Praxair Inc. Q1 2010 Earnings Call Transcript

Praxair Inc. Q1 2010 Earnings Call Transcript
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Praxair Inc. (PX)

Q1 2010 Earnings Call

April 28, 2010 11:00 am ET

Executives

Jim Sawyer - EVP and CFO

Liz Hirsch - Director, IR

Analysts

Mark Gulley - Soleil Securities

John McNulty - Credit Suisse

Sergey Vasnetsov - Barclays Capital

PJ Juvekar - Citigroup

David Begleiter - Deutsche Bank

David Manthey - Robert W. Baird

Michael Harrison - First Analysis

Bob Koort - Goldman Sachs

Laurence Alexander - Jefferies

Mike Sison - KeyBanc

Edward Yang - Oppenheimer

Kevin McCarthy - Bank of America/Merrill Lynch

Don Carson - UBS

Jeff Zekauskas - JPMorgan

John Roberts - Buckingham Research

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the First Quarter Praxair incorporated earnings conference call. My name is Jerry and I'll be your coordinator today. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today Mr. Jim Sawyer, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Jim

Sawyer

Good morning and thank you for attending our first quarter webcast. Liz Hirsch, Director of Investor Relations and Matt White, Vice President and Controller are with me this morning. Liz will review our first quarter results. Afterwards, I'll discuss the current business environment, our outlook for the balance of 2010 and our earnings guidance. We'll then be available to answer questions. Liz?

Liz

Hirsch

Thank you, Jim, and good morning. Today's presentation materials are available on our website at www.praxair.com in the Investors section. Please read the forward-looking statement disclosure on page two and note that it applies to all statements made during this teleconference.

Please turn to slide three in our presentation for a summary of our first quarter results. Please note that these results and the year-over-year earnings comparisons have been adjusted to exclude the impact of the Venezuelan currency devaluation, which was announced in January. This resulted in a one-time pre-tax charge to our earnings this quarter of $27 million, $26 million after-tax, and $0.08 of earnings per share.

As you will recall, the earnings guidance we gave you in January for the first quarter and for the full year of 2010 excluded this charge. A reconciliation of these results to our GAAP reported numbers appears in the appendices to this presentation and the press release.

Praxair's results in the first quarter reflect improving global business fundamentals, though the strength of the improvement we have seen varied considerably by geography. Volumes have picked up sequentially in all our regions led by Asia and South America. The modest overall sequential volume growth we reported was muted because March was kind of an inflection point following demand levels in January and February that were pretty much on a par with December. So this should position us well for incremental growth in the second quarter, given that the March trends are holding or slightly improving in April.

Sales in the quarter were $2.4 billion, 14% above the prior year. Higher volumes contributed 6% growth and foreign currency appreciation contributed 7%. Volume growth came primarily from higher sales to chemicals, metals and electronics customers whose production levels were very low a year ago as these three industries were working through significant inventory destocking. New plant startups in Asia also contributed to volume growth.

Operating profit was $506 million in the quarter, up 14% from the prior year in line with our sales growth and the operating margin was 20.8%, also in line with the prior-year quarter. Higher volumes of base business atmospheric gases contributed a high incremental margin in the 30% to 40% range. However, this is masked primarily because last year we were collecting take-or-pay revenue from a number of large onsite customers. The first quarter of 2009 was our volume trough and therefore, the quarter, when take-or-pay revenue was the highest.

Secondly, to-date, electronics has shown the fastest and strongest volume recovery and electronics process gases have lower margins than atmospherics. Higher cost pass-through also had a modest negative effect on the margin percentage.

So we do expect that the incremental margin contribution from the recovery of our base business volumes will be more evident as we go forward.

Net income was $340 million and 14% of sales. Net income grew 17% from 2009, a higher increase than the increase in operating profit due to lower interest expense. Interest expense this quarter was lower than we had forecasted due to strong cash flow generation in several of our countries with higher interest rate debt. We expected to trend upwards over the next few quarters and be in a range of $140 million to $150 million for the year.

Earnings per share were $1.09, 17% above prior year. We generated $483 million of operating cash flow this quarter, primarily from net income and depreciation. This cash flow is 20% of sales due to the fixed cost reductions we implemented last year and our ongoing tight control of working capital.

This cash flow funded $288 million of capital expenditures in the quarter, related primarily to construction spending on the large on-site projects in our backlog. Our free cash flow after CapEx of $195 million funded a $138 million of dividends and $68 million of stock repurchases, net of issuances.

The reason our total debt increased from year-end was because in January we took advantage of very attractive rates in the bond market and issued $500 million of three-year notes at a coupon of 2.125%. These proceeds will be used to pay off a note issue that matures in May. At the end of the quarter, this cash was sitting on our balance sheet because we have paid down essentially all our commercial paper and US short-term bank borrowings with the proceeds of the over $2 billion of note issues we executed over the past 12 months, locking in very attractive low cost financing.

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