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Praxair Q3 2010 Earnings Call Transcript

Praxair Q3 2010 Earnings Call Transcript

Praxair (PX)

Q3 2010 Earnings Call

October 27, 2010 11:00 am ET


James Sawyer - Chief Financial Officer and Executive Vice President

Elizabeth Hirsch - Director of Investor Relations


Mark Gulley - Soleil Securities Group, Inc.

David Begleiter - Deutsche Bank AG

Michael Sison - KeyBanc Capital Markets Inc.

Jeffrey Zekauskas - JP Morgan Chase & Co

Robert Koort - Goldman Sachs Group Inc.

Michael Harrison - First Analysis

David Manthey - Robert W. Baird & Co. Incorporated

Laurence Alexander - Jefferies & Company, Inc.

Kevin McCarthy

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P.J. Juvekar - Citigroup Inc



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Good day, ladies and gentlemen, and welcome to the Third Quarter 2010 Praxair Earnings Conference Call. My name is Katie, and I'll be your coordinator for today. [Operator Instructions] I would like to now hand the call over to your host for today, Mr. Jim Sawyer, Executive Vice President and CFO. Mr. Sawyer, over to you.

James Sawyer

Thank you. Good morning, and thank you all for attending our third quarter earnings call and webcast. Liz Hirsch, Director of Investor Relations; and Mark Murphy, Vice President and Controller, are with me this morning. Liz and I will review our third quarter results. Afterward, I will discuss our earnings guidance for the fourth quarter and our business outlook. We will then be available to answer questions.

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 this teleconference and website.

Praxair had a strong third quarter with overall business trends in line with our expectations. Our results showed strong volume growth in all geographies as compared to last year. Volume growth was particularly strong in South America and Asia. As we anticipated, sequential growth in the second quarter was at a more modest pace from what we were seeing in the first half of this year. We grew operating profit and net income faster than sales from productivity and cost reduction and operating leverage from higher volumes.

We reported record net income and earnings per share despite the fact that in developed markets like the U.S., Canada and Europe, our volumes are still below pre-recession levels. We generated very strong operating cash flow, started up four new plants, signed a number of new customer contracts and acquired an investment in a leading industrial gas business in the Middle East, a region, which we believe offers significant opportunity, all of which positions us well for continued future profitable growth. Liz is going to review our quarterly results in more detail.

Elizabeth Hirsch

Thank you, Jim, and good morning. Please turn to Slide 3 in our presentation for a summary of our third quarter results. Please note that the results for the prior year quarter and the year-over-year comparisons have been adjusted to exclude the impact of the Brazil tax amnesty program and other charges last year. Sales in the quarter were $2.5 billion, 11% above the prior year, primarily due to 9% volume growth. Sales were higher in all our major end markets. Chemicals, metals, electronics and manufacturing have the strongest growth versus prior year. New plant start-ups in Asia and in the U.S. contributed to overall growth. Sequentially, sales were similar to the second quarter as organic volume growth was somewhat offset by summer vacation seasonality in Europe, combined with a number of customer plant outages in Europe, the U.S. and China.

Operating profit of $551 million grew 15% from the prior year and the operating margin increased to 21.7%. Excluding the effect of higher cost pass-through, operating margin was 22.1%, which is a record. The contribution of higher volumes on a lower cost structure from ongoing productivity initiatives drove this improvement.

Net income of $377 million grew 19% from 2009, aided by lower interest expense and higher income from equity investments. Interest expense is lower due to lower rates and lower international borrowings. Equity income is higher due to higher earnings in our affiliates in Italy and Norway, and our recently acquired investment in the Middle East, the ROC Group. Earnings per share were a record $1.21, also up 19% from prior year.

We generated strong cash flow from operations of $596 million, which is 23% of sales. This cash flow funded $324 million of capital expenditures, largely related to the construction of large on-site plants in our project backlog and acquisitions of $114 million. Acquisition expenditures relate primarily to our recently announced acquisition of a 49% interest in the ROC Group, which is the leading industrial gas company in Kuwait and the United Arab Emirates, and which also has a growing business in Qatar. Cash flow also funded dividends of $139 million and $54 million of net stock repurchases.

After-tax return on capital was 14.7%, and return on equity was 26.4% for the quarter.

Please turn to Page 4 for our results in North America. Sales in North America were $1.3 billion, 10% above prior year, due primarily to 7% volume growth. Higher cost pass-through, primarily higher natural gas prices, contractually passed through to our customers in hydrogen prices, increased sales by 3%. Sales to chemicals and metals customers were well above prior year and manufacturing showed nice improvement. Sequentially, sales volumes were flat with second quarter due to the mix. Merchant volumes were higher and packaged gases volumes were lower due to normal seasonality related to summer holidays. On-site volumes were modestly lower due to several seal [ph] and refining customer turnarounds.

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