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Praxair (PX)

Q4 2010 Earnings Call

January 26, 2011 11:00 am ET


James Sawyer - Chief Financial Officer and Executive Vice President

Kelcey Hoyt - Director of Investor Relations


Mark Gulley - Soleil Securities Group, Inc.

David Begleiter - Deutsche Bank AG

Michael Sison - KeyBanc Capital Markets Inc.

Donald Carson - Susquehanna Financial Group, LLLP

John McNulty - Crédit Suisse AG

Michael Harrison - First Analysis

Edward Yang - Oppenheimer & Co. Inc.

Laurence Alexander - Jefferies & Company, Inc.

Kevin McCarthy

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Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2010 Praxair Inc. Earnings Conference Call. My name is Lacy, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Jim Sawyer, Executive Vice President and CFO. Please proceed.

James Sawyer

Good morning, and thank you for attending our fourth quarter earnings call and webcast. I am joined this morning by Liz Hirsch whom you will recall was appointed Vice President and Controller of the Corporation in December; and Kelcey Hoyt, our new Director of Investor Relations. Today's presentation materials are available on our website at in the Investors section. Please read the forward-looking statement disclosure on Page 2 and note that it applies to all statements made during the teleconference.

I'm going to start this morning with an overview of our full year results for 2010. Kelcey will then review our fourth quarter results. Afterwards, I will discuss our current business trends outlook and our earnings guidance for 2011. We'll then be available to answer questions.

Let me first address several significant one-time issues. First, we decided to sell the U.S. portion of our North American Home Oxygen business. It's no secret that the reimbursement environment for this business has become worse and worse throughout the decade, and the future looks no brighter. So we have ratcheted down into an expected realizable sale value, and we expect the close to expect in the first half of the year. This will reduce sales by $150 million in 2011 with negligible impact on earnings.

Now on the tax side. Over the past several years, we've seen sovereign governments using excessively aggressive actions in order to collect money. We expect this trend to continue going forward not only overseas but also in the U.S. and particularly with state governments. Consequently, we settled our issues in Spain with a handsome in size payment of nearly $500 million. Last year, we settled the majority of our issues in Brazil and Mexico at no significant cost. Going forward, we don't expect to have any significant charges, and we do expect to close audits in the U.S. and Canada up to 2008.

With respect to the Brazil, we've appealed the case, have a very strong defensive position and don't expect it to be fully agitated for many years to come. And lastly, five years ago, there was a concern about welding rod cases brought against the welding industry. At this point, 95% of these cases have now been withdrawn as the plaintiff's lawyers had little success.

Please refer to Slide 3 in our presentation which summarizes our full year results. Please note that in the presentation, our earnings have been adjusted to exclude the impact of these items. These charges are detailed and are reconciled to GAAP reported numbers in the appendices in the presentation and press release.

That behind us, we closed 2010 on a very strong note. Our full year results reflect strong growth across all of our geographies and major end markets. We started up 20 new plants around the world and established a presence in two new growing geographies, Russia and the Middle East. Our intense focus on productivity and cost reduction allowed us to leverage our 13% sales growth to 19% growth in earnings per share.

In 2010, we achieved about $400 million in cost savings from productivity. Overall sales were $10.1 billion, 13% above 2009 primarily due to 9% volume growth including new plant startups in Asia, North America and South America. Manufacturing, metals, chemicals and energy end markets showed a stronger growth in the prior year. Foreign currency translation increased sales by 2% for the year due primarily to depreciation of the Brazilian real, partially offset by the weekly euro.

Operating profit was $2.2 billion, 15% above 2010, primarily due to volume growth in productivity gains. Operating margin improved 40 basis points to 21.4%. We were able to leverage the economic recovery by continuing to execute on productivity savings and cost reduction.

Full year net income of $1.5 billion grew 18%, also benefiting from higher earnings from our equity affiliate companies in Italy, China, Norway and our new joint venture with ROC Group and the existing industrial gas operating in Kuwait, United Arab Emirates and Qatar.

Full year earnings per share were $4.74, up 19% from 2009, higher than the increase in net income due to fewer diluted shares outstanding as a result of our ongoing share repurchase program. Our team produced outstanding results in getting positive leverage on the income statement by sustaining our productivity efforts implemented during the economic downturn and executing on new projects and new business wins. Our aftertax return on capital for the year was 14.4%, reflecting improved earnings on higher capital due to ongoing investment in new on-site projects, which will provide significant future revenue and earnings growth. Return on equity for the year was 26.4%.

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