I remember it by, and by the individual contracts, but I would say it's probably about 4% to 5%.
Operator
Next we'll go to David Begleiter with Deutsche Bank.
David L. Begleiter - Deutsche Bank AG, Research Division
Paul, just on the backlog, given a large number of projects coming on in 2012, will the $2.5 billion backlog be up or down by year end 2012 versus 2011?
Paul E. Huck
And that depends upon the award activity. But for right now, the way in which we see the world panning out and the way in which we see these bids happening, we would expect our backlog to be up.
David L. Begleiter - Deutsche Bank AG, Research Division
And just given the 30-ish, $0.40 of earnings growth in '12 versus '11, would that be the same amount in '13 versus '12? Given based on what we have in the backlog today would be up or down or lower?
Paul E. Huck
It would probably close to the same. It could increase as we get some smaller projects on, so we still need the ability to raise that a little bit.
But I'd say it'd be about the same.
Operator
Next we have Bob Koort with Goldman Sachs.
Robert Koort - Goldman Sachs Group Inc., Research Division
First an observation, it seems like you guys get picked on quite a bit for your Electronics exposure. But it seemed like in the quarter at least, Electronics held pretty well and it was the Performance Materials side that had the challenges.
Just wondering in those end markets, you called out housing and construction and autos, can you give us a little more feel for what's going on a specifically? I would have thought autos was improving as Japan came back globally, auto rates improving.
And then I thought housing and construction was already pretty coarse. So is there something specific to your business or your product lines that might be different than the macros there?
Paul E. Huck
And Bob, I think, another thing, which I think factored in the business is we have seen a lot of concern from the people who bought from us and the customer base that they don't want to build inventory. And so people are paying a lot of attention to that, because they're concerned about the economy going forward and therefore, what they did during this quarter is a they took the inventories down for their products.
So I don't think it's so much related exactly to production. But people are concerned going forward about producing too much and being called inventory.
So we did see that occur over the summer.
Robert Koort - Goldman Sachs Group Inc., Research Division
And Paul, I know you don't see this as a prelude to the economic environment of '09, but I mean, clearly, to get to your '15 targets, you need a pretty massive acceleration after a slower year end 2012. So would you expect to defer those 2015 targets or do you think there's still a reasonable chance you could achieve those?
Paul E. Huck
No. We do not think -- no, and we're not going to defer them and we still think there is a good chance for us to get there.
We are still very pleased with the markets and the opportunities, which we see for investment which drive this. So I think we're on track as you see in the capital spending area for growing our capital expenditures and what that means is that there's growth, which sits behind there in the 2013, '14 and '15.
Operator
All right. And next we have Dan Carson with Susquehanna Financial.
Donald Carson - Susquehanna Financial Group, LLLP, Research Division
Paul, question on just your guidance outlook, it does seem somewhat conservative. The midpoint is about 8% or actually 6.5% on a reported basis.
Is part of that conservatism due to the fact that you've kind of have a number of one-time items? It seems in this quarter alone you had about $0.09 of one-time items.
Paul E. Huck
Well, I think, and the concern, which we have, Don, is with the economy. As I've talked about it.
And does the economy picked up in the second half of the 2012 or not from where we see it today. You can see the quarter 1 guidance for us is low, and we're not happy, but we think it reflects the reality of what we're seeing in the economy out there.
I don't think it reflects the noise from one-time items.
Simon R. Moore
And maybe just, also -- Don, sorry, this is Simon, too, you mentioned $0.09 as a one-time items. I mean, I think maybe just for a second, we did talk about the $0.05 in the Tonnage contract roll and while there were some items in the equity affiliates, they were kind of offset by the minority interest line as well.
So those kind of sets, so we would have said it's more like a $0.05 one time.
Donald Carson - Susquehanna Financial Group, LLLP, Research Division
Maybe just to follow up on the Tonnage, but back out that $0.05, I guess it's about $14 million to get you to about 15.6%, which is still well below your 2015 target of 17% to 20%. And given that you have such a high proportion of hydrogen, where at $4 or $5 natural gas it's hard above sort of 14% to 15% margins.
What drives that big margin improvement in Tonnage? Are you going to get more aggressive, say, on financial engineering and perhaps not taking title of the gas so that you get the benefit of not passing through that cost component?
Paul E. Huck
We're not going to try to do it by trying to wave our hands or trying to engineer this from a financial standpoint. The way in which we're going to do this is we have a backlog in China, which we talked about in the gasification end.
We have more projects to announce there and those projects are oxygen and the margins and the returns on them are very good and they will help drive that margin up higher. Because there are going to rep a lot of investments for us going forward here.
And you can see the Asia portion of our capital expenditures has picked up, and we expect that to continue to grow.
Operator
And next we have a Mike Harrison with First Analysis.
Michael J. Harrison - First Analysis Securities Corporation, Research Division
I was -- first of all, hoping as we're talking about these sort of one-time items. Can you just segregate what's in the negative $22 million number in the corporate operating income number?
Paul E. Huck
Yes, Mike. And so -- and there's a slide in the backup for that.
You'll see the big number, which is included there is an inventory number, which and so I'll explain what happened to this. In total, the inventory number, which affected the corporation in total is about $2 million unfavorable.
What happens is, at year end, is we do 2 things. First, within the books we use a standard cost in our P&Ls and so what that means if you go back to accounting courses, you take the inventory out its standard and you put the inventory in its standard and that goes into the COGS and the purchase price variances flow through the P&L.
At the end of the year, we do our inventory on the balance sheet and they get they get valued at current cost for those things. And so there is a write up or a write down of inventories, which occurs within the business segments.
In the U.S. only then, we also adjust to LIFO, which occurs at the corporate level in total on that thing.
So it's a gain or loss, and which gets impacted there. So the $19 million or so on inventory, I believe, is all relates to those 2 adjustments on net for the company, is $2 million unfavorable.
Michael J. Harrison - First Analysis Securities Corporation, Research Division
All right and just looking at demand trends overall in key end markets, can you talk a little bit about areas that you watch as leading indicators and it sounds like there is sort of indicating to you that things are softening and that there are areas of concern. I don't think you would guide to a number like you've guided just based on what you're reading in the headlines and what the are seeing.
Paul E. Huck
We watched the statistics and we watched the trends on a sequential basis. And so, we do have -- and real concerns as we talked about, from an economy standpoint about the amount of uncertainty, which holds back on the invest in business, holds about people creating jobs, which you need to create jobs to get consumer confidence to get consumers to buy.
And so as we look at it, the economy is a just kind of limping along globally to a very large extent in many instances. And what we're looking for really is some signs of some of these issues, which hang over everybody around the uncertainty to get the economy to start to move again.
But the developed world is in tough shape from an economic standpoint right now. Corporations are doing well, and we're doing well on a financial standpoint.
But volumes -- and the volume growth is just not there in many instances, and we're concerned about that.
Michael J. Harrison - First Analysis Securities Corporation, Research Division
All right. And lastly, I was hoping to maybe just get some more details on the Merchant business.
You kind of referenced expecting to see some improvement in LAR in some of the dislocation issues you've been seeing related to LaPorte, Texas, as well as the new helium project that's coming onstream. Just maybe a little better sense of kind of a supply-demand dynamics on LAR and helium?
Simon R. Moore
Good question. As Paul said, both those projects are coming on in the next quarter.
So when they come on, that'll loosen things up a little bit. We have talked in the past about helium being tight globally, longer term than that.
So they will help but they will not solve the problem.
Operator
And next we'll go to Mike Sison with KeyBanc.
Michael J. Sison - KeyBanc Capital Markets Inc., Research Division
In terms of the $0.30, $0.35 of new plant earnings of this year in '12, is that fairly even throughout the year or is it maybe a little bit front-end loaded, back-end loaded?
Paul E. Huck
I think it is pretty even. When I look at this overall, Mike, I think we have plans coming on throughout the year.
Michael J. Sison - KeyBanc Capital Markets Inc., Research Division
Okay, great. And then one quick follow-up on Merchant.
What type of incremental leverage do you expect to get back to and will we see that at some point in 2012?
Paul E. Huck
You will start to see the operating leverage from North America probably in late Q1 and Q2, Q3 and Q4 with the signings that we have. I just go by the rules of thumb which we have, so I would expect to see that happening.
As far as the operating leverage is concerned, we have the ability probably to sell another $150 million or so within the U.S. just based upon the leverage, which exists today and before we got to a sold-out condition.
So it's a pretty nice -- a nice margin comes with that.
Operator
And next we have David Manthey with Robert W. Baird.
David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division
First off, what are the top and bottom line impacts from currency that you're assuming in your fiscal year '12 guidance? And also do you just assume constant natural gas prices in your forecast?
Paul E. Huck
Yes. And what we do is we pick a gas forecast out there so the forecast for gas is pretty consistent to what we saw in 2011 was a little over $4 or so.
If I look at the guidance here, we actually have in our guidance, the dollar strengthening against the euro overall from that and some deterioration against the RMB.
David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division
Okay. And then second question sort of economic macro.
What odds would you place on a mild economic recession or global recession in the coming year? And you've mentioned a couple of times that you sort of expect acceleration in the back half of the year and I'm wondering as your comments earlier, sound like pretty uncertain, what gives you confidence that we will see that?
Paul E. Huck
Okay. First, I do not see a global recession occurring.
So the odds that I place on it would be low from my standpoint. I do think the odds in Europe are higher, but not for a global one.
If you then took a look at and said, the confidence on the second half of the year, I think what happens is hopefully, some of these uncertainties start to resolve. We gave the thing for the U.S.
it is that within the U.S., we start to see a consensus emerge on things like tax reform, regulations, entitlements, spending and things like that. And people start to see a way forward where they can start to predict what impact is that going to have on the decision, which I mean -- we're talking to make to run my business.
Once we see that, I think people will start to expand, invest, hire people and stuff like that. And once we get the politicians somewhat in line with these things and we get a path forward, I think it gets better for that.
In Europe, I think as they continue to work through the current crisis which exists there, as they start to see and resolve those things in whatever way they go, whether they go worse or better on things as we work our through. We're going to get at some point to an end at that, and I think that probably occurs sometime within the next year or so.
Operator
And next we'll go to Mark Gulley with Ticonderoga.
Mark R. Gulley - Ticonderoga Securities LLC, Research Division
Paul, I recognize just 4 months after your Investor Day in New York, you start to change the goal. Well I'll check some math with you.
If I take the fiscal '12 guidance in order to get to the $10 earnings share number, you sort of implied back in June, you'd have to grow earnings 18% per year for years, the last 4 years in that period. Is that about right and is that what you're sort of telling us today?
Paul E. Huck
Yes, yes.
Mark R. Gulley - Ticonderoga Securities LLC, Research Division
Okay. And then maybe a little bit of detail on the tax rate.
Why is it accelerating a little bit in fiscal '12?
Paul E. Huck
And the reason for us taking up tax rate is we continue to see pressure in the government to close things down to make things harder, to take advantage of credits and other things, which we have. So we think there is upward pressure on taxes going forward.
Paul E. Huck
Okay. And thank you, everyone, for joining us today.
The whole Air Products team is excited by the opportunities which we face, and are committed to take the actions to improve our performance in 2012 and beyond. Hope every one has a good weekend.
Operator
And that does conclude today's conference, and we thank you for participating.