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Praxair, Inc. (NYSE:PX)

February 20, 2013 1:20 pm ET

Executives

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

Kelcey E. Hoyt - Director of Investor Relations

Analysts

Duffy Fischer - Barclays Capital, Research Division

Duffy Fischer - Barclays Capital, Research Division

Okay. Well, we'll go ahead and get started with the 1:20 presentation from Praxair. And before I get in -- well, let's go ahead and do it. I'll just kind of introduce the folks who we've got here.

Jim Sawyer has been the CFO for over 10 years now at Praxair, has been with Praxair for over 25 years. Very distinguished career. The company has done phenomenal under his leadership. With him is Kelcey Hoyt, the Head of IR. And for those of you not familiar with Praxair, it's one of the 4 major industrial gas companies globally. It's the largest industrial gas company in the Americas. And I think if you look at its track record, you could argue it's maybe one of the 20 greatest companies in any market in the world over the last 20 years. So just a very, very good industry, a phenomenal company, and we're very pleased to have them here to present for us.

And so what we'll do is, we'll kind of get in the Q&A in a minute. I want to run through kind of some of the standard questions we've been running through for each of the companies, where we'll ask you on the pads in front of you to kind of vote for these series of questions. And I think -- this is the first year we've done it with Praxair. As we get a history of it, it will be kind of interesting to see how trends change over time. But with that in the back, if we could put up the first question for Praxair. I guess -- okay, you can read this a little better than I can from my angle here. But basically, we're just -- we're going to vote on these questions. Can you see Jim now? Yes. We've got -- okay. So the first one is just: Do you currently own Praxair? And 4 choices: yes, overweight; yes, equal weight; yes, underweight; and then not at all. And so you've got about 6 seconds to plug that in. We've got some nice music here to get us in the voting mood.

[Voting]

Duffy Fischer - Barclays Capital, Research Division

Okay. So 2/3 don't own Praxair. So that's good. We've got a good fishing pond here then for potential buyers. Okay, then the second question: What's your general bias towards the stock right now: positive, negative or neutral? And again, 6 seconds.

[Voting]

Duffy Fischer - Barclays Capital, Research Division

We lost our music. Okay, so mostly neutral on this one with a -- so, call it a positive bend. Okay, third question. In your opinion, kind of through the entire cycle for EPS growth, how would you rate Praxair versus its peers: above peers, in line with peers or below peers?

[Voting]

Duffy Fischer - Barclays Capital, Research Division

Okay. I would argue with some people there. I think one should have carried the day a little larger than that. Okay, number four, in your opinion, what should Praxair do with its excess cash: bolt-on acquisitions, larger M&A, share repurchase, dividends, debt pay-down or internal investment?

[Voting]

Duffy Fischer - Barclays Capital, Research Division

Okay. Again, a bit interesting. Coming out a little different than I would have guessed, absolutely. All right, next question. In your opinion, what multiple of 2013 earnings should Praxair trade: less than 10x, 10x to 12x, 13x to 15x, 16x to 18x, 19x to 21x or higher than 21x?

[Voting]

Duffy Fischer - Barclays Capital, Research Division

Okay. That sounds right. And then -- was that 6 or we've got 1 more? One more? Okay. What do you see as the most significant investment issue for Praxair: poor growth, margin performance, capital deployment or execution/strategy?

[Voting]

Duffy Fischer - Barclays Capital, Research Division

Okay. Well, that's interesting. We'll have to think about that, especially as we get a couple of years data. All right. Now I'm just going to hop over here.

Question-and-Answer Session

Duffy Fischer - Barclays Capital, Research Division

And so what we'll do is, I've got some questions prepared up here, like some of the other presentations. As we get about 15 minutes out or so, we'll kind of open it up, and if the audience has questions, we've got a couple of mic runners to come around, and we'll take questions from the audience. So Jim, I just guess the first one is, to level set for some of the folks who maybe don't know the space or don't know the company that well. Can you talk about just the 3 modes of distribution for your business, kind of what's unique about each and how Praxair plays in each 1 of the 3?

James S. Sawyer

Right. Thanks, Duffy. Let me start off by saying that basically, mostly, what we sell are gases and, really 2 different generic types of gases. One, we call atmospheric gases, which means they come from the atmosphere. Those will be oxygen, nitrogen, argon and some specialty gases. And then we also do sell processed gases, which include helium and hydrogen and carbon dioxide and other gases there. The main attribute of the gases is that the transportation cost of the gas is much, much higher than the production cost, which means that -- particularly in the atmospheric gases, where we're getting the raw material out of air, so we don't have to pay for a supply of raw material. So the big issue for our customers is, how do we get the gases to them so that they can use them and how do we get them there efficiently, reliably and at low capital cost. So for the largest customers, which would be typically, the chemical industry or refineries or the steel industry, we will build what we call an on-site plant right at the customer's location. And we'll invest capital there. It could range in size from a $20 million investment to a multi-hundred-million-dollar investment, depending on the size of the requirement that they have. In exchange for us investing capital there and making a commitment there, we ask the customer to make a commitment back in the form of a 15- to 20-year take-or-pay contract, where they pay us in equal monthly installments, essentially what it costs us to build the plant plus the return on capital, plus coverage for our operating costs in the form of escalations in the prices. Those would be what we'd call on-site customers. They could also be connected by a pipeline to a pipeline infrastructure system. What I'll call medium-sized customers -- which would typically be a hospital, as an example -- would be customers whose volume requirement doesn't justify an on-site plant. In those cases, we will deliver a product to them, the liquid oxygen, liquid nitrogen with tanker trucks. And we'll also build a tank and metering and monitoring system at the customer's location. Those are what we refer to as merchant customers. Sometimes, we refer to them as bulk customers. And they, too, have to sign contracts, typically 5 years with fixed pricing. And the way it's worked out is that the pricing is set to get us a return on capital over the length of the contract. Then there are smaller customers, who don't justify their own tank and invest in what we call cylinder gases, and that's what you see as high-pressure cylinders, like helium balloon cylinders or small medical oxygen cylinders and so forth. And they would be what we call cylinder gas customers. And our revenue model there, in order to connect the customer with some stickiness is that we rotate the cylinders. We bring the cylinders to their location. We rotate them. We keep them full all the time. We charge them a fee for cylinder rental, as well as a product price. And again, it may not be quite as sticky and the barriers may not be quite as high -- barriers to entry may not be quite as high as the on-site business, but it is set up so that -- customers fairly rarely change suppliers. And I would say the good and bad about this business model, from an investment point of view -- the bad about it is that's very capital-intensive. We generally invest $1 of capital and get $0.50 of sales. So that's not a good thing from an investment point of view. But the good side of that is that it is really our equipment, whether it be a large on-site plant or a pipeline connection or a merchant customer tank or that cylinder rental. It is really the equipment which connects the customer to us and provides the customer a reliable supply at a very low cost. But also, it's extremely inconvenient for the customer to change suppliers. It means that over the full course of time, we have a lot of leverage over the customer in terms of pricing and so forth. And it's the way that we use that leverage and the way we use the long-term contracts that get us a significantly above-average return on capital. So on the one hand, it's capital-intensive. On the other hand, we have a substantially higher return on capital than our cost of capital. And what I would say are the most critical success factors in generating shareholder value is how carefully we manage our capital. And I think we manage it very carefully, and we have the contracts to lock it in there.

Duffy Fischer - Barclays Capital, Research Division

And then again, if you think in those 3 buckets of distribution -- so the on-site, the bulk and the packaged, are there meaningful differences in the financial metrics between those? So either returns on capital, margins, growth rates? And then, if I'm a customer in each one of those silos, how do I differentiate Praxair? I mean, how do you come to me differently on-site versus your competitors, merchant versus your competitors and in packages? Is there a big difference in the players as they approach the customer?

James S. Sawyer

Right. So the on-site, in terms of our economics, the on-site business would tend to have a very low asset turnover but very high margins because the monthly payment is -- a little bit like a lease payment. And if you think of a leasing business, you don't get a lot of sales for every $1 of capital, but you get a high margin, because it's basically a cash flow payment. The merchant business is about half and half in terms of asset turnover and margin, and then the packaged gas business, which is less capital-intensive, is a little bit more on the end of the grocery store business, where you have high asset turnover but lower margin because you have a lot more cost to serve. In terms of the customer's appreciation for the supplier, in all cases, and particularly the on-site and merchant, reliability is the #1 factor. Reliability, purity and quality and so forth because for the most part, our customers cannot operate unless we're there in a reliable way. Think about the oxygen in the pipeline system in a -- piped into a hospital. They can't operate the hospital without the oxygen there. A steel plant can't operate without oxygen. So their #1 concern is reliability, and so they want to look for who's got the capability to take care of what's basically a utility for them with the lowest risk profile. And that's number one. The flip side of it is that for most of our customers, what we charge them for the gas is less than 1% of their cost of goods sold. So it's not a significant part of their economic equation that they would be willing to take a risk with a lower-quality supplier in order to save a little bit of money.

Duffy Fischer - Barclays Capital, Research Division

Okay. And then now to jump a little bit, one of the things that I've liked about industrial gases over a long time is, there's very little opportunity to build inventory. So what you guys are seeing from a demand perspective, generally, is a pretty good read for what's happening with that industrial economy. So with that, can you kind of walk through maybe by geography what you guys are seeing today as far as how your business is shaping up and what you think that portends for those different geographies as far as their economies go?

James S. Sawyer

Right. I'll just say as a beginning answer to that question that for the most part, the growth in demand for gases has historically been about 2x GDP growth. And that is really because the gases are providing some type of benefit in the customer's process, or help, and the applications for gases continues to grow quite rapidly. In terms of geographies, one of the things that we've focused on is -- when I step back 10 years ago and look at how do we -- how do we improve our return on capital? Well, it's fairly clear that our return on capital is a function of what we call production distribution density, which means, take a small geographic area -- because transportation is the single biggest issue in this industry, so take a small geographic area: Who has more plants in that area? Who has more trucks driving around, dropping off product in their area? Who was more customers in that area? So what we call density is where you have a very high amount of plants, trucks, customers, which means that you can operate more efficiently than your competitor can. You can get better plant loading. You can get better, what I'll call, byproduct economics from the plant because typically, plants will make oxygen, nitrogen, argon and other gases, but the on-site customer will probably just be taking one of those products. So you want to be able to take the by-products and put them in the merchant truck and deliver them to other types of customers and other industries that need those products. And on the margin, those products come free to you because you've already paid for the plant and paid for the cost of operating the plant. So having high production distribution density allows you to get synergy between the on-site distribution and merchant distribution and packaged distribution. It also allows you to get -- to sell more of the molecules of gas that come out of the air when you separate it. Because you want to sell the oxygen and the nitrogen, so you want a variety of different customers in that industry. And typically, certain industries like healthcare take oxygen and other industries like food processing take nitrogen. So we sell into many, many different industries, many different companies, and get that by-product economics. Now Praxair's strategy in order to capitalize on that for the benefit of our shareholders has been to decide only to invest capital and only operate in geographies around the world where we have the #1 market share, the best production distribution density, the best value proposition and reliability for the customer and also the highest return on capital. So our strategy to get high return on capital and high growth is to focus on those core geographies. That's basically North America: Canada, U.S., Mexico, South America, primarily Brazil but also Peru, Chile, Colombia, Argentina and so forth. And then over in Europe, we basically are competing against 2 large European competitors, Air Liquide, based in France, and Linde, based in Germany. And so we tend to be a little bit stronger in Southern Europe, in Spain, in Italy, as well as in Scandinavia. Then, lastly, in Asia, rather than trying to be all things to all people in all countries, we really are just in 4 major countries in Asia, which is China, India, Thailand and Korea. Those are the ones where we have the highest market share and the highest return on capital. Looking at the growth, we get growth from many, many different areas. There's no one single ticket to growth in our business. We get growth in most end markets, where the utilization of gas is per ton of product produced. To give you an example, the quantity of gas used to produce a ton of steel or a ton of chemicals pretty much doubles about every 20 years because of application technology. And that allows us to drive growth which is faster than the overall economy. Now that growth has picked up over the last 10 years in the energy sector, where gases are being used increasingly: Hydrogen for refining, as well as CO2 and nitrogens for frac-ing and enhanced oil recovery. So large growth in the energy sector. And also large growth in emerging markets, with our strength being South America, India, China and Mexico.

Duffy Fischer - Barclays Capital, Research Division

And then just on a shorter-term basis, kind of what are you seeing, volume-wise, in those different geographies? Basically, how does the world economy on a geographic look -- Asia, Europe, Latin America, North America -- look to you today?

James S. Sawyer

Yes, what we're seeing right now is a little bit of a mixed bag. We've got some areas which are doing better than others. One of the things that we like to do, which I believe every company should be trying to do, is trying to keep the business running on all cylinders all the time. Right now, our business in Europe is not doing as well as it should be and nor is our business in South America. And so that's definitely hurt our earnings. I think that the fourth quarter of this year, we had a negative GDP growth in Europe and South America and the United States. We saw extended customer shutdowns over the holidays, which is not unusual. But I would say this holiday season, we had probably the worst customer shutdowns, except for the 2008 holiday season, which was, of course, during the big recession, when customers shut down at Thanksgiving and didn't start until May. But we had some holiday shutdowns, and I think that's specifically and directly related to the fiscal cliff and the uncertainty in the U.S. following the election and the fiscal cliff. We've seen in the U.S. some delayed purchase orders from customers for equipment and gases. And we saw the same thing at the end of December in Brazil. So we had kind of a soft last 2 weeks in December and a soft 2 weeks in January, but since then, we've seen a fairly dramatic increase in demand, with strong volumes in South America, very, very strong volumes in China and improving volumes in both the United States and Europe. So that's improved our outlook quite a bit.

Duffy Fischer - Barclays Capital, Research Division

Okay. And then maybe if we take a step back, again, you've been in your current role for a little over a decade. Now versus then, what do you think has changed both as far as kind of the -- maybe not the business model but just the business conditions and what you would have thought the 5-year outlook would have been when you started versus what do you think the 5-year outlook is today, better, worse, the same?

James S. Sawyer

I think over the last 10 years, that the long-term growth rate has increased. Back 10, 12 years ago, when I became CFO, the core end markets for us were chemicals and steel and food and beverage or healthcare and some manufacturing. But since then, I think we really have 2 new entire -- 2 entirely new playing fields that didn't exist back then, one of them being on the energy side and the other one being in emerging markets. So I would say that the playing fields for us to grow on are significantly larger and greater today than they were 10 years ago.

Duffy Fischer - Barclays Capital, Research Division

Okay. And that's even given the larger base that you're trying to grow off of. You still feel comfortable that that growth rate...

James S. Sawyer

Yes, even against a larger base.

Duffy Fischer - Barclays Capital, Research Division

Okay. And then, I guess, maybe touch -- we'll go through 2, but the first one, shale gas in the U.S. is changing a lot of things. It looks like a lot of chemical plants are going to be built. Some pros and some cons for the industrial gas industry with cheaper natural gas. Can you kind of walk through what you think shale gas has done to your business maybe over the last year and then what you see that doing for your business over the next year to 3 years?

James S. Sawyer

Right. So as the gases become cheaper and the horizontal drilling and frac-ing has created lower-cost gas as well as more abundant light sweet crude, that's cut -- kind of cut both ways for us. On the one hand, we had had a fairly significant business in frac-ing of the more expensive gas wells, which has pretty much declined over the last year. So that's been -- a headwind for us is less frac-ing in coal-bed methane and some of the more expensive gases that people aren't spending capital on those wells to drill and frac anymore. And it's also slowed down our enhanced oil recovery business. On the flip side of that, a low natural gas environment has substantially helped a lot of the industries that our customers are in. So for example, in the steel industry, which is operating in the U.S. at about 70% capacity utilization, we're delivering to our on-site pipeline systems about 90% capacity utilization because one of the things that the U.S. steel industry is now able to do is capitalize on low natural gas cost. They have a lower energy cost. Their competitors are overseas. And they also are employing a new technology where they inject natural gas directly into the furnace as a substitute for less coking coal. When they use that technology, they also use more oxygen in the furnace. And this has helped our volume growth there. And it's not atypical of the many drivers of growth that the industrial gas industry has had. As people find different ways of processing what they need to process, oftentimes, they'll need either more oxygen or more nitrogen in the equation there. Similarly, the low natural gas, it will benefit the chemical industry, which is a large end market for us because the U.S. chemical industry actually uses natural gas as a feedstock. And so at this point in time, there are roughly 20 or so large chemical projects which are being kicked around by the industry, and most of those projects will require -- they're either brownfield expansion or a new greenfield project, but they'll require some type of industrial gas supply to make them run. Now those projects need to be signed, and then they need to be constructed and so forth before they start up. So we typically have about a 3-year lag time between signing new business and when we get revenue from new business because we have to build the plant that's dedicated to the customer. And the customer has to build his own plant for whatever it is, but that will add significantly to our growth prospects in the U.S. as we sign up more and more of those projects. So the impact of the shale gas, I think, up until now has probably been more of a negative impact. But probably, going forward, it will be more of a positive impact, but it will take time for the new projects to get built and start up and start delivering on revenue.

Duffy Fischer - Barclays Capital, Research Division

And just on the negative front, if you think about a guy who maybe has a cement plant or a glass plant who's using natural gas in a kiln or furnace, is that person using less oxygen today per ton produced? Because at $6 natural gas, I want to conserve as much natural gas as possible. Now if I come down to $3.50, maybe my formula says, okay, I can use a little bit less oxygen because I don't mind kind of, call it, wasting more natural gas. Have you guys found that? Or that hasn't been the case that some of these guys have dialed down the amount of industrial gases they're using because they're getting cheaper natural gas?

James S. Sawyer

Right. So we have a technology that has not -- it's partially rolled out but, depending on the economics, we'll roll it out more. It's called oxy-fuel combustion, where instead of combusting natural gas with regular air, you put pure oxygen into the combustion. And what that does is it improves the efficiency of that combustion. They get more heat output per unit of natural gas going in. Now one of the drivers for that is if you've got very high natural gas prices, you will be more likely to incorporate this oxy-fuel combustion technology. On the other hand, one of the reasons that the technology does get incorporated is it also removes the nitrous oxide emissions from the airstream. So most of the glass and cement and other producers that have air quality permit issues have to go to oxy-fuel combustion. And so there are kind of 2 drivers there. So as gas has gotten cheaper, the drive to go to that technology because of high energy cost isn't really there anymore, but the drive to go there because of air emissions still is there. And if they do start expanding their own production, they'll start coming up on the limits of their air permits and have to go to oxy-fuel combustion for that reason.

Duffy Fischer - Barclays Capital, Research Division

Okay. And then can you help us size the opportunity -- so people have talked about anywhere from maybe 5 to 10 new crackers, ethylene crackers in the U.S., a couple of propane dehydro units. Let's say you came up with 3 PDH units within the next 6 years, 8 chemical crackers, just to pull a number out. What's the size of the opportunity for the industrial gas industry with that kind of a build-out? I mean, how many air separation units is that? How many different plant wins would that be for the industry? How big would those plants need to be?

James S. Sawyer

I think -- how do I characterize it? It's bigger than a bread box, but it's not that big. In other words, we're talking about maybe $500 million to $1 billion of new investment in air separation plants by us or by our competitors. And that's significant. That would give kind of high -- that will give a low-double-digit growth in our sales, specifically the chemical industry, but our sales in the chemical industry are less than 15% of our total sales. So it won't turn the needle on the whole company that significantly. Maybe a couple of percent higher growth in the whole company than if we didn't have it.

Duffy Fischer - Barclays Capital, Research Division

Okay. And then to jump to another area of growth in the chemical space, coal gasification in China has been a pretty big push for them. A number of plants coming online now both -- either just to make syngas or some guy's trying to do coal to olefins and coal to other chemicals. When you handicap that, that seems to be an area that the investors are a little bit worried about today, whether it's low shale gas in the U.S. or just, "Can I get there on technology?" How do you guys handicap the build-out of coal gasification in China? How do you look at the backside of who you're signing a contract with if you're making that bid? Just how do you see that market, I guess, playing out over the next 3 to 5 years?

James S. Sawyer

Right. Duffy, that's a really good question. Who's the customer for those projects? Who's building, who's the customer, and what's going to happen there? Coal gasification has been a technology that's been around for a long time. There are very many different versions of it and uses of it. It's really not competitive in the United States, even more so now with cheap natural gas. But this coal gasification projects require huge amounts of capital, and if you are trying to get one permitted in the United States, it would be a very heavy slog uphill. However, in China, the permitting requirement is much less. The capital intensity is less because of their ability to build them much faster. And the Chinese government does not want to have the economy too dependent on imported oil and gas. And so they have a lot of coal, so they think about, "How do we make more use of our coal and not be too dependent on imported oil and gas?" And coal gasification is a good way to do that. Now when you think about fossil fuels, there are basically 3 kinds of fossil fuels. There's solid, which is coal; there's liquid, which is petroleum; and there's gas, which is gas. Then if you think about the industries that need fuel, there are basically 3: there's the electric power industry; there's the transportation industry, cars, vehicles and buses, planes; and then there's the feedstock for the chemical industry. So it makes logical sense for coal to be used in a place where it does not have to be moved to -- and that would be coal-fired power plants, or it would be the feedstock or chemical plants. And then -- and that's really what China's energy strategy is about. It's taking -- it's using that coal to be the feedstock for the chemical industry rather than bringing in liquid petroleum for that and save the liquid petroleum and the gas for other industries. We've got -- and anytime you build a coal gasification plant, it requires a large oxygen plant to procure oxygen into it to make it run. So we're really only in the oxygen business. We're not building gasification units for our own account. We've got several that we're running right now. We have 2. One, SOPO, which is China's low-cost acetic acid producer. Another one in Wuwei, which is a chemical feedstock, and a couple more are under construction. Those are what I would call the kind of garden-variety sides of coal gasification, where it's not a huge plant, number one; and number two, it's being built in a chemical industrial park somewhere, where you have a multitude of chemical plants owned by people like DuPont or BASF or Huntsman or Bayer, who are producing common variety chemicals like polyurethane intermediates and acetic acid and so forth. And so those are the opportunities that we have built there and are operating there and are focused on building more. And I think that the customers are safe. I think the technology is safe. I think that it's a good high profitable growth area for us. Now there's another variety that I'm less keen on, and that is the talk about building large coal gas -- humongous coal gasification plants up where the coal mines are, which is an area south of Mongolia called the coal triangle, where there are big plans to build the coal gasification plant right at the mouth of the coal mine, which, in some ways, makes a lot of sense. But in other ways, it's kind of in the middle nowhere, number one; number two, it's not really clear who the customer is going to be, because you don't know who's going to use that material going forward. It's what I would call a supply-push project, where somebody's, "Oh, let's go build this project", rather than a demand-pull project where there's a demand for the plastics and somebody building a plastics plant and now they need the feedstock to that. So we're very clear about differentiating between what I will consider to be the low-risk coal gas or smaller coal gasification projects at the existing petrochemical sites. We like those. The large mouth -- ones up in the Mongolia area, we're studying and we're working on, but I think they're definitely riskier and more uncertain than the other kind.

Duffy Fischer - Barclays Capital, Research Division

And then I've got one more question I'll ask, and then if you guys have questions, we've got mic runners who can stand up, I think, if they're in the back, and we'll take some questions from the audience. But just my last one would be, you've kind of said that 2012 feels to you like the peak of the CapEx cycle for you guys. I guess when we look forward, it still feels like there's pretty solid growth, and we haven't really kind of hockey-sticked, I guess, even out of the recession yet. So why wouldn't it be that 2 or 3 or 4 years from now actually ends up being the CapEx peak, as the world keeps growing, we start building some of these plants in the U.S. on the chemicals side, China gets back on its growth path a little bit? And then just -- from everything else in the world, talking to companies, '12 wasn't a great year. But for you guys on the CapEx side, it feels like it was maybe the strongest year as you see out over the next few. Can you kind of triangulate those, I guess, a little bit?

James S. Sawyer

Right. Well, I'll start by saying that capital spending itself isn't the end. It's money out the door. And virtually, it's the means to the end. It's the means to getting the growth. We have to spend the capital to build the projects that generate the revenue. And as we go -- went through the cycle of 2008 through 2012 -- and I said before, there's about a 3-year gestation period on the projects, we had very few project signings in 2009 and 2010, which meant that we didn't put much -- many shovels in the ground and start building things. However, in 2010, end of 2010, 2011, I think we signed a lot of projects that if the world hadn't come to a crash and the financial institutions suddenly melted down, those projects probably would have gotten started earlier. So 2012 was really a peak year of spending for us because we were building the projects that we signed in 2009, 2010, 2011. And now we've got a lot of projects which are going to be starting up in 2013 coming off of that bump, if you will. But looking further out -- I would say there was probably a crowding of projects into a shorter timeframe over the past 3 years. Looking farther out, I think the outlook for new projects, whether they be in coal gasification in China or the chemical industry in the U.S. or other parts of the world, I think the outlook is just as positive as it's been, and we'll continue to sign a lot of new business over the next couple of years.

Duffy Fischer - Barclays Capital, Research Division

Perfect. And then do we have any questions for Jim? Yes? We got a mic coming upfront. Not that your voice can't be heard generally without a mic.

Unknown Analyst

So Jim, I listened to the conference call earlier. I forget if it was this month or last month. And you sound a lot more optimistic today than you did when you -- at the conference call. Am I reading too much into it, or it in other words, have volumes picked up and things seem a little better? Is that -- am I reading too much into it? Or do things seem a little better than they did when you gave your conference call?

Kelcey E. Hoyt

More optimistic today than at the conference call at the end of January.

James S. Sawyer

Oh. I would say yes, because I think that, while we weren't negative at the end of January -- I'm not sure where that came from. But basically, I think people saw what guidance we gave for our earnings, and we essentially saw a flat fourth quarter in GDP in most countries of the world, without, really, expectation of that improving. I think that as we look today, we've seen a pickup in volumes in January. And the first part of February, we've seen a nice pickup in volumes in Europe. A very, very strong pickup in volumes in China and also a strong pickup in North America.

Unknown Analyst

How about Brazil? Brazil?

James S. Sawyer

Brazil? Brazil, I think, remains to be seen. Brazil at this time of the year has about as many days off as days on. It's summertime there. You have Christmastime, Christmas holiday and then last week, we had Carnival. And so every year, we go through this weak summer period in Brazil, and then we see March as really the litmus test month for Brazil. And I'm optimistic it will be a stronger month.

Duffy Fischer - Barclays Capital, Research Division

We got a mic coming up here.

Unknown Analyst

Two quick questions, Jim. One, as more light sweet crude from the shale plays makes its way into the Gulf, does that affect hydrogen demand at all in your refinery business? And then second question is if the sequester goes into effect, does that impact any of your businesses, like healthcare or any or else?

Kelcey E. Hoyt

The impact of light sweet crude on the current hydrogen business.

James S. Sawyer

Got it. Hydrogen is being used increasingly in the refining for basically several reasons. Primarily 3 reasons I would give. The first one being that the EPA tightened up on the fuel standards for gasoline and then more recently, for diesel. And now you can contemplate getting a diesel car that doesn't smell because the diesel is out of the road fuels. And then there are several more steps to go to get the diesel out of the airplane fuels and train fuels and the ships and so forth. In order to get the sulfur out of the fuel, they need to use more hydrogen in the refining process. And so there's been a steady increase in the intensity of hydrogen in refining. That's continuing to go forward, and I don't see any slowdown in that. The second drive was that in order to refine heavy/sour crude, you need more hydrogen than if you're going to refine light sweet crude. And I think one of the things that's changed in that direction is that 5 years ago, I think we would have all said that we probably would be consuming more Canadian tar sands than we would say today. Although those tar sands projects are still alive and going forward. So the mix of available crude is slightly tilted now more towards the light sweet, which doesn't entail as much hydrogen. But then a third driver is, the refiners want to get as much value out of each barrel that they refine and produce. And by having hydrogen in hydrocrackers and hydrotreating units, even with light sweet crude, they can get more high value out of the products, out of the barrel of oil than low value-added products. And for those who follow the refining industry, I would say that Valero was really one of the key pioneers in utilizing this technology. And if you look at their results, I think you can see that it's made a lot of difference for them, and they're doing extremely well with it. So I guess I would say that the outlook for refining hydrogen is still very strong. It's not quite as compelling as it would have been if we were really forced to go into more heavy/sour crude than we are, but it's still a very compelling argument.

Kelcey E. Hoyt

The expected impact of sequestration on our business.

James S. Sawyer

Oh. I think that we spend a lot of time and energy on sequestration because it's a natural -- it would be a natural industry for us to participate in because we're talking about gases that we have the technologies for separating into CO2. And because of the ways that we can use oxygen and oxy-fuel combustion to help separate the CO2 and so forth. Having said all of that, the primary problem, primary issue with sequestration -- I assume you're talking about carbon dioxide sequestration, and they're talking about...

Kelcey E. Hoyt

Government. The government.

James S. Sawyer

Oh, talking about government? Well, let me finish the carbon dioxide because it costs a lot of money to pump that CO2 under the ground. Government sequestration, I think that remains to be seen. We're not a primary supplier to the government, but some of our customers are suppliers to the government, and I think there's a little bit of hesitancy by them to spend money on equipment, not knowing what the future contracts are going to hold.

Duffy Fischer - Barclays Capital, Research Division

Terrific. Well, Jim, Kelcey, thank you guys very much for coming out. It was a great presentation. Thank you.

James S. Sawyer

Great. Thank you all, and thank you, Duffy.

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Source: Praxair Inc. Presents at Barclays Industrial Select Conference, Feb-20-2013 01:20 PM
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