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Executives

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

Elizabeth Hirsch - Director of Investor Relations

Analysts

David Begleiter - Deutsche Bank

Mark Gulley - Soleil - Gulley & Associates

Robert Koort - Goldman Sachs

Jeffrey Zekauskas - JPMorgan

Prashant Juvekar - Citigroup

Kevin McCarthy - Banc of America-Merrill Lynch

Donald Carson - UBS

John Roberts - Buckingham Research

Sergey Vasnetsov - Barclays Capital

Laurence Alexander - Jefferies & Co.

Edward Yang - Oppenheimer

Michael Sison - KeyBanc Capital Markets

Steve Sherman - Lafayette Research

Praxair, Inc. (PX) Q1 2009 Earnings Call April 29, 2009 11:00 AM ET

Operator

Good day ladies and gentlemen. And welcome to the Q1 2009 Praxair Incorporated Earnings Conference Call. My name is Antoine, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions).

I would now like to turn the call over to Mr. Jim Sawyer, Executive Vice President and Chief Financial Officer. Please proceed, sir.

James S. Sawyer

Thank you and good morning. And thank you all for attending our first quarter earnings call and webcast. Matt White, Vice President and Controller; and Liz Hirsch, Director of Investor Relations are with me this morning.

Liz will review our first quarter results. Afterward, I will discuss the current business environment, our outlook for the balance of 2009 and our earnings guidance. And we'll then be available to answer questions. Liz?

Elizabeth Hirsch

Thank you, Jim. And good morning everyone. 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 two, and note that it applies to all statements made during this teleconference.

Please turn to page three for a summary of our first quarter results. Note that year-over-year comparisons exclude the pension settlement charge taken in the first quarter of 2008. The reconciliations to GAAP reported numbers are in the appendices to this presentation and the press release.

Praxair had very good results in the first quarter given a very difficult macro environment. Overall, demand was weaker than we had anticipated, and this continued right through the quarter with overall volumes lower sequentially from the fourth quarter.

The decline now appears to have stabilized in most sectors. But we haven't seen a meaningful and sustainable overall pick up yet. However, you can see in our results that the early and swift cost reduction actions we initiated in November offset a significant portion of the impact of the lower volumes on our earnings. Though our sales declined 20%, our operating profit only declined 11% and our operating margin improved to 20.8%.

Sales in the quarter were 2.1 billion, 20% below the prior year. There were three primary factors contributing to the lower sales. First, we had negative 9% year-over-year impact from foreign currency translation.

Second, lower cost pass-through reduced sales by 2%. This number primarily reflects the lower price of natural gas pass-through automatically to hydrogen customers in hydrogen prices.

Beginning this quarter, we are also including in this number the cost of electric power pass-through automatically to on-site atmospheric customers. These costs were previously included in the price component of our sales variance. But we think that combining all class pass-through will give better transparency on organic sales growth and margins.

Thirdly, our overall volumes were 12% below the prior year quarter and 8% below the fourth quarter. This is an average of volumes across all our end markets with the largest decline in chemicals, metals and electronics followed by general manufacturing.

Sales to energy markets were higher year-on-year. On the positive side, we realized higher overall pricing as compared to the prior year.

Operating profit was 442 million in the quarter, 11% below the prior year. The sharp drop in sales volumes reduced operating profit by about $180 million. We realized about 95 million of productivity and cost savings, which offset a significant amount of this impact.

Cost of sales was 25% below prior year and SG&A expenses were 21% lower. These savings resulted from ongoing productivity programs plus the cost reduction program we announced in the fourth quarter.

In addition, we realized additional savings from procurements and the curtailment of other discretionary expenses. The significant cost reduction plus higher pricing resulted in a higher year-over-year operating margins despite the sales decline.

Net income of 290 million was 9% below prior year, but as a percentage of sales it increased from 11.9% to 13.7%, nearly a 200 basis point improvement in margins. In addition to lower costs, net income benefited from lower interest expense on commercial paper and other short-term debt despite the tightening in global capital markets.

Earnings per share of $0.93 were 6% below the $0.99 we earned last year. Earnings per share included the benefit of a 3% lower share count due to stock repurchases we made during 2008.

We generated $349 million of operating cash flow this quarter for net income and depreciation. This cash flow funded $293 million of capital expenditures related primarily to the on-site projects in our backlog which are under contract with customers globally. Overall, debt levels and our debt-to-capital ratio of 53.6% were relatively unchanged.

In March, we issued $300 million of five year bonds at 4.38, the proceeds of which reduced outstanding commercial paper. This is part of our ongoing financing strategy, whereby we will continue to issue medium and long-term debt in the public markets to refinance short-term debt when rates are attractive.

Please refer to pages four and five for our North American results. Sales in North America were 1.16 billion, 15% below the prior year, excluding a negative currency translation effects of a weaker Canadian dollar and Mexican peso.

Sales were reduced 4% by lower cost pass-through. This was due to the impact of natural gas prices which were 40% lower than in the prior quarter, and thus reduced the dollar value of our hydrogen sales with negligible impact on operating profit.

Underlying sales were 11% below the prior year due to lower volumes in all major end-markets except energy, partially offset by higher pricing levels.

In the energy sector, we had higher sales for enhanced oil recovery. Enhanced oil recovery is strong and growing in Mexico. The gas well tracking business in the U.S. and Canada was weaker this quarter due to low gas prices. Underlying hydrogen demand continues to be strong. This quarter, we have slightly lower volumes due to a number of refinery customers who took schedules maintenance turnarounds.

Sales to metals, chemicals and electronics were down inline with the November and December run rates. Sales to general manufacturing markets were up 16% ex-currency inline with the overall decline in industrial production.

On-site sales declined 23% ex-currency. 13% of this decline was due to lower cost pass-through, primarily natural gas. On-site volumes were 10% below last year.

As I just mentioned, hydrogen volumes were slightly lower due to customer turnarounds. Oxygen and Nitrogen volumes were significantly lower attributable primarily to chemical and steel customers. Volumes to some of these customers at individual facilities were off 20% to 40% due to extended production cut backs in order to de-stock inventory levels in the phase of falling prices for their products and weak demand.

For the most part, we are seeing similar run rates in April. In some locations individual customers have increased their demands, but many others have not. And so we are being cautious about calling a meaningful change in business trends yet.

This quarter, we signed a new enhanced oil recovery contract in the U.S. Oil prices have come down a lot from their peak, but these are long-term contracts and oil companies take a long-term view of their production economics.

We also announced a new hydrogen supply contract, whereby we will be supplying hydrogen to Shell's Deer Park, Texas Refinery from our Gulf Coast pipeline systems. These new contracts demonstrate the sustainability of growth and demand for industrial gases for the production of energy supplies.

Merchant liquid sales were 4% below the prior year excluding currency impacts. Volumes were down 12% partially offset by higher pricing and facility fees. Volumes declined from the fourth quarter for all product lines as overall customer demand continued to weaken. Pricing is higher year-over-year and stable sequentially across all products and geographies. We continued to sign new business for energy, food and environmental applications.

Overall sales of package gases in North America were 14% below 2008 ex-currency due to lower volumes in the U.S., Canada and Mexico. Pricing is higher year-over-year. In PDI, our U.S. and Canadian business, same-store sales declined 13% due primarily to a 28% drop in hardgoods. Gases declined 3%.

The drop in hardgoods volumes is not surprising and reflects the sharp contraction in capital spending in construction, auto, metals and mining due to weak demand and the uncertain economic outlook. While capital equipment showed the largest decrease, volumes are off in other product lines as well. Gases are more resilient as they are consumables which customers need to operate.

Operating profit in North America of $256 million was only 2% below the prior period quarter. The negative impact of lower volumes was offset by cost savings from productivity initiatives and our cost reduction program.

Excluding the currency effect of lower exchange rates in Mexico and Canada, our operating profit was higher. The operating margin increased from 18% to 22%. The realized cost savings and higher pricing accounted for 300 basis points of this improvement, with the remaining 1% attributable to the effect of lower natural gas prices, which reduced sales without similarly impacting operating profit.

Our outlook for the second quarter in North America is for volumes to remain at a low level. We are seeing a sequential improvement in Gulf Coast chemicals and plastics production primarily driven by the low price of natural gas. We are also seeing some improvement in electronics due to re-stocking. However, we do not expect a significant pickup in other markets.

Please look at page six for our results in Europe. Sales in Europe were 303 million, 22% below the first quarter of 2008. The currency translation effect of the weaker euro reduced sales by 9%. Underlying sales fell 11% resulting from 14% lower volumes. As we anticipated, volume declines were largest in chemicals, metals and electronics.

During the quarter, merchant and packaged gas volumes weakened, particularly related to construction and metal fabrication customers. Volumes were down 10 to 15% in most end-markets except food and beverage, healthcare and environmental applications, where we signed a number of new contracts this quarter. Overall, pricing in above prior year and we expect it to remain so.

Operating profit was $63 million, compared to 87 million in the prior year. Decrease was due to lower volume and currency depreciation only partially offset by cost reductions. The operating margin was reduced this quarter due to the significant operating leverage of the lower volumes.

Our cost reduction programs are proceeding more slowly in Europe due to the more rigid labor market and our unwillingness to pay high severance costs. We are stepping up our productivity program and expect the margin to improve over the balance of the year. Remember that our operating margin last quarter was high because it included a $4 million currency hedge gain.

Please turn to page seven for our results in South America. Sales in South America this quarter were 353 million, 24% below the prior year, almost entirely due to negative currency translation. Ex-currency sales were slightly below the prior year.

Overall, volumes were 8% lower, largely offset by higher pricing. Similar to other regions, sales to on-site customers in commodity export industries were most impacted due to inventory de-stocking. Merchant liquid and package gas volumes were down much more moderately in the 6 to 8%. Sales were up to food and healthcare markets.

Operating profit was $75 million, 16% below 2008. Excluding the impact of currency, underlying operating profit grew as substantial cost savings and productivity and higher pricing more than offset the impact of lower volumes.

Operating margin increased both year-over-year and sequentially excluding the hedge gain in the fourth quarter.

Looking ahead, the Brazilian government has been cutting interest rates and taxes to support growth and inventory de-stocking should update. So we expect some improvement in the underlying level of macro economic activity we saw this quarter. In addition, we have several new projects starting up in the second half of the year.

Page eight summarizes our results in Asia. Sales in Asia, up $180 million, were 5% below 2008 excluding currency effects. This sales decline was primarily due to electronics, where sales ex-currency were down 22% year-on-year.

Excluding electronics, underlying sales were higher from new projects startups in China, India and Korea partially offset by lower demand from existing customers.

Overall, volumes declined 8%. In China, on-site volumes were lower primarily due to reduced demand from steel customers. In India and Korea, on-site volumes were higher due to new project start-ups. Excluding electronics, merchant volumes remained relatively stable across the region.

Operating profit was $26 million, compared to 37 million last year. The operating margin was primarily impacted by the downturn in on-site volumes and the sharp drop in electronics volumes, particularly rare and specialty gases to plasma display customers. We partially offset the impact with cost reductions.

Looking forward, we expect growth to resume in Asia albeit at a slower pace than in 2008. Our customers in China are slowly increasing production. India has remained more isolated from the global recession. We have a large number of projects in our backlog, which we are continuing to build for customers including two large oxygen plants for gasification. We continued to believe that China shortage of domestic oil and gas and abundance of coal and synthetic coke will drive the development of more gasification projects.

We also expect that the Chinese government will spend what it needs to on infrastructure to create jobs and stimulate growth. The electronics market appears to have bottomed. So, while we don't have a lot of specific visibility right now, we do expect that our growth will pickup in the second half of the year in our base business and from new projects start-ups.

Page nine shows surface technologies results this quarter. PST had sales of a $123 million, down 7% from 2008 ex-currency effects. Underlying growth in the energy market was 35%, offset by a decline in sales to the aerospace market of 16%, and to manufacturing and other market of 21%. The lower volumes of aerospace coating work we have had for the last several quarters is a result of the Boeing strike and the delays in the Boeing and Airbus next generation plane programs. Our forecast is for these volumes to steadily increase from current levels throughout this year.

We're seeing steady growth from the energy market, which includes coatings for industrial gas turbines and also coatings for oil well service parts. The IGT market is strong, as natural gas turbines are in economic source of clean energy for emerging markets. Demand in Europe for general industry markets such printing is soft.

Operating profit of 22 million was below prior year, but PST produced excellent results in cost reduction and productivity, which more than offset the impact of lower volumes.

Operating margin increased both year-over-year and sequentially to 17.9%.

Now, Jim will discuss our results in the quarter by end-market, our business outlook and our guidance.

James S. Sawyer

Thanks Liz. The global manufacturing environment turned out to be weaker during the first quarter than we had earlier anticipated. When we implemented our cost reduction program back in October, we had anticipated a fourth quarter 2008 and full-year 2009 industrial production will be off by about 5%.

In the first quarter, U.S. industrial production was actually off by more than 10% and GDP now reported off by 6%. The decline is a lot larger in some parts of Europe in the 20% range in Spain, in Germany and other places. Additionally, Brazil and Korea both, large exporters to the U.S. and Europe have also suffered double-digit declines.

Going forward we share the view with others of the economic freefall has stabilized and the overall manufacturing will hold at about a 10% lower level than a year ago.

The pie-chart on page 10 shows our first quarter sales by end-market and our year-over-year sales growth this quarter for our principal end-markets, excluding currency effects and cost pass-through.

The markets in red; metals, chemicals and electronics are the end-markets we sell to our customers produce commodities. These markets represent about a third of our sales. We saw the sharpest volume declines in these markets. Many of these customers dramatically reduce production to de-stock inventory as prices for their products fell and demand weakened around the world. The production levels stayed at very low levels right through the quarter and continued in April.

As Liz mentioned earlier certain chemical plants in the Gulf Coast have restarted due to low price to natural gas. Electronics, February appears to have been the low point with a slight improvement in backlog, hence sporadic pickup orders in March and April. But we believe it will be a very slow recovery because consumer demand remains so depressed.

We're seeing growth in the solar market and so this is a bright spot in the current environment, but it's not a large part of our business today.

Global steel production remains at very low levels, particularly in the U.S. where industry production is off about 50%. Our U.S. volumes are not off to that degree, but are running significantly below prior year. And we've not seen much of an upturn yet.

More than half of our exposure to this market is outside the U.S. In South America and China, some of our customers have started to increase production levels. In India, our volumes are higher than last year due to new project startups.

Our global sales for the chemicals market were down 16%. The decrease was largely due to curtailment of production by customers in North America, resulting from a collapse in demand due to weak housing and auto demand. A number of our customers have started up again so we're seeing a little sequential improvement.

Our sales in Asia were comparable to last year. Manufacturing is 24% of our sales and sales of this sector were 12% below last year. This sector encompasses a variety of markets and applications, including lot of metal fabrication for construction and machinery. So, you can see that are sales are generally tracking a decline in industrial production.

The energy sector continues to be positive with sales up 8% this quarter. Hydrogen for refining will continue to grow. This quarter, we announced a new contract to supply hydrogen to Shell's Deer Park Refinery. They need the hydrogen to refine low sulfur diesel. We'll be supplying them off for our existing gulf coast line system.

Our enhanced oil recovery sales are growing. And we're signing new contract in North America this quarter. As Liz said before, our fracking sales in the U.S. and Canada are slow because of low natural gas prices. But oil well services remain strong in Mexico. Mexico needs to continue to increase its oil and gas production as that was a major source of the government revenue.

Finally, the blue sectors, was represented about a third of our sales are relatively non-cyclical. We expect food and beverage and healthcare to continue to grow at steady mid-single digit rates.

Growth in overall healthcare segment is weighted down a little by our U.S. homecare business, which struggles with reduced reimbursement rates set by Medicare. But this is less than one quarter of our global $1 billion business.

Our hospital business is a steady grower and our homecare businesses in Europe and South America continued to do well.

Food and beverage is down slightly this quarter. But we expect this market to be a steady grower. We're signing a lot of new merchant contracts around the world for frozen food applications which are growing with the increasing demand for convenience prepackage foods.

Aerospace is down this quarter because of the lower PST aerospace coatings, which we mentioned.

Now, please turn the page 11 for our earnings guidance. In second quarter of 2009, we expect diluted EPS in the range of $0.95 to $1. Our guidance assumes a negative currency impact of about 11% versus the second quarter of 2008, and a negative natural gas and electricity pass-through effect on sales of about 5%.

The second and third quarters of this year will have the largest negative year-over-year currency comparisons because of dollar with its lowest relative exchange rate to most major currencies in those quarter's last year.

We expected second quarter to be sequentially stronger in the first quarter due to couple of typical seasonal factors, fuel refinery turnarounds and holidays, combined with sequentially stronger volumes of hydrogen.

We expect a little volume pickup in Asia and South America for on-site customers. And we'll realize more benefit from cost reduction.

For the full year 2009, we now expect sales to be about $9 billion. This is below the range of 9.5 to 10 billion we gave you last quarter for a couple of reasons. We're now expecting a 9% negative currency impact, and we're also expecting about a 3% headwind overall for lower cost pass-through, primarily due to low price of natural gas. In addition to these factors, we're expecting a slower recovery in volumes from current levels.

We're forecasting our diluted earnings per share to be in the range of 385 to 415. We expect that productivity, cost reduction and pricing will offset our more cautious volume assumptions, allowing us to maintain our expectations for earnings.

We expect that our CapEx will be about 1.4 billion for the year. Our project backlog still stands at 42. New project activities has slowed from the torrid pace of last year, but we signed six new projects during the first quarter. Projects in our backlog are solid, and will come on stream giving us about 5% growth in earnings in 2010 and 2011.

We've two major wells to go (ph) harder and complex starting up next year in the U.S., plus two major coal gasification acetylene supply systems starting up in China.

Now, I'd like to make a few comments about operating leverage. 12% decline in volumes we saw in the first quarter reduced our operating profit by $118 million or about $0.42 of EPS. Praxair team achieved a new level of productivity, generating about $95 million of cost reduction during the quarter, which offset about half of the operating leverage impact on earnings.

You can see the effect in the improvement in both our gross margin and operating margin, when all others things mean equal, a significant loss of volume would normally hurt margin percentages.

When volumes do come back, we will have significant operating leverage on the upside as we expect to be able to hold on and improve our new level of operating efficiencies.

And now we are happy to take the questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.

David Begleiter - Deutsche Bank

Hey, good morning.

James Sawyer

Hi, David.

David Begleiter - Deutsche Bank

Hi. Jim, just on the cost fortuity issue. The decline in SG&A we saw in the quarter, how much of that is sustainable, how much was FX driven on that issue?

James Sawyer

Well, about 11% of that is currency, which is offsetting the sales volumes as well. But the remainder is too sustainable lower cost. And we are really risen to a new level of efficiency all around the world, but particularly in North America.

David Begleiter - Deutsche Bank

And just on the new projects, were there any cancellations in new bidding activity, is competition still quite rational?

James Sawyer

I can't really speak for competition. But what we're seeing is that there is still a lot of new projects out there. Four of the six that we signed were energy related. So that shows that, that's still going very strongly even though oil prices and gas prices are down. But there is still quite few new projects out there. What we don't have this year that we have last year was a lot of those speculative oil sands projects and gasification projects. But kind of normal main stay industrial gas projects are still out here.

David Begleiter - Deutsche Bank

Did you see any cancellations of projects in the quarter?

James Sawyer

We've seen some deferrals that we talked about last quarter, but no major cancellations.

David Begleiter - Deutsche Bank

Thank you.

James Sawyer

Sure.

Operator

Your next question comes from the line of Mark Gulley with Soleil Securities. Please proceed with your questions.

Mark Gulley - Soleil - Gulley & Associates

Good morning. First question is use of cash flow. If I take everything you said in terms of earnings and CapEx and all of that and coming up with something like a new order of half a billion dollars of free cash flow this year, between acquisition, share repurchases, debt reduction, any other, can you give us an idea Jim how you expect to deploy that?

James Sawyer

Well basically, our main, our highest return investments are bricks and oil projects. And so of course that will be in the capital spending line. Additionally, we are taking a hard look at a couple of smaller acquisitions where we may be able to pick up some business that are core business but at good prices.

And then lastly, we'll probably hold debt relatively flat and have some money left over buyback some stock. But we still haven't stopped our stock buyback program even though we didn't buy much back in the first quarter.

Mark Gulley - Soleil - Gulley & Associates

And then secondly, you may given this already, you signed six new projects in the quarter in terms of doing our inventory equation for the backlog, how many projects did you complete?

James Sawyer

We completed six.

Mark Gulley - Soleil - Gulley & Associates

Okay. So no net change then in backlog I guess what you are saying, right? Got it. Okay, thanks Jim.

James Sawyer

Yeah.

Operator

Your next question comes from the line of Bob Koort with Goldman Sachs. Please proceed with your questions.

Robert Koort - Goldman Sachs

Thanks. Good morning. Jim, I was wondering if you can talk about variation in pricing power across different geographies and then also comment if you believe there is or isn't any cyclicality to pricing?

James Sawyer

Okay. Well, I think you all know that we have a lot of control over pricing in this business. Number one, because we do sign long-term contracts and the pricing that we put into those contracts sort of gives us a guaranteed return on our capital and the on-site contracts go for 15 years. And I haven't seen, we're not seeing anything changing there.

In the merchant business, typically five year contracts and we haven't seen any change there as well. So, and basically if I try to look at around the world, there is no part of the world that's really different than any other part of the world.

And then I guess you asked if pricing was cyclical? I don't think it will be cyclical because of the long-term contracts. It's not like the commodities industries where people just produce and have to sell their product and lower the price to sell the product.

Robert Koort - Goldman Sachs

Got it. Thank you.

Operator

Your next question comes from the line of Jeff Zekauskas with JPMorgan. Please proceed with your question.

Jeffrey Zekauskas - JPMorgan

Hi. Good morning, Jim.

James Sawyer

Hi Jeff.

Jeffrey Zekauskas - JPMorgan

Hi. So, I've got a little puzzled by one of your slides. In that you in terms of pricing what you show is that there is no sequential change, that is that from Q4 to Q1 you are up straight, but in your Q4 presentation your up six. So one would think that you would be down three on a sequential basis. And the basis for that is that North America looks like it got restated downward by about three percentage points and Asia by about eight percentage points. But you also changed the classification. You now talk about price mix and other or used to talk about prices. So can you clarify all that?

James Sawyer

Okay. Well, let me start with your comparison of the fourth quarter and the first quarter.

Jeffrey Zekauskas - JPMorgan

Sure.

James Sawyer

Fourth quarter was up 6% from the prior year fourth quarter, okay.

Jeffrey Zekauskas - JPMorgan

Right.

James Sawyer

This quarter was up 3% from the prior year first quarter. But you can't say it was sequentially down, because the I think the fourth quarter was versus the prior year fourth quarter, okay. So, there is no disconnect in the fact that we're showing price sequentially unchanged as I'll disconnect with the 6% in the fourth quarter. We did change the cost pass-through to include changes in electricity cost which had been showing up in price before. So that's a little bit bigger category now.

And then the other thing is in price mix other, what happens is that almost all of our sales have accommodation of variable sales but also a fixed fee payment at the bottom. And the fixed fee payment is the thicker pay part of the on-site contract where the rental for the cylinders and tanks and so forth. And so, as volume comes down, it has a mix effect on the overall average price there. I don't know if that makes sense to you, but usually there is not very much mix effect because volumes are not changing very much. But with the 12% change in volume is from our mix effect.

Jeffrey Zekauskas - JPMorgan

So, the meaning of it is that the... so in the... and I'll just try this once and then I'll pass on to somebody else. So, the meaning of it is that, so for example, in Asia, the prices were up. In the fourth quarter they were up 8% year-over-year.

James Sawyer

Right.

Jeffrey Zekauskas - JPMorgan

And in this quarter, they were up zero percent year-over-year. But what you're saying is that there was no change from the fourth quarter to the first quarter.

James Sawyer

Yeah, basically, in overall price, it's zero percent sequentially. Now, I will tell you though that electronic sales are a significant part of our Asian business. And there was a decline in electronics pricing overall, which was offset by increases in merchant package gases.

Jeffrey Zekauskas - JPMorgan

Right. And, I guess --

James Sawyer

If you take the electronics out of that portfolio, we did have harder pricing.

Jeffrey Zekauskas - JPMorgan

Okay. And, thanks very much. That will do so.

James Sawyer

So that's why, this year, the year-over-year, this quarter year-over-year effect is not what it was in the fourth quarter, because here is prominent (ph) electronics this quarter.

Jeffrey Zekauskas - JPMorgan

Well, so last year in the first quarter of 2008, your prices were up 4%. And so if your prices were up, so last year in the first quarter you were up for four in Asia in the fourth quarter you were up eight. So, there was a 4%, sequential benefit. So then when you get to the 2009 in the first quarter, where you were up zero, it certainly would seem that there would be some sequential diminution?

James Sawyer

Then the electronics speaks, okay. And if you want to go into a more detail, why don't you pick it up with Liz on the phone.

Jeffrey Zekauskas - JPMorgan

Okay. Thank you very much.

James Sawyer

Thanks.

Operator

Your next question comes from the line P.J. Juvekar with Citi. Please proceed with your question.

Prashant Juvekar - Citigroup

Yes, hi. Good morning, Jim.

James Sawyer

Hi, P.J.

Prashant Juvekar - Citigroup

You made three small acquisitions in packaged gases. So, is the strategy there to make acquisitions while the market is down? And can we see more rollups like this in packaged gases?

James Sawyer

Well, we will be doing rollups. The strategy is to rollups, where we can extract a lot of synergy. Because what we're buying as it overlay on our existing business. And I think, one other thing I would look at in businesses as you want to have synergy between the new business and the old business, and that's for the packaged gas acquisitions come into play. But they all have to do with the willingness of the seller to sell the property. And most of them are privately owned or family owned. And just because the economy comes down, it doesn't necessarily cause them to want to sell the business nor it requires them to be willing to sell at a lower price.

So, that's a lot of people asked that question. But people who own private businesses, they tend to think of them sort of like people in their house that the value of the market went down but they are not going to sell it.

Prashant Juvekar - Citigroup

Sure.

James Sawyer

At lower price unless they need to.

Prashant Juvekar - Citigroup

So, what kind of multiples are you paying for these gases in general? Can you tell us like maybe in terms of EBITDA multiples?

James Sawyer

Anywhere from... there is a huge wide range. I'm going to tell you anywhere from 3 to 10.

Prashant Juvekar - Citigroup

3 to 10?

James Sawyer

Yes.

Prashant Juvekar - Citigroup

And then --

James Sawyer

And it's also you question of what EBITDA are you looking? Are looking at trailing EBITDA or you're looking at over EBITDA, which is generally a lot less than trailing EBITDA.

Prashant Juvekar - Citigroup

In this environment. Okay.

James Sawyer

Yeah.

Prashant Juvekar - Citigroup

Just quickly on projects and there were bunch of questions on this project backlog. I guess my question is, the new project that you are signing, are they all the same size as the ones that you're completing?

James Sawyer

No. Because there are more normal; the ones we signed this quarter were kind of normal 15 million average kind of size projects. But in the backlog we've got those two big gasification complex, they are multi 100 million and the two coal gasification projects, they are quite large also.

Prashant Juvekar - Citigroup

Great.

James Sawyer

So the backlog number of projects is staying the same. In terms of dollars it's gone down some, but we didn't start up any of those big projects in the first quarter anyway. So generally if you want to put some dollars on it, it's about $2 billion on unchanged from the prior quarter.

Prashant Juvekar - Citigroup

Okay. That's what I was looking for. Thank you.

James Sawyer

Yeah.

Operator

Your next question comes from the line of Kevin McCarthy with Banc of America Securities. Please proceed with your question.

Kevin McCarthy - Banc of America-Merrill Lynch

Yes, good morning. Jim, with regard to the 95 million in cost reductions that you achieved in the first quarter, how would you expect that number to trend moving into the June quarter, would it remain stable or escalated all?

James Sawyer

Will get a little bit more cost savings going forward because we have always got productivity programs going on. And when you look at the cost savings there, three quarters of that was due to ongoing productivity initiatives and another 25% of it was due to just tightening down spending and SG&A and so forth.

So, the productivity initiatives keep going forward and those create advantages for costs advantages through procurement, through just production and distributions of lower energy cost consumption, more efficient truck routing and that type of thing.

And I think some people are kind of amazed that how much cost reduction we can actually get in this business. But it is basically a distribution business and in distribution business is all about efficiency.

Kevin McCarthy - Banc of America-Merrill Lynch

Got it. And speaking of distribution with regard to PDI, I was wondering if you comment on the price and volume composition of the minus 13 on same-store sales?

James Sawyer

Yeah, I can't go specifically into price and volume on that. Because it's just not something it's appropriate to do here. But I could tell you we're continuing to get positive price and that volume actually was off more than the 13% negative same-store sales number.

Kevin McCarthy - Banc of America-Merrill Lynch

Okay. And finally if I may on the interest line Jim, would you comment on where you stand with regards to fixed versus floating and what a reasonable forecast might be for the June quarter given the bond deal?

James Sawyer

Right. We'll see interest expense up some for rest of the year because of moving into more fixed rate money. It's... and we're basically financing commercial paper at less than 0.5%. And so that's helping on the interest line.

But during this low interest rate environment we do want to lock in more long-term money at below 5% rate, so it's kind of our goal. And so you want to take advantage of the low commercial paper rate, but at the same time you want to take advantage of the future of locking in interest rates for a longer period.

Kevin McCarthy - Banc of America-Merrill Lynch

Understood. Thanks very much.

James Sawyer

Yeah.

Operator

Your next question comes from the line of Don Carson with UBS. Please proceed with your question.

James Sawyer

Hi Don.

Donald Carson - UBS

Thank you. Hi Jim. Jim, a longer-term question. Recently you sort of took down your estimate of post 2010 organic sales growth from 8 to 12, to 6 to 10%.

James Sawyer

Right.

Donald Carson - UBS

And I'm just wondering if you can go into little more detail about that why won't... I mean clearly we've had some above trend and demand from commodity projects the last few years. But why won't you think we can get back to the same level of organic sales growth you've had in the past? And then any comments on recent decision by EPA to classify CO2 as a greenhouse gas, that sort of speed up the potential for gasification of utilities in U.S.?

James Sawyer

Right. When we scaled back the long-term forecast because of what I'll call commodity capacity overhand in metals and chemical and plastics and electronics. So, given the excess capacity in those through the end markets, we're just forecasting that there are going to be fewer projects to do going-forward, and that take about 2% out of the total.

We also brought down our expectations for industrial production in that chart that we had on the long-term growth. So, top-line probably 6 to 10% over the period, but it will be combined with lower capital spending and therefore more free cash flow generation, which actually will be extremely strong in the outpost years.

But there is still a lot of good projects there. And so, we think once we get out of the comparables from prior years 6 to 10% organic growth is doable. And that will leverage into low single-digit I mean low double-digit earnings growth. And so, once we get through the comparables of this year, the outlook doesn't change that much from what it was a year ago.

Now, on the CO2 legislation, that there are several ways that we benefit from that. In the short-term, we've got a lot of ways of helping our customers improve their combustion efficiency. We have a whole technologies in combustion. And if you can improve your combustion efficiency, you can reduce, incrementally reduce your CO2 emission. So, if there is a tax to our customers or have been trade, that's going to increase demand for combustion technologies and the oxygen that goes along with that.

Longer term, we have the oxy-coal combustion technology which is, government wants to build power plants that in sequester of the CO2 for power plants, this is the ideal way to do that. But, and we've got two projects that were power projects we're working on right now to do on a term-fee basis. But that will be ways out I think.

Donald Carson - UBS

And then just one follow-up. When you say you see the lower CapEx, but what you see is sort of a normalized CapEx sales or absolute dollar CapEx sort of post 2010 environment?

James Sawyer

More down to the 10 to 12% sales.

Donald Carson - UBS

Okay, okay. Thank you.

James Sawyer

Yeah.

Operator

Your next question comes from the line of John Roberts with Buckingham Research. Please proceed with your question.

John Roberts - Buckingham Research

Good morning. Two quick questions. The fact that hardgoods was down so much more than gases and inventory de-stocking, should we expect gases to still decelerate down in the package North American gas segment? Will hardgoods be a leading indicator maybe here?

James Sawyer

Well, hardgoods both on the upside and the downside are leading indicator or I would say they are the most. And that's why so much a leading indicator or I would say as the more cyclical part of it. Because a lot of the hardgoods are like weld any equipment and laser cutting equipment and so forth. And people stop spending money on those, what to the user would be a piece of capital equipment, okay. So that's why the hardgoods are down so much, roughly 35% on the equipments there, just because they don't see the need to increase their capacity.

John Roberts - Buckingham Research

Again same-store sales will be down more than 3% maybe coming in the June quarter?

James Sawyer

It could be down a little bit more. But I don't see it being down much more. Basically, the whole economy is down 10% roughly year-over-year and the gas sales have pretty much a function on the economy here.

John Roberts - Buckingham Research

And, was pricing significantly different in the new EOR contract in North America, compared to previous business?

James Sawyer

No, no. It's a good fixed fee take or pay contract with good yield, with good returns.

John Roberts - Buckingham Research

Great. Thank you.

James Sawyer

Yeah.

Operator

Your next question comes from the line of Sergey Vasnetsov with Barclays Capital. Please proceed with your question.

Sergey Vasnetsov - Barclays Capital

Good morning. Jim, on your slide's page 10, it might be a reflection of the current situation on the U.S. tenants. The blue sectors are stable and red are shrinking $0.01 at a time, right? My question is about the green sector that we shift energy and so I don't know which party it corresponds to with, it was up 8% this quarter. I presume that's would help the 3% increase with some new contracts. If you take them out, if you compare same-store sales from existing customers, would energy that would be up year-over-year?

James Sawyer

Yeah. I'd say I expect energy to be up double-digit this year. The reason, it wasn't up as much in the first quarter is because we had a lot of refinery turnarounds and hydrogen sales were actually off 6%. But other places around the world and in hydrogen volumes being back up again, I'm looking at energy being double-digit growth this year.

Sergey Vasnetsov - Barclays Capital

Okay. And so on slide 11, previously quarter I recall, you were talking about new projects contributing about 4% of sales in '09 and 5% in '10. And this morning if I heard it correctly I think you mentioned 5% in each of '10 and '11. Did I hear correct?

James Sawyer

I did.

Sergey Vasnetsov - Barclays Capital

Okay.

James Sawyer

But actually I was talking about the contribution to earnings rather than sales.

Sergey Vasnetsov - Barclays Capital

I see.

James Sawyer

And they are high margin, they are on-site high margin projects sort of coming out of screen.

Sergey Vasnetsov - Barclays Capital

Okay. So you have enough visibility in your new projects into '10, '11 to think that affects an increase?

James Sawyer

Yeah.

Sergey Vasnetsov - Barclays Capital

Okay. Thank you.

James Sawyer

Okay.

Operator

Your next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question.

Laurence Alexander - Jefferies & Co.

Good morning. First question on merchant pricing in North America. Just want to circle back to your comments about price and mix. What you feels the underlying pricing trend in the merchant business if you backhouse the mix effects?

James Sawyer

It's... it won't be going up the way it has been going up over the last five years. Because part of the increase in the last five years was part of the cost of building plants and the cost of equipment and so forth was inflating rapidly. I think we're moving into generally deflationary environment. And we're still looking at some decent positive pricing in merchant gases.

Laurence Alexander - Jefferies & Co.

There are still high-single digits?

James Sawyer

Yeah, of 7, 8%.

Laurence Alexander - Jefferies & Co.

Okay. And with the electronics business drop in on that segment, if you look at it globally, how much of a drag was the exposure to electronics this quarter to earnings?

James Sawyer

How much of the drag of earnings was it? The question, the number is off of my head.

Laurence Alexander - Jefferies & Co.

Okay. And back in circle.

James Sawyer

Probably about $0.05.

Laurence Alexander - Jefferies & Co.

And with... and then just one bookkeeping question to you, depreciation for the quarter dropped by about 11 million?

James Sawyer

Right.

Laurence Alexander - Jefferies & Co.

Is there an issue there, I mean what they are all --

James Sawyer

No, no. What you have to realize is that we have a currency impact on the whole income statement of 11%, okay. So, ex-currency depreciation would have been 5 or 6%.

Laurence Alexander - Jefferies & Co.

Okay. Thank you.

James Sawyer

With the new projects coming out of screen.

Laurence Alexander - Jefferies & Co.

Perfect.

James Sawyer

Yeah.

Operator

Your next question comes from the line of Edward Yang with Oppenheimer. Please proceed with your question.

James Sawyer

Hey Ed.

Edward Yang - Oppenheimer

Hi, good morning Jim. The lower CapEx guidance, is that volume related or cost and supplier concessions?

James Sawyer

It's really more volume related. I mean, we are getting through procurement, lower costs on almost everything that we buy. But, I would say, the more the impact is from volume.

Edward Yang - Oppenheimer

Okay. And last quarter you mentioned that a few customers were below minimum revenue requirements, this quarter volumes are softer. So, are these customers further behind, and is it still your expectation that they will makeup the difference in volume by the end of the year?

James Sawyer

Well, they don't necessarily makeup the difference in volume. But they will continue to pay the take-or-pay part of the contract.

Edward Yang - Oppenheimer

Okay. And --

James Sawyer

So, there is no issue. There is no issue here. It's not like that we have to take the minimum volume. Now, a lot of them are actually, and especially in Asia, are operating at the volume level of the minimum take-or-pay, because below that they have to pay for it even if they don't take it. So, they are taking it anyway. I mean, actually that's an inefficient level for us to be operating analyst, I mean the plan turndowns.

Edward Yang - Oppenheimer

Okay, I understood.

James Sawyer

So that we are referring some.

Edward Yang - Oppenheimer

And you mentioned the margins in Europe were down, the margins in North America were actually up, although there has been more pressure in volumes in North America versus Europe. So was that all just a labor issue, is there any thing else going on or are there any other steps you could take other than basically improving margins to help the margins out in Europe?

James Sawyer

Well, roughly, volumes in Europe were off by more than volumes in U.S. And so there was a big decline there. But, the labor market flexibility just takes a lot more time in Europe than it does in the U.S. because in most parts of Europe, U.S. will pay like three year severance.

And when we look at the numbers on that, it's just really a good payback on that, okay. And we're not going to take charge just so we can pay three year severance. So, we will continue to get the cost down in Europe, but there will be more out of attrition and so forth.

Edward Yang - Oppenheimer

Okay. And thanks for providing the current quarter breakup between pass-throughs and price. In Asia, last year in the 2Q and 3Q, prices and cost pass-throughs spiked about 11, 12%. How much of that was again the breakup between pass-throughs and price or electronics? And how much of that do you expect to give back this year?

James Sawyer

Well, basically, the Asia pass-through was primarily in electronics last year in some of the rare gases and so forth. And also a lot of electricity cost increases. And so, basically what we're expecting to see going-forward that we haven't really seen yet, we haven't really seen a decline in electricity prices yet. It's starting to decline in some places, but not... but it's actually electricity was up 15% in Europe. So, we are hoping to see decline in electricity prices going-forward.

Now, we'll have to give that back to the customers in terms of pass-through. So, I would expect that it will be relatively in different tour with the operating profit line, but the sales line it'd be a function of electricity prices going up substantially in the last couple of years and I think probably falling 10 to 15% going forward.

Edward Yang - Oppenheimer

Thank you very much.

James Sawyer

Yep.

Operator

Your next question comes from the line of Mike Sison with KeyBanc. Please proceed with your questions.

James Sawyer

Hi Mike.

Michael Sison - KeyBanc Capital Markets

Hey, good morning. When you take a look at your guidance for 2009 for sales, I'm assuming the currency impact and the natural gas pass-throughs that would sort of imply that your volume growth for the full year of '09 would be down let's say mid single-digits to high single-digits. Given the tougher start to the year and it doesn't sound like second quarter to be that much better, are you assuming sort of an improvement in industrial demand in the second half of the year or are more of the sort of big projects coming on to the second half that sort of give you that improvement in sales in the back half?

James Sawyer

Right. Well, basically it's... we're expecting some end to the de-stocking in the second half, in the projections there. Because steel productions are 50% in the United States, but consumption is not off that much for example. And the same thing, and we're starting to seeing chemical and plastics the de-stocking come to an end. So, in the second half we're expecting there will be some de-stocking, some bounce back from de-stocking, that the overall demand, overall consumption will probably stay down about 10%.

Michael Sison - KeyBanc Capital Markets

Okay. I got you. Then in terms of electronics, the improvement you're looking for sequentially, are you seeing order patterns for your customers already given you that sort of outlook that things can improve heading into the second half?

James Sawyer

Yeah. Basically much of what we saw in the electronics is on-site contract. And so that's not really affected. In the material science business, we do a combination of long-term contracts and additional sales on top of that, were both pick up sales and we are seeing more pick up sales. But we're not seeing a commitment by the semiconductors fabs to enter into long-term higher levels.

Michael Sison - KeyBanc Capital Markets

Okay. And last question in terms of merchants, could you on just and I apologize if I missed this, what are your operating rates for your plants globally?

James Sawyer

Our operating rates are there generally in the low 70s globally. But remember that as the product can't move, you can't take products from one point and move it to where some other customer would be. So that does no impact on price.

Michael Sison - KeyBanc Capital Markets

Great. Thank you.

James Sawyer

Yeah.

Operator

Your next question comes from the line of Steve Sherman with Lafayette Research. Please proceed with your question.

Steve Sherman - Lafayette Research

Good morning everyone. In the last decade you had a fairly substantial increase in volumes, pricing et cetera and really two trends out there; one being the consolidation in the industry and two being hydrogen. Could you guys, could you just talk about sort of the next 10 years and what you see out there?

James Sawyer

Right. Well, I think that the past 10 years was really a combination of pretty much what you said, a combination of consolidation plus the overall economy was growing pretty nicely. And then on top of that you had for energy situation which is broader than just hydrogen.

I don't expect the economies to be growing that fast, going forward. There maybe a bounce back from this depression. But long-term I expect consumer savings rates to go up and so forth. But the other big driver is going to be emerging markets, mainly India and China and South America. And we're going to continue to sign new projects in all three of those countries. And in fact they all have been impacted by this financial crises, but they are rapidly bouncing out of it and bouncing back up right now. But, if you look 10 years forward, we'll have a substantial amount of our business in emerging markets.

Steve Sherman - Lafayette Research

And then, on the sort of CO2 global warming et cetera, a lot of your products may help in that area. But well obviously you're going to see a huge tax on energy and other products, you call it tax, call it whatever you will, and that's going to lead a lower demand. So offsetting that, you're going to see lower demand across a lot of your products, and how do you think that balances out in the end?

James Sawyer

Right. Well, that would be lower demand for hydrocarbons, okay. But we don't really sell... we don't sell any hydrocarbons other than hydrogen. And that only impacted the demand for hydrogen going down.

Steve Sherman - Lafayette Research

Well, of course, I mean for selling less oil, you're going to see lower... you are going to see lower refinery hydrogen et cetera?

James Sawyer

Yeah. Lot of the hydrogen is going to keep going and enhanced oil recoveries are going to keep going. And, there are hopefully I guess what the administration is looking for, and what you're talking about with attacks on energy, reducing energy demand, I guess you would see that mostly in a electric power production in coal burn in plants, which we don't really have as customers right now. So I don't see any negative effect on growth from that.

Steve Sherman - Lafayette Research

But you certainly would say that maybe the next 10 years is not going to look like the last 10 years?

James Sawyer

We'll be what first and last 10 years?

Steve Sherman - Lafayette Research

I guess I'm saying would you say that the next 10 years for the industry gas business may not look as rosy in the last 10 years?

James Sawyer

That's hard to say. I think the next five years we'll not look as rosy as the last five years.

Steve Sherman - Lafayette Research

Fair enough. Thank you.

James Sawyer

But I don't know about 10 years.

Operator

This concludes the question-and-answer portion of today's call. I will now like to turn the call back over to Mr. Jim Sawyer for final remarks.

James Sawyer

Well, thank you all for joining the call. And if you have any additional questions, please feel free to give Liz or myself a call. And we wish you well.

Operator

Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect. Good day.

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