Praxair (PX)

Q1 2011 Earnings Call

April 27, 2011 11:00 am ET

Executives

James Sawyer - Chief Financial Officer and Executive Vice President

Kelcey Hoyt - Director of Investor Relations

Analysts

Mark Gulley - Soleil Securities Group, Inc.

Brian Maguire - Goldman Sachs Group Inc.

Michael Sison - KeyBanc Capital Markets Inc.

Abhiram Rajendran - Crédit Suisse AG

Donald Carson - Susquehanna Financial Group, LLLP

Jeffrey Zekauskas - JP Morgan Chase & Co

James Sheehan - Deutsche Bank

Edward Yang - Oppenheimer & Co. Inc.

David Manthey - Robert W. Baird & Co. Incorporated

Laurence Alexander - Jefferies & Company, Inc.

Kevin McCarthy

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P.J. Juvekar - Citigroup Inc

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Praxair Inc. Earnings Conference Call. My name is Michelle, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Kelcey Hoyt, Director of Investor Relations. Please proceed, ma'am.

Kelcey Hoyt

Thanks, Michelle. Good morning, and thank you for attending our first quarter earnings call and webcast. I'm joined this morning by Jim Sawyer, Executive Vice President and Chief Financial Officer; and Liz Hirsch, our Vice President and Controller. Today's presentation materials are available on our website at www.praxair.com in the Investor section. Please read the forward-looking statement disclosure on Page 2 and note that it applies to all statements made during this teleconference.

In addition, please note that the comparisons are the prior-year results, which include an adjustment in 2010, and these reconciliations to the U.S. GAAP reported numbers are in the Appendices to this presentation and the press release. Jim and I will now briefly review our first quarter results and future outlook, and then we'll be available to answer questions.

James Sawyer

Thanks, Kelcey, and good morning, everyone. Praxair began the year with another record quarter as the manufacturing economy in the U.S. begin to recover augmenting our long-term growth initiatives in emerging markets, energy and environment. Consequently, we delivered earnings per share growth of 18%, which is the high end of our long-term earnings growth forecast range of 12% to 18%. Overall, sales growth was 11%, driven primarily by volume growth in both our base business and new project startups. We're beginning to see some opportunities to improve pricing particularly in Asia and South America, where inflation has crept up to the 5% range. We're also able to increase overall price in the U.S. Most importantly, we continue to deliver earnings leverage, with operating profit growing faster than sales and EPS growing faster than operating profit. This is due to our unrelenting focus on productivity, which drives margin and cash flow which drives earnings.

New project signings in the quarter accelerated to about $500 million, bringing our on-site backlog to 40 projects, representing about $2.5 billion in capital investment. As we continue to sign more projects and complete the ones in our backlog, on budget and on schedule, we'll continue to drive double-digit earnings growth.

Kelcey Hoyt

Thanks, Jim. Now please refer to Slide 3 in our presentation for a summary of our first quarter results. Sales this quarter were $2.7 billion, up 11% versus the prior-year quarter. Higher volumes contributed 8% growth and price contributed 1%. Volume growth was strongest in Asia, followed by South America, North America and Europe. Pricing opportunities are improving with capacity utilization increases and are reflected in Asia, South America and North America. Sequentially, sales grew 3% also due to higher volumes, price and currency. Overall volume growth of 1% reflects seasonal effects of the Lunar New Year, carnival in Brazil and customer turnarounds in North America which are typical during the first quarter.

Operating profit was $591 million in the quarter, up 17% from the prior year and the operating margin rose to 21.9%. The increase was driven primarily by higher sales volumes, price and ongoing productivity initiatives. Net income was $398 million, 17% above the prior-year quarter and earnings per share grew 18% to $1.29. Earnings per share grew faster than net income due to share repurchases under our $1.5 billion share repurchase program authorized in the middle of last year. $835 million remains available under this program, which we expect to complete by the middle of next year. EBITDA of $844 million grew 14% from the prior year.

During the first quarter, we extended the maturity of our debt profile by issuing $500 million of 10-year notes at a rate of 4.05%. Our debt-to-capital ratio for the quarter was 47.2% and debt to EBITDA was a strong 1.7%. After-tax return on capital for the quarter was 14.4% and return on equity was 26.6%.

Now, we'll review our results in North America, which are summarized on Page 4. Sales in North America were $1.3 billion, 8% above the prior-year quarter due primarily to 6% volume growth. Merchant liquid and packaged gas volumes both showed growth versus the prior year. Underlying sales, including price, increased 7%, primarily driven by the manufacturing, chemicals, metals and energy end markets. We completed the divestiture of U.S. Homecare in early March which decreased sales by 1% versus the prior-year quarter.

Sequential sales increased 2%, primarily reflecting the continued steady recovery we are seeing in merchant and packaged gases. On-site volumes were impacted by the timing of hydrogen customer turnarounds. Merchant sales grew 10% from the prior-year quarter and grew 3% sequentially. We continue to see strong demand from the energy sector, some of which is seasonal. Natural gas frac-ing in Canada remains strong due to frac-ing for natural gas liquids. However, these volumes will decline during the second quarter as they do each year with the spring, fall which makes it too difficult for the trucks to access the sites. Oil well serviced volumes also increased in Mexico with the higher price of oil driving increased activity from Pemex.

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