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Praxair, Inc. (NYSE:PX)

Q2 2013 Earnings Call

July 24, 2013 11:00 am ET

Executives

Kelcey E. Hoyt - Director of Investor Relations

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

Analysts

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

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Mark R. Gulley - BGC Partners, Inc., Research Division

David L. Begleiter - Deutsche Bank AG, Research Division

Laurence Alexander - Jefferies LLC, Research Division

James Sheehan - SunTrust Robinson Humphrey, Inc., Research Division

Neal Sangani - Goldman Sachs Group Inc., Research Division

Duffy Fischer - Barclays Capital, Research Division

Vincent Andrews - Morgan Stanley, Research Division

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

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

P. J. Juvekar - Citigroup Inc, Research Division

John P. McNulty - Crédit Suisse AG, Research Division

John E. Roberts - The Buckingham Research Group Incorporated

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2013 Praxair Earnings Conference Call. My name is Kirsty, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now I'd like to turn the call over to Kelcey Hoyt, Director of Investor Relations. Please proceed.

Kelcey E. Hoyt

Thanks, Kirsty. Good morning, and thank you for attending our second quarter earnings call and webcast. I'm joined this morning by Jim Sawyer, Executive Vice President and Chief Financial Officer; and Liz Hirsch, our Vice President and Controller.

Today's presentation materials are available on our website at praxair.com in the Investors section. Please read the forward-looking statement disclosure on Page 2 of the slides and note that it applies to all statements made during this teleconference.

Please also note that our discussion of full year 2013 earnings excludes the impact of the Venezuela currency devaluation that occurred during the first quarter and a pension settlement charge that will be recorded in the third quarter. A reconciliation of the U.S. GAAP reported numbers appears in the appendices to this presentation and the press release.

Jim and I will now review Praxair's second quarter results, including the current business environment and updated earnings guidance. We'll then be available to answer questions.

James S. Sawyer

Thank you, Kelcey, and good morning, everyone. Praxair delivered record results again in the second quarter despite a landscape of mixed global economic conditions. While there's plenty of uncertainty in many markets and industries around the world, one thing is clear, the United States has become one of the lowest-cost producers for the refinery, chemical and steel industries. Fortunately for us, our on-site pipeline and merchant distribution is second to none in North America. We will continue to focus narrowly on our integrated production distribution strategy and continue to increase density among our on-site bulk and packaged gas customers in each of our key regions around the world.

We've been investing heavily over the past 2 years primarily to build on-site production plants, which are contracted by our core customers in our core geographies. Nearby on-site merchant and packaged gas customers, who use our applications technology, get the synergistic benefit of capitalizing on our system, improving both our customers' performance and our return on capital.

This year, we start our eighth plant for Samsung in Korea and we're currently starting up 2 worldscale hydrogen plants for Valero, one on our Texas pipeline complex and the other on our Louisiana pipeline, which we are currently expanding. Our pipeline [indiscernible] in the Midwest, which primarily serves the steel industry, are virtually sold out.

While we are not normally a very acquisitive company, we acquired 2 very successful franchises this year, which use our same distribution density model. NuCO2, which distributes liquid carbon dioxide to the restaurant industry, and Dominion Technology, which provides gases to the offshore oil industry, augmenting our existing oil well services business. We will continue to keep our narrow and deep focus and invest your capital wisely.

For the remainder of 2013, we are narrowing our earnings guidance to $5.90 to $6, taking $0.05 off the top end. This reduction is purely a result of recent currency movements which we assume will prevail for the rest of the year. Since we first gave earnings guidance of $5.85 to $6.10 in January, currency devaluation has impacted our expected results for the year by about $0.10.

We're also giving guidance for the third quarter of $1.48 to $1.53. The guidance puts us at double-digit EPS growth the second half of 2013.

Our consolidated outlook remains strong, with the strongest growth in North America and Asia on-site, while growth in Brazil and Europe are more uncertain.

If you look at the 4 charts on Slide 3, you'll see how conditions are vastly different depending on the end markets and geography. The upper left chart shows U.S. nonresidential construction spending since before the recession. I show this because it's one of the drivers of demand for machinery and metal fabrication, which are big end markets for packaged gases. You can see from the green line that privately funded construction plummeted and has only slightly recovered. Meanwhile, publicly funded construction continued to grow, primarily as a function of the American Jobs Act. Now with cuts in discretionary spending by all 3 levels of government, public spending on construction is falling.

Europe public spending on construction has been falling continuously as a result of the austerity programs. The lower left chart shows that our Spanish packaged gas sales have fallen by 30% over the past 5 years.

By comparison, our volumes in China have risen by threefold. These volumes are largely on-site, feeding the chemical, metals and energy industries.

Brazil, on the other hand, has been on a rocky road with double-dip and triple-dip recessions.

And now, I will let Kelcey explain in more detail our second quarter results.

Kelcey E. Hoyt

Thanks, Jim. Please turn to Slide 4 for our consolidated second quarter results. Praxair's second quarter results reflects solid growth in our on-site business, with the strongest growth in the energy, chemicals and steel industries in North and South America, as well as Asia. Merchant volumes grew more modestly with steady demand from health care and food and beverage markets. However, packaged gas demand weakened slightly across most regions due to poor overall business confidence and lower private and public spending on construction and capital projects.

Consolidated sales in the second quarter were $3 billion, up 7% versus the prior-year quarter. Underlying sales grew 4%, as strong volumes in South America and Asia were partially offset by lower volumes in Europe, while North America volumes were comparable to the prior-year quarter. Higher pricing was achieved in North America, South America, Europe and Surface Technologies. Industrial gas acquisitions in North America and Europe contributed 3% sales growth.

Operating profit was $665 million, up 5% as compared to the prior-year quarter from higher volumes, pricing and productivity gains, partially offset by higher depreciation and SG&A expense attributable to new plant startups and acquisitions.

EBITDA and operating margins remained strong at 31.6% and 22.1%, respectively.

Net income of $445 million increased 4% from the prior year, slightly less than operating profit due to higher interest expense from increased debt levels to fund acquisitions, as well as higher rates, as we have turned out most of our debt long-term to protect against rising interest rates.

Earnings per share of $1.49 grew 5% over the prior-year quarter, higher than net income growth due to a 1% reduction in the number of diluted shares outstanding as a result of net repurchases of common stock.

During the quarter, we repurchased $152 million of stock, net of issuances. $647 million remains available under the $1.5 billion share repurchase program authorized in January of last year.

Our after-tax return on capital this quarter is 13%, reflecting peak construction in progress on the balance sheet for plants that have not yet started or are just beginning to ramp up, as well as the acquisition of NuCO2. This really is more of a timing issue. Praxair's return on capital will start to trend upward in 2014 and 2015 as the full earnings contribution from new projects kicks in and merchant loadings ramp on new projects and our existing capacity.

Our CapEx backlog, which we define as projects greater than $5 million and associated with a fully executed long-term customer contract, is currently at $2.3 billion and comprised of 36 projects. During the quarter, we started 5 plants and signed 2 large long-term customer contracts for projects that are under construction. About 45% of the CapEx in the backlog is in North America and about 35% in Asia, with the rest in Europe and South America. The projects will serve customers in the energy, chemical, manufacturing, electronics and metals markets.

New proposals remain active. The largest amount of activity in our operating regions is in North America, followed by Asia and Russia.

Now please turn to Page 5 for our results in North America. Sales in North America were $1.6 billion, 11% above the prior-year quarter. Organic sales grew 2%, driven by continued strong price attainment with volumes comparable to the prior-year period. Growth from acquisitions was 6%, driven by NuCO2, as well as packaged gas distributors, of which we acquired 17 in 2002 and 5 year-to-date in 2013. The effects of cost pass-through, primarily higher natural gas price, which is contractually passed on to hydrogen customers, increased sales by 3%.

Our on-site business in North America continues to run at very high levels. In the United States, our customers in the process industry, such as steel, chemicals and refining, are continuing to take advantage of the low natural gas prices, cheap energy and high labor productivity, which makes them very competitive globally. We serve these customers through major pipeline networks in the Chicago and Gulf Coast regions of the United States, as well as various on-site plants.

Even though the overall steel industry capacity utilization remains in the high-70s, oxygen demand from our steel customers in the Chicago area continues to be significantly higher than a few years ago. Natural gas is increasingly being used in the blast furnaces as a cost-competitive substitute for coal. This shift to higher natural gas usage is requiring 25% more oxygen per ton of steel produced to maintain the desired thermal characteristics of a blast furnace.

Oil refiners benefit directly from low-cost natural gas and low-cost hydrogen, which is produced from natural gas using a steam methane reforming process. Refiners, for example, convert through a hydrocracking process utilizing steam and hydrogen 1 barrel of low-value vacuum gas oil into 1.2 barrels of high-value transportation fuels.

Earlier this week, we announced the start-up of 135 million standard cubic foot per day hydrogen plant serving Valero's refinery in Port Arthur, Texas, as well as other customers in the region. The plant is connected to our existing Gulf Coast pipeline system, which is more than 300 miles long, and brings total capacity in the region to about 750 million standard cubic feet per day. In addition, the network includes our unique 2.5 billion standard cubic foot high-purity hydrogen storage cavern that provides additional supply reliability for Praxair customers along the pipeline.

Our similar sized worldscale hydrogen plant serving Valero St. Charles, Louisiana refinery is scheduled to be commissioned and start up during the third quarter.

Merchant volumes grew 1% year-over-year and sequentially. Our Lox/Lin capacity utilization rates in the U.S. are running at about 80%.

North American packaged gas sales excluding acquisitions and foreign currency were up 1% year-over-year and up 2% sequentially, as positive pricing more than offset lower volumes in all 3 countries, the United States, Canada and Mexico. In PDI, gases growth was positive, but hard goods volumes were lower than the prior-year quarter. By end market, the U.S. packaged gas business is seeing strength in auto and chemicals, with modest weakness in metal fabrication and mining, while manufacturing is steady.

North American operating profit was $381 million, 5% above the prior-year quarter. The increase in operating profit from higher pricing and acquisitions was partially offset by higher costs, primarily seasonal power costs and increased pension expense. The packaged gas acquisitions we made in the past year are in the process of being integrated, which will improve profitability.

The operating margin remains strong at 24.5%. Higher cost pass-through, which increased sales with minimal impact on operating profit, reduced the operating margin percentage by 70 basis points year-over-year and 30 basis points sequentially.

Proposal activity for new on-site plants in North America remained solid in chemicals, metals, energy and manufacturing.

Now please turn to Page 6 for our results in Europe. Our European businesses are primarily in Spain and Italy, which comprise about 50% of the European segment sales. Other operating locations include the Ruhr Valley in Germany, the port of Antwerp, Scandinavia and more recently, Russia.

The northern part of Europe is clearly performing better than the southern part, as Spain and Italy are still suffering from a lack of government spending and a lack of credit availability from the banks.

Sales in Europe were $382 million, which was comparable with the prior-year quarter. Higher pricing was offset by lower volumes, primarily lower merchant and packaged gas lines in Spain and Italy due to continued weak industrial activity.

We continue to drive price attainment, and operating profit of $69 million was up 1% due to positive operating leverage from price, productivity and the benefits of prior restructure actions.

We are on track to deliver annual savings of more than $18 million from the third quarter 2012 restructure at a payback of less than 1.5 years. The segment is well positioned for further market improvements as volumes stabilize in Southern Europe and we begin to further start up and load the new plants in Russia.

In Russia, we are executing our profitable growth strategy by building production distribution density. During June, we announced the acquisition of VOF, a merchant liquid and packaged gas business. VOF serves more than 2,000 customers in a variety of industries, including steel, aerospace, health care and food and beverage. The acquisition provides immediate synergies with our existing regional infrastructure, including our newly built air separation plant in Volgograd, serving a large chemical customer under long-term contract.

During July, we announced a joint venture with KuibyshevAzot, also in the Volga region, to produce and sell industrial gases. The joint venture will construct a new air separation plant to produce 1,400 tons per day of oxygen, nitrogen and argon that is scheduled to start up in mid-2016. The joint venture will also own and operate KA's existing air separation unit. The merchant liquid supply will support the surrounding industrial region, including energy, automotive and manufacturing customers.

Praxair's modernization and new plant investment will bring significant energy efficiency and cost savings to the company, while increasing the supply of liquefied industrial gases to serve the growing demand from smaller regional customers. This will be Praxair's fifth on-site project in Russia and third in the Volga region.

During the second quarter, we also announced the expansion of our supply system in the port of Antwerp, the second largest petrochemical enclave in the world after Houston, Texas. We will build a 1,300 ton per day plant and extend our pipeline system in the port to expand our business with customers under long-term take-or-pay contracts, including agreements with several leading global chemical companies. Start-up of the air separation plant is expected in early 2016.

The pipeline system will have the ability to supply oxygen and nitrogen to the majority of chemical companies in the port. In addition, the new facility will produce liquid oxygen, nitrogen and argon to support customers in the pharmaceutical, chemical, glass, metal fabrication and food industries in Belgium and the Netherlands.

Page 7 shows our results in South America. During the quarter, we saw an improving volume trend to metals, manufacturing, health care and chemicals customers, similar to what we had seen with the recovery from the recession beginning in March of this year.

South American segment sales were $536 million, up 3% versus the prior-year quarter. Underlying sales grew a strong 9% year-over-year and 5% sequentially excluding negative currency impact.

Operating profit in South America was $123 million, up 12% versus the prior year. Excluding currency effects, operating profit in the quarter increased 18%, demonstrating strong operating leverage from higher volume and continued execution of price and productivity, including the results of last year's fixed cost actions.

So while we have seen a somewhat bumpy recovery the last few months in Brazil, the outlook for the second half of 2013 remains mixed. The currency weakened 8% against the U.S. dollar versus the rates in place in April, which does have a primarily translational impact on our results.

Current Brazil Central Bank consensus industrial production for the year is now 2.2%, which implies an industrial production rate of about 3% for the second half of the year. The business has and will continue to take action to adjust to changing economic conditions as needed, as was indicated in the strong operating margin for the second quarter.

Now please turn to Slide 8 for our results in Asia. Sales of $379 million grew 9% versus the prior-year quarter. Strong volume growth increased sales by 10% due to higher volumes in China, India and Korea, driven by about 2/3 new project growth and about 1/3 base business growth. Volume growth in this segment was strongest to metals, manufacturing, chemicals and energy customers.

We continue to grow merchant sales to customers through our application technologies across Asia. Our offerings provide energy reduction, environmental solutions and productivity to our customers. 2 such examples are combustion and water treatment.

Lower merchant and packaged gas pricing reduced sales by 1% from the prior-year quarter, primarily due to liquid argon in regions of China impacted in part by the weak solar market. In addition, electronics gases pricing in Asia, which is used in solar, LCD and integrated circuits, continues to be weak.

Asia's operating profit of $61 million decreased 10% from the prior-year quarter due to a gain on sale of land in the prior-year quarter.

Strong volumes resulted in a 15% operating profit increase year-over-year, which was partially offset by lower pricing.

Praxair is one of the largest atmospheric gases suppliers to Samsung, and during the quarter, we started up our second state-of-the-art air separation plant at the Samsung Electronics semiconductor facility in Hwasung, Korea. Through a long-term contract, the plant will supply on-site high-purity oxygen, nitrogen and argon to Samsung.

The air separation plant will also expand Praxair's merchant capacity in the region, supplying liquid oxygen, nitrogen and argon to a variety of industries, including nonferrous metal, wastewater treatment and shipbuilding.

In addition to atmospheric gases, Praxair supplies hydrogen, helium, processed gases, sputtering targets, ALD precursors and other advanced materials for use in Samsung's manufacturing processes.

Our results for Surface Technologies are shown on Page 9. Surface Technologies sales for the quarter were $165 million, comparable with the prior-year excluding currency and cost pass-through. Higher pricing in the quarter partially offset the impact of lower volumes of industrial coatings.

Operating profit increased $4 million or 15% in the second quarter. The impact of higher pricing and lower costs, including benefits of prior restructure program, more than offset the impact of lower volumes.

And with that, I'd like to turn this call over to Q&A. [Operator Instructions]

Question-and-Answer Session

Operator

[Operator Instructions] Please standby for your first question, which comes from the line of Mike Sison from KeyBanc.

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

Jim, when you take a look at the second half of the year, in terms of double-digit earnings growth that you're looking for, how much of that is coming from sort of the backlog and new projects coming in?

James S. Sawyer

Virtually all of it.

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

Okay. So the outlook there is pretty, pretty firm to some degree?

James S. Sawyer

Yes. I mean, I don't -- we're not looking for any major economic expansion in any of the countries that we operate in that would drive significant amount of volume growth. So it's mostly from the projects.

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

Okay. And then just a quick follow up. In terms of pricing, it seems like you guys did a good job at getting pricing. So far this year, Air Products is complaining a little bit about being squeezed from higher energy costs and lack of pricing. Are you seeing any of that type of issues at all this year?

James S. Sawyer

I can't comment on Air Products says, but I know our guys work very, very hard on pricing and their very scientific method and artful method to make it happen. So about the pricing, I don't see any problems in the environment. Generally for pricing, with the exception of argon pricing in China, which I think most people know is off because the largest consumer in China had been the photovoltaic panel business, about half of which has shut down versus last year. So that took away a big demand for argon in China.

Operator

Your next question comes from the line of Edward Yang from Oppenheimer.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Is there anything to read into the relative weakness in packaged gases versus the bulk in merchant in North America? Is that a leading indicator for base volumes there?

James S. Sawyer

I think it's just a different end market, okay? I wouldn't call it a leading indicator. It's just that packaged gases go into many, many, many applications. But about half of it goes to welding, metal fabrication and machinery, all of which happen more when people are building things. And what I see right now is that the private sector is not building very much and the public sector is not building very much. And that's what I think is the cause of the relative weakness in packaged gases. But it's just a different end market than merchant and on-site.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Okay. And the backlog dipped a little bit, and I think in the prior quarter, you said it will probably be a little lumpy, fluctuate from $2 billion to $2.5 billion. Is that kind of your current thinking still?

James S. Sawyer

Yes, that's still our thinking.

Operator

Your next question comes from the line of Jeff Zekauskas from JPMorgan.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

The results in Brazil were pretty great in that your operating profits grew about $9 million with virtually no revenue growth. Is that a onetime event? Or is that -- this kind of cost reduction something that stretches out into the future?

James S. Sawyer

It's basically 2 things: a lot of cost reduction and efficiency -- well, there's 3 things: a lot of cost reduction and efficiency. You can see we got 3% price in Brazil. And lastly, I think in the last 12 months or so, we have been operating with some dislocations in our supply systems that we got ironed out in the first quarter.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Okay. And then lastly, when does Valero St. Charles actually start up? I know you said it's the third quarter. Is that the end of this quarter, or has it started already? Where does that stand?

James S. Sawyer

It will probably be in the middle of the quarter.

Operator

Your next question comes from the line of Mark Gulley from BGC Financial.

Mark R. Gulley - BGC Partners, Inc., Research Division

A couple of things. One, with respect to quantifying the impact of those gaseous hydrogen startups alluded to earlier, is there any way you can size those in terms of sales impact for the second half of the year?

James S. Sawyer

Well, I think we've given the earnings guidance. The sales impact, to some extent, is a function of natural gas prices, so we don't really focus so much on the sales impact. If you want to follow up with Kelcey on that, it's fine.

Mark R. Gulley - BGC Partners, Inc., Research Division

Sure. You said you're not very acquisitive, but yet you did make some 2 very interesting acquisitions, NuCO2 in the U.S.; Dominion in the U.K. Can you talk about what you're doing and what you want to do to globalize both of those platforms?

James S. Sawyer

That's a good question. NuCO2 primarily operates in the U.S. It requires a very, very high density of fast food locations. And I think there's a potential in Asia and Brazil for that. There's probably less potential in Europe for it because the restaurants have to be designed basically, a new design that has room for the tank and the system in it. And these small pubs and stuff in Europe just don't have the space for that, plus they just don't consume as much beverage drinks in Europe, they tend to be more bottled. Now Dominion, I think we can leverage very well around the world. And we can leverage back and forth our U.S. and Mexican oil services and Canadian oil services business with the products that they have to offer.

Operator

Your next question comes from the line of David Begleiter from Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

Jim, just in terms of new plant startups and their impact in 2014, do you have an early read on the EPS impact that it could provide to earnings growth?

James S. Sawyer

Well, it's kind of early in the year for us to make comments about 2014. But the impact of startups in this year has slid a little bit later in the year, and that's -- some of that sliding into 2014. So I'm going to say off the top of my head maybe $0.30 of EPS, but it kind of depends on timing.

David L. Begleiter - Deutsche Bank AG, Research Division

And, Jim, just on the Lox/Lin pricing question, even though you're not seeing any pricing pressure, are you seeing any evidence in the marketplace that there's a little more competitive intensity in Lox/Lin pricing amongst your competitors?

James S. Sawyer

No.

Operator

Your next question comes from the line of Alexander Laurence from Jefferies.

Laurence Alexander - Jefferies LLC, Research Division

Just a quick one. As you look at the cadence of discussions with your on-site customers, is the -- we're going to be rolling forward from a 2013 to 2016 to a 2014 to 2017 backlog in the near future. Should we expect a significant step-up? Or do you see a fairly flat cadence from here? I mean, how should we translate the outlook -- the backlog comments versus the active order pipeline?

James S. Sawyer

Well, I mean, let me try to frame it this way. On-site was about 25% of our sales last year, I think 26% this year. As these projects start up and absent any acquisitions in merchant and packaged, on-site will move up to about 30% of sales in the next couple of years.

Operator

Your next question comes from the line of Jim Sheehan from SunTrust.

James Sheehan - SunTrust Robinson Humphrey, Inc., Research Division

Do you expect -- on North American margins, do you sort of expect them to stay in this 24% to 25% range for the next few quarters given the impact of the NuCO2 acquisition and sort of the dynamics of where natural gas prices are moving?

James S. Sawyer

Yes, I do. The NuCO2 has margins right in that zone. Our margin, I think, this quarter was impacted by about 70 basis points from the increase in natural gas prices, and, of course, they could increase a lot more, and that would depress margins a little bit. But generally speaking, I think we can continue margins in the mid-20s. That's really the way we operate. And the challenge is for us to get the other regions up to that level.

James Sheehan - SunTrust Robinson Humphrey, Inc., Research Division

And on packaged gases, are you seeing any impact from whether that might have affected nonresidential construction during the quarter and maybe push some of it further into this quarter, or -- what impacts of weather have you seen?

James S. Sawyer

I just don't know. I haven't heard it mentioned by anybody. But if you want to follow up with Kelcey, you can do that.

Operator

Your next question comes from the line of Robert Koort from Goldman Sachs.

Neal Sangani - Goldman Sachs Group Inc., Research Division

This is actually Neal Sangani on for Bob. Just looking to get a sense of the European restructuring actions. Do you think you can continue to get year-over-year margin growth with what looks like a flattish outlook on sales?

James S. Sawyer

Well, I think what we've done in Europe is essentially, we downsized and rationalized packaged gas filling stations, following that chart that I showed about packaged gas volumes being down so much. If we see some economic recovery in Europe and if we see governments start to repair bridges and railroads and stuff like that and some private capital spending, our volumes would definitely come up. And they would come up with a very strong incremental operating margin because we'd be able to do that without adding cost. But the jury is out on when Europe is going to recover.

Operator

Your next question comes from the line of Duffy Fischer from Barclays.

Duffy Fischer - Barclays Capital, Research Division

The question -- the first question is around Russia. Again, some nice transactions there. Could you maybe flesh out your Russian strategy a little bit? 2 things. One, what could that business -- or how big could that business be in 3 to 5 years? And then the second is, how do you think about risk, or how does risk get priced into deals you would do in Russia vis-à-vis maybe something in Brazil or something in China?

James S. Sawyer

Well, I would describe our -- the evolution of our Russian strategy, starting off with caution and really thinking through the risk management strategies, such as having contracts denominated in euros or dollars, having contracts guaranteed by offshore companies and so forth, and, of course, making sure that we are serving very viable, low-cost facilities of customers. So those are the kind of bottom line risk things that we have to manage. Additionally, construction in Russia is more difficult. You have -- you've got a lot of red tape you got to go through. And so we're learning our way through that. So we've got a couple of projects under construction. We've got a couple more that we are likely to sign shortly. There's probably more opportunity there than we have appetite to take on at the moment until we see how it plays out.

Duffy Fischer - Barclays Capital, Research Division

Great. And then, again, good strides, the eighth plant for Samsung. How -- have you taken meaningful market share at Samsung? And roughly, what would you guess your market share is there?

James S. Sawyer

I don't think we've taken market share. I think we've already -- always had about a 50% market share there.

Operator

Your next question comes from the line of Vincent Andrews from Morgan Stanley.

Vincent Andrews - Morgan Stanley, Research Division

Could you just help me understand the mix impact in Asia a little better just because I see volume up a lot. I know you have the new plant startups, so maybe there's some cost absorption there. But even adjusting for the sale in the prior year, I just wonder what the trajectory of margin should be from here.

James S. Sawyer

Right. Yes, as you mentioned, we had a -- it's actually a land sale in Korea the prior year, which contributed roughly $10 million to operating profit, which we disclosed last year. So if you take that out, we're still getting pretty good improvement in operating leverage. The sore spot, as I mentioned before, in China relates to very low argon pricing. And that has been, if you want to call it, the mix effect that has hurt the margins a little bit. A small impact in Thailand from our shrimp freezing business being a little bit slower. A small impact in Korea from seasonally higher power cost. But nothing that's really a trend that you would expect to continue. So we really should have margins back in the high-teens going forward.

Vincent Andrews - Morgan Stanley, Research Division

Okay. And then just a follow-up on -- you called out in Brazil the impacts of the political protests, and I'm just curious, is that something that you're seeing an impact from today or something that you're concerned about potentially flaring up?

James S. Sawyer

Well, we haven't seen nor do I expect that we will see any operational impacts [indiscernible] plants and distribution in any of the rest of that, okay? So my concern is whether there ends up being a bigger impact on the currency, which, of course, would hurt our translation rates, or whether there's a bigger impact on slowing the economic recovery. So those are just the 2 areas of concern.

Operator

Your next question comes from the line of Donald Carson from Susquehanna Financial.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

A question on PDI, on same-store sales growth, just the difference between hard goods and gases and rent, and would the weakness in hard goods keep margins in that same mid-teens level? And, Jim, you mentioned the current weakness in nonresidential construction primarily. Do you see that just temporary? Or do you see the need to maybe do some rationalization in PDI, such as consolidation of filling stations or anything like that?

James S. Sawyer

I don't see any -- well, I mean, we're always doing some cost based restructuring, building modern filling stations and closing down a couple of smaller less productive ones. So we're always doing a little bit of that, but I don't -- I'm actually quite optimistic about packaged gases in the U.S. Our same-store sales in gases are up, but in hard goods, they are down. And I can't be sure about this, but my opinion is that people who are contractors to the government, the military and so forth are deferring decisions to buy the equipment until they see what their future workload is going to be. So I do think it will improve.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

And then just as a follow-up, are you doing any hedging of the real for the balance of the year or into 2014?

James S. Sawyer

No, we're not.

Operator

Your next question comes from the line of Kevin McCarthy from Bank of America.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

I just wanted to follow up on Brazil. Jim, your volume there increased 4% on a sequential basis. I'm just wondering if you're starting to see -- or I guess, that was a Latin American figure. But my question relates to Brazil. Wondering if you're starting to see a more meaningful uplift ahead of World Cup and Olympics, or perhaps there are other factors driving the increase there?

James S. Sawyer

Well, let me start out with this, the first quarter in Brazil has got Christmas holidays, summer and Carnival, okay? And it's always the weakest quarter of the year in Brazil. So the sequential buildup in the second quarter is to be expected. Additionally, we were seeing in February, March, April, May and June auto production increasing and manufacturing increasing and a nice healthy trend-up in underlying demand. I don't know whether that's going to continue through the rest of the year or not.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Okay. And then second question, if I may. Last couple of quarters, you'd been repurchasing shares at a rate of approximately $150 million per quarter. As your CapEx ebbs a little bit from the peak last year, is that a reasonable pace to expect in coming quarters as you sit here today?

James S. Sawyer

I will describe it this way, what we've said is that our long-term expectation is to reduce the share count by between 1% and 2% per year. So that covers not just repurchased shares, but it also covers any creep from options and so forth. And our long-term cash flow projection shows that we have the ability to do that because we generate very strong operating cash flows. So that's kind of the range. This year, because we acquired NuCO2, they will probably be closer to 1%. But next year, as capital spending falls and there probably won't be any bigger acquisitions, it will probably speed up again.

Operator

Your next question comes from the line of Mike Harrison from First Analysis.

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

We're hearing that some of the Gulf Coast refiners have recently been running pretty hard, driven by higher export demand for fuels. Can you talk about how that benefits you in the near-term and maybe what kind of opportunities it could present in the long-term, particularly as we're thinking about how that trend might play out against increasing light and sweet crude feedstocks coming from shale areas that might require less hydrogen over time?

James S. Sawyer

Well, let me try and characterize it this way. If you roll the clock back 5 or 10 years ago, I think we all would've believe that by now and in the future, the U.S. would be moving to a higher proportion of heavy sour crude, some of which potentially coming from the tar sands area. But with the advent of horizontal drilling, there's not only a lot of natural gas available, but there are heavy natural gas liquids and there is also a type of crude which has high carbon content but not high sulfur content. And when the refiners refine that type of crude, they can essentially blend hydrogen into it in the hydro frac-ing process and increase the volumetric output of diesel fuel and jet petroleum and so forth. So put it this way, the drive for hydrogen from sulfur reduction is probably less than we would have expected it to be, but the drive for hydrogen for hydro frac-ing is probably getting more than we'd expected it to.

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

And then you mentioned the European and South American restructuring savings. Are those both fully baked into the second quarter results? Or are there still some additional savings that we're kind of yet to see the full run rate?

James S. Sawyer

Well, the South American ones are probably pretty well baked in. Europe has got further to go as the year progresses. And restructuring is kind of a permanent process. It's not necessarily a headcount reduction or whatever, but it's a way of getting higher productivity. So there's always going to be more there.

Operator

Your next question comes from the line of P.J. Juvekar from Citi.

P. J. Juvekar - Citigroup Inc, Research Division

Jim, your chemical volumes were quite good, and the many new chemical plants that are being proposed are in their field study. So at what point do gas companies get involved? And can you size the opportunity in the U.S. chemicals business for you?

James S. Sawyer

Right. Well, I guess we ought to talk about that by country. I presume you're talking about the Gulf Coast. And as chemical production facilities get constructed on the Gulf Coast, there will be increasing demand for a number of the products and services that we do. We are certainly going to play in that as it develops. But we also signed a big contract in Antwerp, which I think is the second largest petrochemical complex in the world, and then most of the chemicals growth is coming in China. It's coming in the form of coal gasification for a chemical feedstock. So I think the outlook is positive everywhere. And I'll put it this way, until 5 years ago, we would have said that all the chemical production would either be built in the Middle East, where the petroleum and gas is from, or it'd be built in China. That equation has now changed for the better for the United States.

P. J. Juvekar - Citigroup Inc, Research Division

When these new plants get built, is it a number like they may need 10 or 15 ASUs? Is it a scale or size that you think about on the Gulf Coast?

Kelcey E. Hoyt

In the Gulf Coast, so scaler size for -- I mean, no, it all depends on the plant they're building, the chemical downstream product, that would drive the size of the industrial gases needed.

James S. Sawyer

I mean, there are about 20 projects that are being kicked around, some huge oxygen consumers, some not oxygen consumers at all. I do not expect all 20 projects to get built. So the counter remains to be seen how they come out.

P. J. Juvekar - Citigroup Inc, Research Division

Okay. And then, Jim, you had mentioned on the last call that your CapEx may have peaked. Wondering if you see CapEx coming down in the next few years. Can you just quantify that for us?

James S. Sawyer

Yes, last year we had $0.2 billion in CapEx. And we're probably going to be in the $1.8 billion to $2 billion range this year and probably over the course of the next several years. And so I think it's peaked. I don't think that you can really attribute that to some cyclicality, except for the fact that during the recession in 2008 and 2009, we didn't sign very many contracts. And therefore, with a 3-year delay period, we didn't start up a lot of projects in 2011 and 2012. So there was kind of a swelling effect there, with more projects that came into the backlog and came higher CapEx. But I think that around $1.8 billion to $2 billion is a good range for us. We're not going after every project in the world. We're just focusing on projects in zones where we can get integration between our on-site and merchant businesses and people who are low risk. And we're very selective about it.

Operator

Your next question comes from the line of John McNulty from Credit Suisse.

John P. McNulty - Crédit Suisse AG, Research Division

Early in the call, Kelcey had mentioned something to the effect that because of the shift, I guess, at some of the steel furnaces or steel mills to using natural gas just because it's so cheap, you were seeing these burn up 10% or 20% more oxygen. Are there any other major industries that because of the natural gas shift actually change the demand for oxygen as well?

James S. Sawyer

That's a good question. Certainly, the steel industry does. It's increasing the penetration, tons of oxygen per ton of steel produced. Perhaps you see that in the refining industry with the heavy crude and the natural gas. And one of the big growth platforms for us for decades has been increasing penetration in the same customers in the same industries. So we've spent a lot of R&D time looking at that, and we'll chat with our R&D people to see if they have some ideas there.

John P. McNulty - Crédit Suisse AG, Research Division

Okay, great. And then just a quick question on the NuCO2 platform. Can you just discuss what the year-over-year growth was for that business? I know you haven't owned it that long, but how should we think about kind of the growth trend in that business for the quarter?

James S. Sawyer

Well, we haven't owned it long enough for that, but I'm going to suggest that 2% per quarter -- or sequentially, 8% is kind of the area that we expect growth to come there. And I'll also say that the number of new contract signings since we bought it well exceeds what was in our due diligence analysis when we made the analysis to decide to buy it.

Operator

Your next question comes from the line of John Roberts from UBS.

John E. Roberts - The Buckingham Research Group Incorporated

I think that the health care business is noncyclical, but not necessarily high growth, and you've got 6% global growth in the back of your hand out in terms of your global markets. That means a number of areas must be well above 6%, I guess. So maybe you could comment on where you're seeing such high-growth in the health care.

James S. Sawyer

It's in a variety of places. It's not a huge growth business, but...

John E. Roberts - The Buckingham Research Group Incorporated

And I don't think of that.

James S. Sawyer

One thing I would point to, if you look at the South American slide, we had price at 3%. I'm sure that some of the health care growth that we're showing on that slide is coming from pricing. It's probably also coming from higher helium sales to MRI machines, although I can't confirm that, but it's miscellaneous.

John E. Roberts - The Buckingham Research Group Incorporated

Would it be one of your highest price appreciation markets then?

James S. Sawyer

No, not necessarily. But it's a big business in South America, and South America had a lot of price.

Kelcey E. Hoyt

Okay. Thank you very much -- thank you. So thanks for participating in our second quarter earnings call. I would ask that you could note the following dates on your calendar. We'll have our Investor Day on September 16 in New York City that will also be webcast. And our third quarter earnings call will be held on October 30. If you have any follow-up questions, please feel free to reach out to me directly. Thank you.

Operator

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

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