Praxair Management Discusses Q2 2012 Results - Earnings Call Transcript

Praxair (PX)

Q2 2012 Earnings Call

July 25, 2012 11:00 am ET

Executives

Kelcey E. Hoyt - Director of Investor Relations

James S. Sawyer - Chief Financial Officer and Executive Vice President

Analysts

Duffy Fischer - Barclays Capital, Research Division

Vincent Andrews - Morgan Stanley, Research Division

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Laurence Alexander - Jefferies & Company, Inc., Research Division

Michael J. Harrison - First Analysis Securities Corporation, Research Division

John P. McNulty - Crédit Suisse AG, Research Division

Robert Koort - Goldman Sachs Group Inc., Research Division

David L. Begleiter - Deutsche Bank AG, Research Division

P.J. Juvekar - Citigroup Inc, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the second quarter Praxair Earnings Conference Call. My name is Stephanie, and I'll be your coordinator 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, Ms. Kelcey Hoyt, Director, Investor Relations. Please proceed.

Kelcey E. Hoyt

Thanks, Stephanie. Good morning and thank you for attending our second 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 praxair.com in the Investors section. Please read the forward-looking statement disclosure on Page 2 of the slides and note that it applies to all statements made during this teleconference.

Jim and I will now review Praxair's second quarter results and outlook. We'll then be available to answer questions.

James S. Sawyer

Thank you, Kelcey, and good morning, everyone. Please turn to Slide 3 for our consolidated second quarter results. A first glance at the slide reveals the sales and earnings growth were subdued and fell short of our long-term objectives. But I want to emphasize that our results were significantly constrained by negative currency translation, lower pass-through of natural gas price and hires and sales, and deteriorating manufacturing conditions in Europe and Brazil.

Having said that, we had fantastic results in North America, which we expect will continue, and when Brazil and Europe turnaround, then we'll be back on our historic trajectory of double-digit earnings growth. We've taken restructure actions in Brazil and are evaluating additional actions across Europe and in surface technologies in European plants, which serve the manufacturing sector. These steps will ensure better results in these weak spots without waiting for a rising tide of economic conditions.

There's a chart on Page 11, I would like to refer you to in the appendix for the teleconference slide deck, which shows the volatility of our 6 major overseas currencies and also why we are lowering our guidance for the remainder of the year by about 3%. Year-over-year as of June, the Brazilian real has fallen 22%. The euro, 11%, the Mexican peso, 16%, and the Canadian dollar 4%, and the Indian rupee, 19%, and the Korean won, 8%. Our year-over-year sales declined 2% to $2.8 billion, but excluding a 6% negative currency impact and a 2% impact from lower gas pass-through of natural gas, sales would have grown 6%. More importantly operating profit, x currency, was up about 9% and EPS about 11%, demonstrating that we're still getting leverage down the income statement in productivity and strong cash flow.

In fact, operating cash flow was a record $75 million, representing more than 25% of our sales.

Our debt-to-capital ratio for the quarter was 53% and debt-to-EBITDA was 1.9x. During the quarter, we paid dividends of $164 million, and repurchased stock of $104 million, net of issuances. $1.3 billion remains available under the share repurchase program authorized in January of this year. After-tax return on capital for the quarter was 14.2%, and reflects the large amount of projects under construction, and therefore, a significant amount of project capital on our balance sheet not yet completed. Return on equity increased to 29.7%.

Now please turn to Slide 4 for our updated earnings guidance. In the third quarter, we see a continuation of similar business trends sequentially, and are issuing earnings guidance in the range $1.35 to $1.40. This guidance reflects the assumption of an additional $0.03 of currency headwind sequentially from the second quarter, as the major currencies swings occurred in late April. On a year-over-year basis, our third quarter earnings expectation reflects negative currency translation impact of about $0.12 per share. As such, for the full year, we've lowered our earnings guidance to $5.60 to $5.70 or about $0.15 to $0.20 from the prior guidance.

The majority of the reduction, or about 2/3, relates to negative currency translation impact based on current exchange rates. Additionally, volumes everywhere outside of North America are falling short of expectations, and we're not anticipating macroeconomic conditions to improve in the second half. Our long-term growth outlook remains strong and we're maintaining our capital spending forecast of $2.1 billion to $2.4 billion against the backlog of $2.5 billion of projects under construction, with committed customer contracts. As these projects start up over the next 2 to 3 years, they will contribute significantly to sales and earnings growth. The backlog remains strong at $2.5 billion, and reflects 5 plant startups during the quarter, as well as signings in 4 new plants under construction for long-term contracts.

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