Praxair Management Discusses Q3 2013 Results - Earnings Call Transcript

Oct.30.13 | About: Praxair, Inc. (PX)

Praxair (NYSE:PX)

Q3 2013 Earnings Call

October 30, 2013 11:00 am ET

Executives

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

Stephen F. Angel - Chairman, Chief Executive Officer and President

Matthew J. White - President of Praxair Canada

Kelcey E. Hoyt - Director of Investor Relations

Analysts

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

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

Vincent Andrews - Morgan Stanley, Research Division

David L. Begleiter - Deutsche Bank AG, Research Division

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

Robert A. Koort - Goldman Sachs Group Inc., Research Division

Duffy Fischer - Barclays Capital, Research Division

Christopher Noon - Susquehanna Financial Group, LLLP, Research Division

Christopher Perrella - BofA Merrill Lynch, Research Division

P. J. Juvekar - Citigroup Inc, Research Division

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

John Roberts - UBS Investment Bank, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2013 Praxair Earnings Conference Call. My name is Ashley, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Jim Sawyer, Executive Vice President, Chief Financial Officer. Please proceed.

James S. Sawyer

Thank you, Ashley, and good morning, everyone, and thanks for joining today's third quarter conference call. As many of you have seen from this morning's press release, I have decided to retire after 28 years with Praxair and Union Carbide. I'll miss everyone in the Praxair team, as well as the regular flow of conferences and meetings with those of you in the investment community.

It has been a very exciting and rewarding career, especially the formation of Praxair 20 years ago and each step of the way watching our team make us a better and better company, and I'm confident that it will become better yet with the new generation of Praxair leaders and particularly, my successor, Matt White.

Now Steve Angel would like to say a few words and introduce Matt before Kelcey and I review the quarter's results.

Stephen F. Angel

Thank you, Jim. I wanted to take this opportunity to thank Jim for his many years of service and also to introduce Matt to you.

Jim was the CFO when I joined the company in early 2001, and I've had the pleasure of working with Jim as both a business leader within the company and for the last 7 years as CEO. Now if I do the math, Jim, it would say that you've been on more than 50 earnings calls over your tenure.

Now Jim has been an integral part of Praxair's successes, as you all know. And during his tenure as CFO, our net income after tax has quadrupled from about $440 million to $1.7 billion, and market cap has grown from $8 billion to more than $35 billion today.

I will miss Jim's steady hand and sound judgment. Jim, we all hate to see you go but we know all good things must come to an end, and we wish you and your family all the best.

I know you will be around to help with the transition and say goodbye to all your friends and coworkers out there.

Now of course, we've been planning for Jim's succession for some time, just as we do all senior management roles within Praxair. And we believe Matt is well prepared for his new role.

You will note from Matt's resume that he was Controller of our largest and most profitable business, North American Industrial Gases, for a number of years. He also has served as our Global Corporate Controller, and then Global Treasurer before taking on an operational business role running our Canadian business over the last couple of years. Matt has performed exceptionally well in all these assignments and we are confident he will do the same as our next CFO.

And with that, I'll give Matt a chance to say a few words and then we'll move on to the quarterly results and outlook.

Matthew J. White

Thanks, Steve. I've worked closely with Jim during my 9 years here at Praxair. And like everyone else who has worked with him, I respect and admire the strength of his knowledge, as well as his many contributions to Praxair. His approach to running the business for cash flow while maximizing growth and return on capital is one that is instilled throughout our entire organization.

We plan to continue this high level of quality and discipline while returning cash to shareholders through growing dividends and share repurchases.

From an investment community perspective, while I've had an opportunity to meet quite a few of you in my prior roles, I do look forward to meeting more of you in the months and years to come. So congratulations once again, Jim, on your many successful years leading our finance organization and I wish you well in retirement.

And now, I'll turn the call over to Kelcey for her commentary on the quarter.

Kelcey E. Hoyt

Thanks, Matt. 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 earnings for the third quarter, including year-over-year and sequential comparisons, excludes the impact of a pension settlement charge taken this quarter, as well as previously disclosed adjustments in the third quarter of 2012. These items are detailed and reconciled to the U.S. GAAP reported numbers in the appendices to this presentation and the press release.

Please turn to Slide 3 for our consolidated third quarter results. Consolidated sales in the third quarter were $3 billion, up 9% versus the prior-year quarter. Similarly, adjusted EPS, excluding the pension settlement charge, was up 9% year-over-year.

Excluding foreign currency, third quarter sales grew 10%, while operating profit grew 11%, continuing to demonstrate operating leverage. Sales growth from higher volumes and higher pricing was 7%, reflecting growth in all geographic segments.

On-site sales in North America and Asia had strong growth, driven by new project start-ups, including refinery hydrogen supply.

South American organic sales reflect higher price and growth from a few end markets, including metals, manufacturing and health care.

European organic growth was driven by price.

Industrial gas acquisitions in North America and Europe contributed 3% to sales growth.

Sequentially, 2% organic growth was driven by double-digit on-site volume growth in North America and Asia. Merchant volumes were steady to modestly higher in most regions except Europe, which included summer vacation seasonality.

Operating profit was $679 million, up 9% as compared to the prior-year quarter from higher volumes, pricing and acquisitions.

The EBITDA and operating margins were strong at 32.1% and 22.5%, respectively.

Net income of $451 million increased 8% from the prior year, slightly less than operating profit due to higher interest expense from increased debt levels to fund acquisitions and capital expenditures, as well as the fact that we have termed out more than 80% of our debt with long-term bonds that carry higher interest rates than commercial paper.

Earnings per share of $1.51 grew 9% 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 $81 million of stock, net of issuances. $532 million remains available under the $1.5 billion share repurchase program that we authorized in January of last year.

Our after-tax return on capital this quarter is 12.8%, reflecting CapEx 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.

Our project backlog, which we define as projects greater than $5 million and associated with a fully executed long-term customer contract is currently at $2 billion and comprised of 35 projects.

During the quarter, we started 3 plants and signed 2 long-term contracts for new projects. About 40% of the capital expenditures in the backlog is in North America, and about 40% in Asia, which includes projects in China, India and Korea. The rest of the backlog resides in Europe, primarily Russia and in South America.

The projects will serve customers in the energy, chemical, manufacturing, electronics and metals markets.

New proposals remain healthy with the largest amount of activity within our operating regions in North America, followed by Asia and Russia.

Now please turn to Page 4 for our results in North America. Sales in North America were $1.6 billion, 14% above the prior-year quarter. Underlying sales growth was 7%, driven primarily by higher on-site volume from new project start-ups for hydrogen supply to refinery customers in the United States and higher pricing.

Growth from acquisitions was 6%, driven by NuCO2 as well as packaged gas distributors.

The effects of cost pass-through, primarily higher natural gas price, which is contractually passed on to hydrogen customers, increased sales by 1% year-over-year.

During the third quarter, we announced the startup of 135 million standard cubic foot per day hydrogen plant in the Mississippi River Corridor, serving Valero Saint Charles refinery and Louisiana under our long-term supply agreement. This plant, along with a similar-sized hydrogen plant that started up in the second quarter in Port Arthur, Texas, contributed significantly to the double-digit year-over-year on-site volume growth.

Merchant sales grew organically 4% year-over-year and 3% sequentially on higher volumes and pricing. In particular, we are seeing strong liquid nitrogen sales to energy customers for our oil well service business in Mexico, as well as frac-ing for natural gas liquids and oil in Canada.

In our U.S. packaged gas business, sales were up 6%, and excluding acquisitions, up 2%, as strong pricing more than offset lower hard goods volumes.

By end market, the U.S. packaged gas business has seen modest growth in chemicals and refining and commercial aerospace, where we are beginning to ramp national supply across multiple locations to a global manufacturer, including their new facility in Charleston.

On the other hand, met fab and heavy machinery remains weak. This is largely a reflection of the fact that nonresidential construction is not growing in the United States, and in fact, government expenditures have fallen over the past 9 months.

North American operating profit was $406 million, 9% above the prior-year quarter due to higher volumes from project start-ups, higher pricing and acquisitions. The operating margin remains strong at 25.6%.

Proposal activity for new on-site plants in North America remains solid in chemicals and metals.

Now please turn to Page 5 for our results in Europe. Sales in Europe were $386 million, 10% above the prior-year quarter. Excluding the effects of lower cost pass-through and the positive effects of currency translation, sales grew 6%, primarily from industrial gas acquisitions.

Overall volumes were comparable to the prior year, as volume growth from project start-ups in Russia was offset by lower base business volumes, primarily packaged gases in Spain and Italy.

Similarly, construction in Spain and Italy has not recovered at all since the recession.

Operating profit of $64 million increased 7% due to higher pricing, acquisitions and currency translation. Cost reductions and productivity benefits outpaced inflation in most markets.

The segment is well-positioned for margin improvement as volumes stabilize in Southern Europe, and we begin to further start up and load the new plants in Russia. The majority of project proposal activity on European segment on the chemical and metals market is within Russia.

Page 6 shows our results in South America. During the quarter, growth in South America continued to move forward at a moderate pace with industrial production expansion in capital goods and construction.

South American segment sales were $494 million, down 4% versus the prior-year quarter. Excluding unfavorable currency translation impacts, sales grew 6% from higher volume, primarily from merchant and packaged gas customers and higher overall pricing.

Sales growth came from most major end markets including metals, manufacturing, chemicals, health care and food and beverage.

We continue to grow merchant and packaged gas sales to customers across South America through our application technologies. One example in the area of food and beverage in South America as food exports are strong industry and improved consumer incomes are driving higher local per capita consumption.

Praxair provides food and beverage manufacturers with freezing, chilling and processing technologies for improved yield, productivity and finished goods quality.

Operating profit in South America was $115 million, up 3% versus the prior year. Excluding currency effects, operating profit in the quarter increased 14%, again demonstrating strong operating leverage from improved volume and continued execution of price.

New on-site project proposals remain active but are more weighted towards small to midsize plants. Projects are located in Brazil and the surrounding countries in South America and are for customers in the metals, energy, pulp and paper and construction markets.

Please turn to Slide 7 for our results in Asia. Sales of $385 million grew 8% versus the prior year quarter. Strong volume growth increased sales by 10% due to higher volumes in China, India and Korea, as well as strong demand from existing customers in the metals and chemicals markets. The growth was driven by new projects -- the growth was driven half by new project growth and half base business growth.

Lower argon pricing in China and electronics packaged gas pricing in Asia reduced sales by 1% from the prior year quarter, primarily due to weaker demand for electronics, including solar.

Asia's operating profit of $67 million increased 29% from the prior year quarter. Strong on-site volume growth and a settlement of a prior-year receivable in China, partially offset by the impact of lower pricing, contributed to the growth in operating profit.

Our results for Surface Technologies are shown on Page 8.

Surface Technologies sales for the quarter were $160 million, up 1% organically versus the prior year, excluding currency. Strength in commercial aviation and industrial coatings was partially offset by weakness in military aviation.

Operating profit increased $2 million or 8% in the third quarter. The impacts of higher pricing and lower costs including benefits of prior year restructure programs, primarily in Europe, more than offset the impact of lower volumes.

And now I'll turn the call back to Jim for a discussion of our outlook and fourth quarter earnings guidance.

James S. Sawyer

Thanks, Kelcey. Please turn to Slide 9. Looking into the fourth quarter, we see that global industrial production growth is a tad slower than we anticipated earlier in the year. Also currency headwinds are a bit higher than we had anticipated.

Consequently, we're setting fourth quarter earnings guidance in the lower half of the range that we had set in July. Fourth quarter EPS is expected to be in the range of $1.52 to $1.57, which, as you can see, is this deep sequential increase from the $1.51 that we earned in the third quarter. That places full year EPS guidance at $5.90 to $5.95. These represent year-over-year growth of 10% to 14% for the fourth quarter and 6% to 7% for the year, as the first and second quarters did not show as much earnings growth as we're seeing now.

In North America, we're expecting all of the growth to come from new projects and productivity efforts. Consequently, we're not expecting much help from the economy. This probably will not change until government spending plans are clarified and small businesses and government contractors' level of business confidence rises to the point where they will make new investment decisions.

Over the longer term, we still think the outlook for U.S. manufacturing and commodity production will be very good due to labor productivity and low energy and feedstock cost.

The pipeline of new projects [indiscernible] remains very strong but the timing is getting stretched out due to the same uncertainty and level of business confidence.

South America seems to be on the mend, particularly in Brazil, but industrial activity remains spotty with some industries accelerating nicely, but others still looking for direction. We expect the currency to stay around BRL 2.2 to the dollar, which we think is a good equilibrium which allows exports, including steel, to be profitable. But having said that, we all know the BRL is one of the most volatile currencies in the world due to the risk on, risk off nature of fast money.

Asia is doing well in all of the countries we participate, India, Korea, Thailand and China. The rate of new projects activity remains strong in all countries and end markets.

Europe seems to be on the mend as well, and as we've said earlier, we're well-poised to deliver significant operating leverage when the underlying demand for package and merchant gases begins to grow.

We are very excited about what we're doing in Russia, where there are many new project opportunities.

Now just a final word on cash flow and return on capital. Return on capital is lower than we would like it to be as a result of goodwill associated with the NuCO2 acquisition. The large amount of new projects which are under construction and other projects which have started up but not yet ramped up on the merchant byproducts partially due to the stagnant global economy.

This means overall capacity utilization has lots of room to grow and we expect to see that over the next 5 years. Accordingly as we said before, we're leaving the era of peak capital spending. As operating cash flow continues to grow strongly, while capital spending levels off, we'll be generating increasing free cash flow, which, as always, we will distribute to you, our shareholders.

And with that, I'd like to turn the call over to Q&A and Steve and I will answer your questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of James Sheehan with SunTrust.

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

Jim, I just want to ask a question about Europe. Do you have -- do you see any concrete signs that -- of recovery in Europe or any signs of a tick up, any -- how confident are you that the situation in Europe has bottomed?

James S. Sawyer

Well, I guess, my opinion is that part of the reason for the slowdown in Europe, on top of the private sector slowing down in the great recession, was the governments in Italy and Spain and Portugal and Ireland and now France, have to reduce their budgets and spending. And as a result of that, one of the things they cut was discretionary spending and that would include construction spending. And a lot our packaged gas and our merchant products go into either construction spending or machinery and so forth that goes into those projects. So I think that, now, most of those countries have stopped reducing their budgets and will start increasing spending. So what we've seen is basically a leveling off, no longer going down in volumes there. And it's hard to predict what will go on in Europe but I see either stabilizing here or getting better.

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

And also, on EPS guidance, you mentioned some of the change was due to impacts from FX. How much of the reduction in guidance was attributable to currency?

James S. Sawyer

Just a couple of cents.

Operator

Your next question comes from the line of Jeffrey Zekauskas with JPMorgan.

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

The cash flows from the quarter were pretty great and your deferred taxes had $153 million benefit to cash flow. Is that temporary or did something happen so that you're paying less cash taxes?

James S. Sawyer

Well, the quarter was unusually high in cash flow. But basically, our cash flow is weaker in the first and second quarter and then it gets a lot stronger in the third and fourth quarter. As you mentioned, a large source of it was from deferred taxes, and that's partially related to strategy. We're going to take more advantage of accelerated depreciation this year and consequently not pay much cash taxes in the third quarter. So it will probably -- it's probably like $100 million higher than an average quarter would be.

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

And then, secondly, what was the size of the settlement of the prior-year receivable in the Asian business?

James S. Sawyer

It's a couple of million and it's really just as a result of the fact that if we don't receive on-site committed payments, we don't book it as revenue. And we had a bit of a dispute with a customer and we're very aggressive in making sure that we do get paid these on-site payments and we collected it this quarter. So there's a couple of million dollars that we should have collected last year.

Operator

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

Vincent Andrews - Morgan Stanley, Research Division

Could you just give us a sense of start-ups in Russia, sort of what -- where we are in the evolution of that start-up and how much more -- how many more quarters it will be before you're fully up and running there or fully loaded?

Stephen F. Angel

Well, it's just -- this is Steve. We have roughly $8 million to $10 million that we're seeing on the sales front right now. I think, through the fourth quarter, maybe we'll be up around $20 million or so. And so that project continues to start up. We've got others that are starting up next year. I would say, by -- I think, we talked about this during Investor Day, we said that around 2017, that was our outlook, we'd be at about $250 million of sales. That was our projections, so continue to grow.

Vincent Andrews - Morgan Stanley, Research Division

Okay. And just a follow-up separately, you mentioned the government shutdown in the U.S., and I just couldn't quite tell how much of it you're referencing for sort of an impact into the third quarter and then how much of it you're referencing sort of in terms of lingering into the fourth and maybe into the first quarter as it sort of ultimately remains unresolved so far?

Stephen F. Angel

Well, I think Jim's point was that the economy is demand-driven. And to the extent that there's any uncertainty, that prevents growth from starting again. So it was just a negative variable in the overall equation and that's why we're calling the fourth quarter in North America pretty much flat from a base volume standpoint. And we'll see what next year brings, but right now, we're just not seeing growth.

Operator

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

David L. Begleiter - Deutsche Bank AG, Research Division

Steve and Jim, just in terms of the impacts of new projects for next year, are we still tracking towards roughly $0.30 of impact year-over-year?

Stephen F. Angel

Well, I'll go back to, David, what we said at the investor conference day, which is 3% to 4% is about what we expect really in any given year going forward. So if you did 3% to 4%, I think that probably puts you closer to $0.20 to $0.25.

David L. Begleiter - Deutsche Bank AG, Research Division

Understood. And just on the electronics, Steve, any thoughts on weakness and strengths? Any signs that this might bottom on the -- at least on the solar side, and get some positive comparisons?

Stephen F. Angel

Not yet on the solar side. We're not seeing it deteriorate further but it's in pretty poor shape. But just to finish the thought on electronics, Samsung is seeing some increased activity on the memory chip and the DRAM side, so that's one positive indicator on the electronics side. But again, solar, no turnaround there and that's kind of the electronics story.

Operator

Your next question comes from the line of Mike Sison with KeyBanc.

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

In terms of merchant, it looked like volume is perking up a little bit in North America. Is that the base business getting a little bit better or is that just more new wins?

Stephen F. Angel

It was more oil wells -- this is Steve again, it's more oil well services had a very good quarter, both in Mexico and in Canada. But aside from that, I'd say merchant volumes are kind of flatlined.

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

Okay. And then, one quick one on PDI. The recovery there seems to -- well, it doesn't seem like it's happening on a volume front. Any issues you think in terms of the recovery there, any structural issues? It seems like that business in North America has been a little bit more sluggish than I would have thought coming out of the downturn?

Stephen F. Angel

Well, I would agree with that -- Steve again, except that it has rebounded. Certainly, it's rebounded quite nicely coming out of the recession. But right now, it does seem like it's not growing. And if you kind of break it down and look at it, automotives is a plus, chemicals is a plus. But there are certain negatives and they're obviously heavy equipment. Mining, for example, has been negative, and I think that's been well-documented. Public and private nonresidential spending remains very weak. And a lot of the big projects that we and others had anticipated really haven't transpired yet. So you kind of average all that out. That's why we're kind of in a place where we're not growing, not deteriorating. If I look at the volumes within our PDI business, it would say hard goods is certainly negative on the volume front, whereas gas is pretty much flat. I think, the good news for us and probably for the industry at large is that pricing has been pretty good.

Operator

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

Robert A. Koort - Goldman Sachs Group Inc., Research Division

I have a couple of questions on hydrogen. First, your history in hydrogen had some roots in ethylene off gas, I'm wondering, have you guys started working with any of these new mega projects that are coming out in the next few years to source some hydrogen? And then, secondly, what's your expectation about the outlook for the hydrogen business as it might correlate to the refinery customer's health? In other words, they're getting pretty skinny margins again. Do you ever see that? Any ramifications in your hydrogen business when that happens?

Stephen F. Angel

I'll just take your first question, Bob, Steve again. Yes, we do continue to work with sources, byproduct sources for hydrogen. Obviously, I won't go into any details around that. But it is in support of some of the projects that are being discussed. So we continue to do that with interest. But as far as do we anticipate seeing any deterioration in our hydrogen business as a result of skinnier margins, the answer is no. When they've gone through these cycles before, we really didn't see any effect on our hydrogen business. And I don't expect we would see it in this case either.

Robert A. Koort - Goldman Sachs Group Inc., Research Division

And Steve, I'm just curious, as you look forward, I think you guys have talked about how there's a little bit of a slower top line than maybe what you've seen in the last 5 or 10 years, how does your algorithm for earnings growth change, given this period where you're going to have increasing excess cash flow? Should we expect an increase in share repurchase or other financial methods for boosting the earnings growth?

Stephen F. Angel

Well, it will be in the 1% to 2% range in terms of share repurchases. And I think, with the CapEx spend moderating around $1.8 billion or so, and that's our production going forward and that's based on a backlog of about $2 billion of large projects, but if you run out that algorithm, that would say that I would expect 2%, closer to a 2% share count reduction, that share count reduction is about that you should expect, annual.

Operator

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

Duffy Fischer - Barclays Capital, Research Division

I want to go -- you guys have talked about kind of peak CapEx. Competitors in the industry aren't quite there yet. So when you look at the industry, one, do you see yourselves growing slower than the industry as far as capital going in the ground? And two, as the industry, do you think that starts to put pressure on return assumptions that get put into new business bid?

Stephen F. Angel

You want to take that?

James S. Sawyer

Well, I would say this, basically, we've always been very disciplined about the quality of the projects that we take on, the contracts we sign, the hurdle rates in terms of new projects and so forth. And I think, I still think, there are plenty of projects to go around for the industry, especially if you start counting these coal gasification projects in China and everywhere else. But we're trying to be risk averse and disciplined about our hurdle rates. And so we're -- we basically went through a little bit of a wave where there were very few projects signed during the recession. But in 2010, 2011, 2012, we signed a lot of projects that came out as a bulge, and that was really why last year's capital spending and this year's was high. We don't really see the outlook for new project opportunities getting any better or worse, we're just kind of coming out of that kind of bulge there.

Duffy Fischer - Barclays Capital, Research Division

Great. And then, as you guys look at Russia, can you envision the time, maybe 8 to 10 years out, where Russia is as good for you as Brazil is today? Or you don't think you've got a shot at getting kind of that consolidated and concentrated in Russia?

Stephen F. Angel

It's hard for me to -- this is Steve, it's hard for me to forecast what's going to happen in Russia next quarter, much less 8 to 10 years out. But I mean, all kidding aside, I -- we would not have gone into Russia if we did not think we could build a critical mass, if we didn't think we could execute our strategy around integrated supply, which we are, on-site merchant and packaged gas and build density. And that is taking shape. We have 2 regions that we targeted. There will probably be a third later on. But we think that it's going to be a very good business for us and it will have very good returns. It's a lot of hard work, it's a lot of spadework. Construction is very challenging, as we've talked about in the past. But we get better with each project. And as far as what we're finding out as we start up these projects in terms of did it really -- is it panning out the way we'd expect it going in, I'd say yes. But we knew there would be challenges, there are challenges, but we think long term, we're going to be very pleased we made this move.

Operator

Your next question comes from the line of Don Carson with Susquehanna.

Christopher Noon - Susquehanna Financial Group, LLLP, Research Division

This is actually Chris Noon stepping in for Don. Most of my questions have been answered, but I just wanted to ask on Brazil. I know on the last conference call, there was some mention of any impacts that the political protest in Brazil have maybe had on you guys. So I was wondering if you can maybe just give an update on that? And also, if you've seen any ramp-up ahead of the World Cup and Olympics?

Stephen F. Angel

Well, this is Steve again. With respect to protest, I think that's kind of old news. I mean, anytime anybody marches anywhere, it makes the newspapers in the United States. So we're not really seeing any effect of that. With respect to buildup going into the World Cup, that's pretty much behind us. So the buildup we would see now would be really more for the Olympics, which is a little ways down the road.

Operator

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

Christopher Perrella - BofA Merrill Lynch, Research Division

This is Chris Perrella on for Kevin. Just a couple of quick questions. Where do you see asset utilization for your separation units regionally? And could you go on a little bit more detail on pricing in Asia, what you're seeing in Lox/Lin, electronics, LAR, other specialty gases?

Stephen F. Angel

Sure. So with respect to utilization, I'll talk about it in terms of liquid, and the numbers I give you will really be more Lin/Lox because, obviously, utilization or supply-demand situation can vary by product. If you -- I'm just going to walk around the world. If you look at the U.S., we're about 80%, right about 80%. So we certainly have plenty of capacity left with Lin/Lox in United States. Europe is around high 60s, mid to high 60s, I'll call it. Brazil would be in the low 80s. In Asia, China is around mid 80s. And obviously, they're seeing a much stronger growth trajectory than the rest of the world. So fairly balanced, I would say, in China right now. India has dropped down into the mid 70s and that's because there has been some projects that we started up over the last year or so and the economy is not doing all that great at this point. But with respect to the pricing, argon pricing in the solar market in China, it continues to be very weak, and I think it's going to stay that way until the capacity utilization situation changes and demand increases is really what has to happen for that to take place. But I don't expect anything in terms of argon price improvement until that happens.

Christopher Perrella - BofA Merrill Lynch, Research Division

And just the liquid nitrogen and liquid oxygen in China pricing?

Stephen F. Angel

That has been pretty steady. A lot of the work we've been doing there has been on application development with direct end users as opposed to selling through the distribution channel, for example. And as we've done that hard work, pricing has certainly stabilized and it looks fine to me.

Operator

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

P. J. Juvekar - Citigroup Inc, Research Division

In North America, you talked about project growth in chemicals and metals. So the metals was a little surprising. Can you talk about that? And in chemicals, it's all the pet chem projects that are planned here. How much could that add to your backlog, let's say, in the next 3 to 4 years?

Stephen F. Angel

Well, P.J., this is Steve. So I would say in the chemical -- with respect to the chemical projects, we're watching it. We are on top of all of these projects that everybody is discussing. They're moving pretty slowly. There's a couple of issues. One is environmental permitting, which they all have to -- most of them have to go through, not all of them, and that takes some time. And then, I think, every time they go back and look at the estimates, the costs are going up. And that is going to continue to be a challenge in the Gulf Coast. And then, if you add on top of that some of the uncertainty that we talked about at the beginning of the call, that probably -- that certainly doesn't help with respect to people's desire to pull the trigger on these projects and start spending money. We believe, based on the projects that we're looking at, the ones that we're positioned for, the ones we think that will go forward, over the next, I'll call it, 4 to 5 years, we'll close 3 to 5 and probably start up 2 to 3. They tend to be on the larger size type of projects, probably $100 million to $200 million. So you can kind of do the math there and look at what that might add to the backlog. And then with respect to the metals project, one dynamic, and this is a byproduct of what's going on with cheap natural gas, is that if you look at a lot of the steel mills, integrated steel mills, particularly along the Great Lakes, they're substituting coke for natural gas because natural gas is low cost and obviously a cleaner fuel source. But as they do that, they need more oxygen in the furnace to maintain the thermal characteristics. And in some cases, we're seeing up to 25% more oxygen per ton of steel produced, based on low-cost natural gas substitution for coke. So when you kind of run that math through, you can see that we're a lot tighter in terms of our ability to supply oxygen than the steel mills up there in terms of their ability to supply steel. So our capacity utilization is a lot higher than theirs, and our estimation is that's going to lead to more projects.

P. J. Juvekar - Citigroup Inc, Research Division

That's very helpful. And then, you had impressive margin gains in South America, despite the 10% currency drop, was there any incremental cost cutting down there to achieve higher margins?

Kelcey E. Hoyt

Incremental cost cutting.

Stephen F. Angel

Oh, incremental cost cutting. Yes, P.J. there is incremental cost cutting. The individual we have down there running South America is a very strong operator. And he took some cost out last year when obviously Brazil was a disaster. He took a lot of costs out. And he continues -- they have continued to pare away cost, as we do everywhere around the world.

Operator

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

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

A couple of questions. In China, somewhat of an environmental crackdown during this current 5-year plan, do you view that as a threat or an opportunity? A threat would tend to be in terms of are we going to get as many coal gasification projects as perhaps we think or maybe on the other side, it creates opportunity? That's my first question.

Stephen F. Angel

Well, Mark, this is Steve, I'll take that. I think, net-net, it's an opportunity for us. We have a lot of solutions that address cleaner air, cleaner water. So I do view that as a positive. As you know, we don't participate in a lot of the gasification projects that are taking place out there. We are very selective in the ones that we do participate in. And we've said that -- we anticipate we'll probably start up about 1 a year going forward. So we're not heavily reliant on gasification. I think that's just more a result of the fact that we're being selective. The thing that we are seeing today is a lot of projects are slower to close in China, and there's really 2 reasons. One is, again, a lot more attention being paid by the government on the environmental conditions around these projects. So as in the U.S., the permitting process has become the long pole in the tent. So projects are being delayed for that. And then, secondly, with the government's new offense against corruption, particularly corruption in state, on enterprises, we're actually seeing that slow down some decision making. So those 2 factors kind of in play. But net-net long term, we certainly view that as a positive.

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

Okay. And then, you did talk a little bit about a little bit better profitability at NuCO2, but you announced that back in February, you were talking about a run rate of EBITDA $120 million, now it's a little bit higher. That was lower on operation to begin with. So can you talk a little bit about what you are seeing in terms of better EBITDA at NuCO2?

Stephen F. Angel

Well, we've owned it since March 1. We're very pleased with the results to date. If I go back and look at it against our assumptions, it's probably running a little ahead. And going forward, the formula is top line high single-digits. Pricing is a nice component of that. And obviously, that falls nicely to the bottom line. So high single-digit growth going forward. And we're looking at operating profit growth. I'm not going to talk EBITDA anymore, but operating profit growth would be in the mid-teens. And that's pricing, that's volume leverage against -- the infrastructure that they have, it's continuing to build density. That's taking advantage of lower-cost sources. As you know, we didn't go by much of the CO2 going in and continual productivity and there's a lot of productivity opportunities there around distribution.

Operator

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

John Roberts - UBS Investment Bank, Research Division

Could you specifically talk about the hydrogen project backlog? So it doesn't seem to be much there right now.

Stephen F. Angel

This is Steve. That's correct. We have not added much in the way of hydrogen to the backlog. We started up 2 very large projects in Valero. We still have Chevron in the backlog. And I think it will be probably a few years, or a couple of years, at least, before we will be starting that one up. But large hydrogen activity in the U.S. really is -- there's not much going on with that respect. We are working on some hydrogen projects outside of the U.S. that look very positive. But in terms of large hydrogen projects that we would have interest in, and we look at everything, but in some of -- as Jim said earlier, we're very selective in what we participate in. They certainly have to meet our hurdle rate and a lot of them don't. But I think we are going to be doing some projects that we have some interest in. They're not going to be large in my estimation.

Operator

There are no questions at this time. I would now like to turn the conference back over to Kelcey Hoyt, Director of Investor Relations, for closing remarks.

Kelcey E. Hoyt

Thanks, Ashley. Thank you again for participating in our third quarter earnings call. Our year end earnings call will be held on January 29. If you have any further questions, please feel free to reach out to me directly. Thank you.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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