Praxair Management Discusses Q4 2013 Results - Earnings Call Transcript

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 |  About: Praxair, Inc. (PX)
by: SA Transcripts

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2013 Praxair Earnings Conference Call. My name is Brianna, and I will be your operator 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, Ms. Kelcey Hoyt, Director, Investor Relations. Please proceed.

Kelcey E. Hoyt

Thanks, Brianna. Good morning, and thank you for attending our fourth quarter earnings call and webcast. I am joined this morning by Matt White, Senior 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 earnings for the full year and fourth quarter, including year-over-year and sequential comparisons, excludes a fourth quarter of 2013 bond redemption charge and an income tax benefit, as well as previously disclosed adjustments in 2013 and 2012. These items are detailed and reconciled to the reported GAAP numbers in the appendices to this presentation and the press release.

Matt and I will now review Praxair's full year and fourth quarter results as well as our outlook for 2014, including earnings guidance. We'll then be available to answer questions.

Matthew J. White

Thank you, Kelcey, and good morning, everyone. Praxair performed quite well in 2013. Key acquisitions in our core geographies and strong growth from capital projects in Asia and North America helped grow our sales well in excess of underlying economic trends.

Looking around the world, Brazil and Southern Europe both limped into 2013 with recessionary conditions but later stabilized and showed positive growth by the second half.

The North American story was mixed, given strong on-site sales and opportunities around cheap shale oil and gas, partly overshadowed with government uncertainties and limited investment in nonresidential construction, which weighed on packaged gas sales. And Asia continued to grow well across most geographies and end markets.

Excluding foreign currency, we grew full year sales 8% with strong price actions and contribution from project start-ups. EPS grew in line with sales.

We finished strong in the fourth quarter with robust operating leverage and a return to double-digit EPS growth. We successfully integrated multiple acquisitions and generated record operating cash flow of $2.9 billion, which speaks to the discipline and execution of the Praxair team around the world.

Looking forward, we have some significant foreign currency headwinds, specifically in the Brazilian real, the Mexican peso and the Canadian dollar. Excluding currency impact, we anticipate to grow earnings at a double-digit rate in 2014 from solid pricing and productivity, project contribution and moderate economic growth.

Please turn to Slide 3 for a further review of the 2013 full year results.

Overall sales were $11.9 billion, up 8% versus the prior year excluding negative currency translation effects. Sales growth came primarily from increased volumes in North America, South America and Asia and higher overall pricing.

Volume growth came from project start-ups and stronger underlying customer demand in most major geographies. Energy, chemicals, metals and manufacturing markets showed the strongest growth from the prior year.

Operating profit of $2.7 billion grew 8% year-over-year excluding foreign currency, from higher pricing, volume growth, productivity savings and acquisitions. We delivered strong EBITDA and operating margins of 31.9% and 22.3%, respectively.

During 2013, our productivity initiatives exceeded our targeted savings for a fifth year in a row. These efforts are not an annual event, but something that all employees are working toward on a daily basis. The constant focus on generating productivity initiatives, executing them and replicating them globally, typically within the areas of production, procurement and distribution, protects us against declining margins. One additional benefit is that approximately 25% of our savings came from what we call sustainable productivity initiatives, with the largest being energy efficiency improvements in our plants and distribution fleet.

Net income of $1.8 billion increased 5% from the prior year, slightly less than operating profit due to higher interest expense largely attributed to higher debt levels.

During 2013, we issued $2.6 billion of debt with a range of maturities and an average interest rate of 1.7%. Proceeds were used to fund acquisitions and refinance $1.3 billion. We were able to take advantage of low interest rates and our tight issue spreads to treasuries.

At year end, about 80% of our debt was fixed rate and about 20% was floating rate, as we have significantly reduced our exposure to rising interest rates.

Our after-tax return on capital for the year was 12.8%. This was suppressed by significant construction and progress on the balance sheet for plants that did not begin to contribute to earnings until the second half of the year, as well as the large amount of acquisitions in 2013, primarily NuCO2.

Capital projects spend, as well as the acquisition of NuCO2, are typically dilutive to ROC and below the corporate average for the first few years. We expect Praxair's return on capital to trend upward toward the end of 2014 as earnings contribution grows and the capital base depreciates. We maintained a healthy return on equity of 28.6%.

Please turn to Slide 4. We generated record operating cash flow of $2.9 billion for the year, which was equal to about 25% of sales. $3.3 billion was invested in disciplined growth through CapEx projects and acquisitions. $1.1 billion was returned to shareholders in the form of dividends and share repurchases.

Capital spending in 2013 was $2 billion. About 75% of our annual capital spending goes into new growth projects under long-term contracts with customers, about 20% to maintenance spend and the remaining 5% for cost reduction projects, with a typical payback period of about 3 years.

In 2013, we invested $1.3 billion in acquisitions, primarily NuCO2 microbulk carbon dioxide in the United States, Dominion Technology Gases in Europe, serving the offshore oil and gas market, and several U.S. packaged gas distributors.

We continue to look selectively for tuck-in acquisitions in our core business, which are high-quality, low-risk properties where we can bring synergies to the business we are buying and where we can achieve an attractive return on investment.

We paid dividends of $708 million and, this morning, announced an 8% increase to our quarterly dividend in the first quarter of 2014, which represents our 21st consecutive annual increase. This is consistent with our policy of growing dividends each year in line with earnings growth.

During 2013, we purchased 436 million of stock, net of issuances, and reduced our outstanding share count by 1%. $407 million remains available under the share repurchase program that was authorized in 2012. We also announced that our Board of Directors approved a new share repurchase program of $1.5 billion, which, depending upon market conditions, we anticipate completing in 2015.

We expect to continue our strong cash flow generation and our stock buyback program to reduce the share count by about 1% to 2% annually without diminishing our credit rating or access to low-cost funding.

And now Kelcey will take you through the fourth quarter results.

Kelcey E. Hoyt

Thanks, Matt. Please turn to Slide 5. Fourth quarter sales were $3 billion and grew 10% over 2012, excluding negative currency translation effects. Organic sales increased 7% from higher volumes and higher overall pricing, with growth across all geographic segments. Sales were higher primarily to energy, metals, chemicals and manufacturing end markets.

Growth in the energy end market included record North American on-site hydrogen sales from project start-ups. Acquisitions in North America and Europe contributed 3% sales growth in the quarter. Sequentially, sales were comparable to the third quarter as higher pricing offset seasonally lower volumes.

Operating profit was $690 million, up 12%; and, excluding foreign currency, up 14% as compared to the prior year quarter. The increase was driven by volume growth, higher pricing and acquisitions. The EBITDA and operating margins grew to a record 32.8% and 22.9%, respectively.

Net income of $462 million and earnings per share of $1.55 were each up 12% year-over-year.

Fourth quarter operating cash flow was a record $964 million and funded $560 million -- $516 million of capital expenditures, $177 million of dividends and $86 million of share repurchases, net of issuances.

Our project backlog, which we define as projects with CapEx greater than $5 million and associated with a fully executed customer supply contract, remained strong at $2.2 billion and is comprised of 32 projects.

While we continue to anticipate the backlog to hover around $2 billion in CapEx, it may increase or decrease $100 million or so in a quarter depending on the timing of final contract execution as well as actual plant start-ups.

During the fourth quarter, we signed 3 long-term contracts for new projects located in South America and Asia and started 6 plants located across North America, South America and Asia. Our backlog is geographically diverse, with projects in North America and Asia each representing about 1/3 of the capital expenditures in the backlog.

The rest of the backlog resides in Europe, primarily Russia, and in South America. These projects will serve a diverse set of customers in the energy, chemical, manufacturing, electronics and metals end markets.

Please turn to Page 6 for our results in North America.

Sales in North America were $1.6 billion, 11% above the prior year quarter. Underlying sales growth of 6% was primarily driven by higher on-site volumes from new project start-ups for hydrogen supply to refinery customers under long-term contracts in the United States and higher pricing. Acquisitions contributed 5% growth, primarily from NuCO2 as well as U.S. packaged gas distributors.

On-site sales continue to be strong across energy, chemical and metals markets. In the U.S., our customers in these process industries are continuing to take advantage of the low natural gas prices and high labor productivity, which makes them very competitive globally.

Merchant volume trends were steady year-over-year. Sequentially, there was seasonal weakness in carbon dioxide for beverage carbonation as well as liquid nitrogen sales in Mexico for our oil well services business.

Our liquid oxygen and liquid nitrogen capacity utilization rates in the United States currently average about 80%, in line with where we have been most of the year.

We have capacity to grow volumes in most regions with little incremental cost and, therefore, strong operating leverage.

Packaged gas trends in North America improved modestly during the fourth quarter, primarily in Mexico and the United States.

Organic sales for our U.S. packaged gas business grew 4% year-over-year and 3% sequentially. The fourth quarter year-over-year growth continued to be driven by gases and rent, which were up high single digits, while hard goods declined at a low single-digit percentage.

By end market, the year-over-year growth came from oil and gas services, chemicals and refining, as well as spec gases to research and development activity.

Metal fabrication remained weaker, with modest improvement in the Central region. Heavy machinery is still weak, but appears to be stabilizing.

North American operating profit was $393 million, 7% above the prior year quarter due to higher volumes, including project start-ups, higher pricing and acquisitions. The operating margin was a strong 25.1%.

Pricing trends remain positive, and merchant contracts are typically of a 3- to 5-year duration, and the timing of price increases can be impacted by the timing of contract renewals.

During mid-December, we announced a North American merchant and packaged gas price action effective January 1, 2014, across several products and fees. We recently started up an expansion to air separation liquefaction capabilities in Fort Saskatchewan and Prentiss, Alberta. The plant upgrade and new equipment are part of Praxair's ongoing commitment to Western Canada's growing oil and gas market.

During 2014, in North America, we are on track to start up several additional plants, including supply and manufacturing in the United States and Mexico as well as metals in Canada.

Proposal activity for new industrial gas on-site plants in North America remained strong, particularly to the cost-advantaged chemical industry using natural gas as a feedstock. The list of potential chemical projects in the United States is increasing. And therefore, related opportunities for sale of gas is strong across all 3 distribution modes of on-site, merchant and packaged gas.

The pipeline of activity for U.S. packaged gas distributor acquisitions remained healthy.

Now please turn to Page 7 for our results in Europe. Sales in Europe were 11% above the prior year quarter. Excluding the positive effect of currency translation, sales grew 7%.

Acquisitions contributed 5%, primarily Dominion Technology Gases, an industrial gas company that serves the offshore oil and gas industry.

Organic sales were 2% above the prior year quarter due to price attainment and volume growth, driven by new project contribution in Russia as well as modest base business growth.

Southern Europe appears to be stabilizing, and this is the first quarter of positive base business growth year-over-year in our European segment in over 2 years.

Operating profit of $75 million was 25% above the prior year, which demonstrated strong operating leverage from modestly improving volumes, driven by prior cost management actions and price.

Assuming stable volumes across Europe in 2014, we expect to continue to see high-teens operating margins that reflect strong operating leverage on modest growth, as well as additional project contribution in Russia.

The backlog in Europe includes projects primarily in Northern Europe and Russia that will start up in 2014, 2015 and 2016.

We are participating in proposal activity in Northern Europe and Russia in the chemical, manufacturing and steel end markets.

Page 8 shows our results in South America. South American segment sales were $481 million, 1% below the prior year quarter. Underlying sales, excluding negative currency translation, grew 9% year-over-year due to underlying growth in most end markets. Sequentially, lower volumes in on-site, merchant and packaged gases reduced sales by 3%.

During the fourth quarter, customers in Brazil extended holiday shutdown periods. This occurred in most end markets, with the largest impacts in manufacturing and metals customers, which represents about half of Brazil sales.

About 25% of Praxair's sales in South America come from 8 countries outside of Brazil. Underlying sales in these countries grew 17% versus the prior year quarter and 5% sequentially, with strong price attainment and growth in chemicals and food and beverage, health care and metals end markets.

Operating profit in South America was $115 million versus $92 million in the prior year quarter, due primarily to improved volumes, higher pricing and a litigation settlement.

We had project start-up during the fourth quarter in Brazil, Uruguay and Peru.

In Peru, we started up a new 270-ton-per-day air separation plant. Under a long-term contract, Praxair will increase its supply of oxygen, nitrogen and argon to Peru's longest -- largest long-steel maker to meet expanding production capacity for products used in Peru's construction and mining sectors. This is Praxair's third plant serving this customer's facility.

During the fourth quarter, our backlog increased with new long-term supply contracts for customers in Brazil and Peru.

In Brazil, Praxair signed a long-term contract to supply industrial gases to a new steel mill being built near the Port of Pecém in a recently created international free-trade zone in the Northeast region of Brazil. The mill will be operated by CSP, a joint venture between Brazil's Vale and South Korea's Dongkuk Steel and Posco Steel. Praxair will build, own and operate a 2,400-ton-per-day cryogenic plant that will produce gaseous and liquid oxygen, nitrogen and argon. The plant will enable CSP to produce an expected 3 million tons of steel slabs annually, which will largely be exported for further processing by CSP's Korean partners. The plant is expected to start up in 2016.

The new plant will also serve merchant and packaged gas customers in a variety of sectors across the Northern and Northeast regions of Brazil, including food and beverage, metal fabrication, health care and automotive.

During the quarter, we also signed a long-term contract to build Peru's first overspent [ph] hydrogen plant for a petrochemical refiner which serves the local market. The new 12 million standard cubic foot per day steam methane reformer will be constructed near Lima and is expected to start up in 2016.

Currency translation of the Brazilian real is expected to be a full year headwind of more than 10%. 2014 consensus industrial production for Brazil is forecasted to be about 2%. Our 2014 outlook for Brazil volume growth is positive, although it is likely to be uneven, given the macroeconomic challenges such as infrastructure bottlenecks and rising inflation. However, we expect to continue to augment growth with applications technologies that bring productivity and environmental benefits to our customers, as well as growth through higher price.

Please turn to Slide 9 for our results in Asia. Sales of $394 million grew 5% versus the prior year quarter. Volume growth of 8% came primarily from higher on-site and merchant sales in China, India and Korea for metals, energy and electronics customers. More than half the growth was driven by new projects and the remainder from base business growth.

Asia's operating profit of $80 million increased 16% from the prior year quarter. Operating profit grew from higher volumes, productivity gains and also included a gain related to land sale in Korea of about $10 million.

Lower argon pricing in China and lower electronic processed gas pricing in Asia reduced sales by 1% from the prior year quarter. The Asian business has taken price increase actions in electronic gases and helium, as well as merchant products in Korea and India. However, liquid argon price in China continues to be pressured by supply growing faster than demand as large projects have come onstream. However, over time, this trend should reverse as demand growth with higher intensity of gas utilization and supply assets are rationalized.

During the quarter in China, we signed a long-term agreement expanding supply to Shaoguan Steel, a subsidiary of Baosteel Group. Praxair China has acquired an existing air separation plant previously owned and operated by Shaoguan Steel in South China, allowing Shaoguan to focus on its core steel production business. Praxair has been supplying gas to Shaoguan Steel for almost 15 years. Praxair will upgrade the 1,100-ton-per-day plant to meet its operational and reliability standards.

Praxair previously built and currently operates 3 air separation plants at the steel mill and will integrate the plant into our production system. The plant will increase Praxair's total production capacity to 3,200 tons of oxygen per day and will contribute to growth in 2014.

In addition, during the fourth quarter, we signed a long-term contract with Taewoong Steel to supply high-purity oxygen to the company's steel mill facility in Korea. Praxair will construct a new 180-ton-per-day air separation plant and pipeline in an industrial zone that will serve Taewoong as well as other new and existing pipeline and merchant liquid customers. The plant is expected to start up in 2016.

Proposal activity in Asia continues to be driven by longer-term secular needs and includes energy, wastewater treatment, metals, electronics and petrochemical end markets.

2014 project start-ups for Asia include plants to serve manufacturing in China and Korea, steel in India, electronics in Korea and chemicals in China. Our results for Surface Technologies are shown on Page 10.

Surface Technologies sales for the quarter were $164 million, up 1% compared to the prior year. The underlying sales growth came primarily from higher price, as energy sector coatings, including rotors, were steady and military aviation coatings decreased.

Operating profit was $27 million for the quarter.

And now I will turn the call back to Matt, who will discuss our outlook and earnings guidance for 2014.

Matthew J. White

Please turn to Page 11. For 2014, we expect the global economy to grow at a modest pace, in line with recent trends. In Southern Europe, volumes are stabilizing. And with our industry-leading position in North America, we remain well positioned to continue to take advantage of the attractive fundamentals for the energy, manufacturing and material industries.

In Brazil, growth should be positive, although uneven, given ongoing macroeconomic challenges. We are issuing full year EPS guidance of $6.25 to $6.55 for 2014, which represents 5% to 10% year-over-year growth, inclusive of expected negative currency translation effects.

Excluding currency, the guidance for 2014 is for sales growth of 6% to 10% and earnings per share growth of 9% to 14%, in line with our medium-term growth outlook.

Our guidance for the full year of 2014 is for sales to be in the range of $12.3 billion to $12.8 billion. Our range of sales growth assumes organic growth of 2% to 6%, including price. Excluding price, the range of volume growth is expected to be flat to 4%, depending on the strength of industrial activity in the regions in which we operate.

New projects will contribute about 3% top line growth for the year. At current exchange rates, our projected year-over-year sales face an estimated 3% headwind, primarily due to the Brazilian real, Mexican peso and Canadian dollar. We expect acquisitions to contribute about 1% top line growth, which includes existing acquisitions as well as those expected to close this year.

We anticipate a U.S. pension tailwind of approximately $0.05 per share, but this benefit will be mostly offset by higher interest expense.

Our earnings guidance for the first quarter is for EPS of $1.48 to $1.53, up 7% to 11%; and, excluding currency, up 11% to 15%.

Typically, our first quarter is the weakest of the calendar year due to seasonal slowdowns with the holidays in Brazil and China and refinery customer turnarounds. In addition, the recent adverse weather in North America has impacted volumes in the on-site, merchant and packaged businesses.

We expect capital spending to be in the range of $1.8 billion to $2 billion. We are being selective and disciplined about the projects we pursue, only accepting those where we can bring a competitive advantage or get synergies with our existing infrastructure. This allows us to earn a high return on capital, which in turn produces higher cash flow that we will continue to return to shareholders in the form of dividends and share repurchases.

With that, I'd like to now turn the call over to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Mike Sison with KeyBanc.

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

In terms of your outlook, Matt, if I did the math for the new projects, does that translate to like $0.20, $0.25 of earnings growth this year?

Matthew J. White

Yes. Yes, it would be in that range, probably at the lower end of that range, but yes.

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

Is there any reason why it's a little bit lighter?

Matthew J. White

No. 20%, 25% from about a 3% growth.

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

Okay. And then just quickly looking at PDI, I was encouraged to see that business pick up a little bit. Are you seeing the momentum in that business in gases and rent continue to stay at those levels as we head into the first quarter?

Matthew J. White

Yes. We did see a good pickup, especially in the U.S. The U.S. packaged gas business, we were high single digit on gas, but still low negative on the hard goods. We have seen some sequential pickup there. Canada is still a bit of a bigger headwind. We're still seeing double-digit negative on the hard goods there, due more to their exposure to sort of heavy industry and mining. But for the U.S., we continue to see that pick up. And I think we're seeing a lot of stuff in research; spec gas, stronger spec gas activity; overall service improvement, especially in the Bakken area. And heavy industry is still flat. It's not declining as much. But overall, we're pretty happy with the trend this quarter.

Operator

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

Duffy Fischer - Barclays Capital, Research Division

I'm wondering if you could just look at the whole year of '13. You guys usually get really good leverage on sales growth, but sales growth and EPS growth were about the same. Can you kind of walk through what some of the takes were, where you didn't get that kind of the greater leverage on EPS versus sales growth?

Matthew J. White

Yes. Part of that, clearly, we had higher interest expense, so that was a bit of a headwind there for us. Also, when you look at some of the mix, especially in North America, the projects that did come onstream, we had some higher natural gas pass-through in North America. We also had more of a mix toward our hydrogen growth. And as you know, hydrogen for us, on a return basis, is equivalent to what we expect on the -- our atmospheric investments. But on an operating margin basis, it tends to be lower because of the natural gas pass-through. So we don't see any concerns in the trends overall, other than primarily just this mix issue.

Duffy Fischer - Barclays Capital, Research Division

Okay. And then just lastly, can you talk about -- are there meaningful differences in your incremental margins in the merchant business by geographies? So if you look Latin America, North America, Europe and Asia, are there meaningful differences there?

Matthew J. White

Nothing that's that significant, no. I mean, you'll tend to have, across the world, various customers that might be slightly higher or slightly lower margin depending upon the end application, but for the most part, no major difference.

Operator

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

George D'Angelo - Jefferies LLC, Research Division

This is George D'Angelo sitting in for Laurence. Can you guys speak to the magnitude of weather headwinds in Q1 that you included in the outlook?

Matthew J. White

Well, the weather side, right now, it could be $0.01 to $0.02. The primary driver, our on-site customers actually had to shut down in several parts in the United States due to the weather conditions, and those you tend not to get back. In addition, we've seen some challenges in the packaged gas front with our customer base. Those we may get back. It just depends on whether we get it back this quarter or later in the year.

George D'Angelo - Jefferies LLC, Research Division

Okay. And can you speak a little bit about merchant utilization rates?

Matthew J. White

Yes. Sure. U.S. -- North America, I should say, we're about 80%. We've kind of held in that area for most of the year. Looking to South America, we're in the mid 80s. Europe, Southern Europe is high 60s, touching in the 70. Northern Europe is more mid 70s, and in Asia, we're mid 80s. So look across the world, we've definitely got room to grow without capital additions, and any growth there should be highly accretive.

Operator

And your next question comes from the line of Jeff Zekauskas with JPMorgan.

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

Can you talk about the $24 million in other income in the quarter and how it's distributed across your segments?

Matthew J. White

Sure. Normally, in other income, we tend to see maybe $5 million to $10 million just depending on the current -- what's going on in that quarter. But with this quarter, we had about $10 million related to the land sale in Asia, and then another part was the legal settlement in South America. Those were the 2 bigger drivers.

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

Okay. And in your earnings guidance, what's the magnitude of share repurchase that you assume?

Matthew J. White

Right now, we're in the range of 1% to 2%. So that's kind of what we've got baked in, is that range.

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

So $400 million to $800 million, or something like that?

Matthew J. White

In that neighborhood, yes.

Operator

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

Vincent Andrews - Morgan Stanley, Research Division

Can you talk a little bit about the loading rates of new projects, if you're seeing any improvement sequentially or how that's playing out?

Matthew J. White

Yes. I think, well, for '14, we're going to have several projects come on, kind of spread around the world. We'll have a couple in Russia. We've got a few in Asia, and then we've got a few in North America. So it's pretty well spread, and it's spread throughout the year. So overall, I think it's coming on fairly well.

Vincent Andrews - Morgan Stanley, Research Division

I guess my question was more do you -- in the past, there has been an issue where the new facilities haven't ramped as fast as they did historically, and I'm just wondering if you're seeing any positive inflection in that trend?

Matthew J. White

For -- you mean for the merchant loadings and the credits?

Vincent Andrews - Morgan Stanley, Research Division

Yes. Yes.

Matthew J. White

Yes, I think that's more of a function in some of the more emerging markets, Asia especially. So we continue to see some ramp in those merchant credits. We're operating, like I said, in mid 80s on the utilization in Asia, so that gives you kind of an indication of the room we have to grow there. And that mid 80s obviously includes the new assets we've brought on that have merchant capacity.

Vincent Andrews - Morgan Stanley, Research Division

Okay. And then the turnaround impact you're anticipating for the year, is it similar to prior years, or is it more or less?

Matthew J. White

Probably a little bit more in the first half. We've got a large refinery turnaround that's baked into our Q1 assumption. And then we've got 2 other refinery turnarounds spread between Q2 and Q3, but I'd say nothing materially different than what we've seen in prior years.

Operator

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

David L. Begleiter - Deutsche Bank AG, Research Division

Matt, looking at North America margins in '14, given the impacts of currencies in Mexico and Brazil and natural gas prices, how do you think margin will look in North America over the course of 2014?

Matthew J. White

Well, I think from a currency perspective, that would just be more of a mix issue, obviously, if you have Mexico or Canada, depending on their weighting of margin. So maybe that would be a little bit dilutive. But really, as we continue to run full year impact of the hydrogen, that would create a little bit of a headwind on operating margins. But the remainder of the underlying business should continue to operate in the mid 20s for operating margin. So short of just this mix component and the mix of currency, I think we'll continue to operate at this level.

David L. Begleiter - Deutsche Bank AG, Research Division

And just on merchant, is your pricing fully offsetting your power and fuel costs? One of your competitors noted some margin pressure from a lag in those dynamics.

Matthew J. White

Yes. Obviously, I can't comment on the competitor, but from our perspective, we have a fairly robust recovery structure. And we don't -- and we haven't seen any issues in recovery of power or other costs.

Operator

And your next question comes from the line of Robert Koort with Goldman Sachs.

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

Matt, is there any reason to expect an appreciable difference in incremental margins across the world as you start ramping up, assuming volumes come back? In other words, you mentioned, in Northern Europe, you're in sort of the mid 70s, and mid 80s in Asia. Would you expect any difference for incremental margins in those regions?

Matthew J. White

Yes. I think, as you add volume, clearly, that would be quite accretive because given the available capacity, we already have the drivers on the road. We already have the infrastructure in place. So as volumes are added, we would anticipate improving operating margins. If you look back to '08, you saw that trend in North America as we continue to improve the volume loadings from sort of a down-point in the crisis. When you look at Europe, South America, I think there's opportunities there. As we continue to load and they sort of continue to pull out of recessionary conditions, we'd anticipate some margin opportunity.

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

And a follow-up, if I might. On the NuCO2 business that you guys acquired, have you done anything different in terms of their go-to-market or sourcing any of the logistics they do, the SAPs, or is that pretty much running as it was on its own prior to your acquisition?

Matthew J. White

Clearly, we had some synergies. And the synergies are -- range everything from standard cost synergies of -- that we always see in our acquisitions, plus the CO2 supply. So we were able to transition and get more logistical benefits and better CO2 supply with our network. And we're looking to further improve integration with our packaged business. So it's something that we are improving on, and it's performing better than our model in virtually all aspects.

Operator

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

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Yes, 2 questions, one on the backlog, on that $2.2 billion. How much of that is North America? And within North America, is it still heavily weighted towards hydrogen? Or with the 3 hydrogen start-ups this year, is it a little more evenly balanced?

Matthew J. White

Well, I think when you look at the backlog geographically, we're about 1/3 North America, 1/3 Asia, and the remaining 1/3 is roughly split between South America and Europe, with a large portion of Europe being Russia. When you sort of look at the end markets, it's about 1/3 energy, 1/3 manufacturing, and the remainder is between metals, chemicals and electronics. So obviously, we had 2 large hydrogen projects coming out of the backlog. North America is kind of split across really the variety of end markets that I had mentioned. So I'd say it's still fairly well distributed.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Okay. And then as you talk about a $0.20 contribution this year from new projects to earnings per share, what could that be in 2015?

Matthew J. White

Well, generally, we anticipate top line 3% to 4%. And I'd say the EPS associated with that could be anywhere from 20% to 30%. So that's kind of the range.

Operator

Your next question comes from the line of David Manthey with Robert W. Baird.

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

You mentioned a $0.01 to $0.02 potential impact from weather in the first quarter of '14. And there were clearly some holidays, and there was some harsh weather late in the fourth quarter of '13. Not to get too microscopic here, but was there any impact from weather, do you think, in the fourth quarter as well?

Matthew J. White

Not too much on weather, definitely holidays. Our South American, we do tend to see, in that seasonal slowdown during the holidays, they sort of do opportunistic shutdowns. So we did see that, but it's come out of that here in January. But other than normal seasonal holiday patterns, we didn't see any material weather in the fourth quarter.

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

Okay. And then can you discuss the competitive landscape in particularly the hard goods side of PDI? Are you seeing any pressure from manufacturers selling direct or unusually competitive pricing from other large distributors?

Matthew J. White

No. I wouldn't say we're seeing anything out of the normal of what we normally see. I think what you've got going on to some extent in hard goods, some of the very hard good-intensive industries like heavy industry and mining are simply not as strong as they used to be. So I think that's creating a bit of a dampening effect across all hard goods. But we're not seeing anything different than normal activity.

Operator

And your next question comes from the line of Kevin McCarthy with Bank of America.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Matt, I was wondering if you could comment on the changes in proposal activity that you're seeing kind of upstream of your confirmed projects? The commentaries seem to indicate you're seeing strength across all 3 modes in North America, and you called out Northern Europe, Russia and certain end-use markets in Asia as well. So I'm just kind of trying to think ahead and wondering whether we might have seen a bottom in the backlog -- or a trough in the backlog with some opportunity for growth looking ahead.

Matthew J. White

Sure, Kevin. I think when you look across the on-site opportunities, the strongest 2 regions are still North America and Asia, as well as Russia, specifically. I think in North America, there's a lot of activity around the Gulf Coast, but decisions are understandably taking longer. There's higher construction costs there, and there's some uncertainty just around what the oil to gas spreads may be or how the capacity will need to come onstream. So I think our customers are being very thoughtful, and they're doing a lot of analysis to make sure they pull -- before they pull any trigger on projects. Asia, also a lot of activity, but with the change in government and some of the state-owned enterprise leadership changing, coupled with some of the environmental regulations, you're seeing just a little more time before they're going to make decisions. For instance, some of these projects, they may need to meet certain environmental regulations before they can get funding to do incremental investments. So that will all weigh down on some of the timing, but we're still seeing fairly strong activity in those 2 regions. And South America, we had been seeing some smaller opportunities still budding around the country. We just signed CSP, which I think is a great example of leveraging some of the cheaper iron ore in Brazil, taking advantage of the free trade zone and some of the opportunities that brings to make slabs for the Korean market.

Kelcey E. Hoyt

Okay. And Kevin, it's Kelcey. As we think about the backlog, we do expect it to hover around that $2 billion. So even though we bumped up to $2.2 billion this quarter, it's just a function of when we actually started some plants up and when we actually signed these customer contracts.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

That's helpful. Second question, Matt, if I may, on foreign exchange. Just simply, which currencies, if any, are you hedging these days?

Matthew J. White

Well, I think at a balance sheet perspective, we've always continued to hedge. What we do not do is the -- what's called net income hedging. That was discontinued probably about a year ago or so. Obviously, we continue to evaluate the currencies, and we look for ways to mitigate our exposure. But we don't have those net income hedges anymore.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Okay. And then last one, if I may, on hydrogen. Do your contracts typically contain provisions for efficiencies that might create a small benefit with higher natural gas prices that could act as an offset to some of the weather-related pressure that you referenced, or is that not the case?

Matthew J. White

Yes. Generally, obviously, every hydrogen contract will be different. But normally, you will have some type of contractual gas-to-hydrogen ratio. And if you are able to do better than that in how you operate the plant, that could be something that you're able to retain. And the higher the natural gas pricing, the bigger that benefit.

Operator

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

P. J. Juvekar - Citigroup Inc, Research Division

Matt, you had a nice operating income pickup in Europe. Margins were up 200 basis points. How much of that came from new start-ups and acquisitions versus cost-cutting that you've previously started?

Matthew J. White

Well, I think in Europe, looking back, you go back several years prior to the crisis, we had some pretty strong operating margins. And there's a few things that have kind of brought it down. First and foremost, just the lack of volume with the recessionary conditions. As that volume was lost, it fell quite heavy to the operating margin line. In addition, with Russia, we've been ramping up there, as you know, adding a lot of cost and a lot of overhead to be able to execute and build our projects there. So what we're starting to see now is some stabilization in the volumes, even a little bit of pickup in some parts. With Russia, we're starting to bring some projects online, and this year, we'll have a couple we'll bring online. So with that sort of improving, that's what's causing some of the margin improvement. And that's why we think we'll stay in the high teens in operating margin, and that's our outlook into 2014.

P. J. Juvekar - Citigroup Inc, Research Division

And you mentioned chemical projects are kicking into higher gear in North America. Can you just talk about how many projects are in the bidding process in the U.S? And what's the potential there? And make a similar comment about coal to chemicals in China?

Matthew J. White

Well, I think in the U.S. side, it's just there's more bidding activity than we have resources to go chase. I think that's probably the easiest way to look at it. So we're focusing on a few key ones where we have the best ability to add value and get a return that fits our criteria. So we're working, as you can imagine, down the whole hydrocarbon chain on various projects. And I think, over time, we'll start to see some of these converted into contracts in the next year. Now looking at China, clearly, they're still trying to take advantage of their coal feedstock, and there's still a lot of activity in -- and I'll call it the Inner Mongolia part, where you've got the push from the coal gasification from the coal companies. That, we're not really participating in too much, but we continue to participate more along the coasts, where you see coal to chemicals for some of the major multinational chemical companies. So that activity still is good, and we've started up a few already. We've got a couple more we're starting up that are in our backlog, and we're still seeing some activity around the chemical parts.

P. J. Juvekar - Citigroup Inc, Research Division

All right, totally, just quickly, I would just follow up on the project backlog question. I think project backlog in 4Q went from $2 billion to $2.2 billion, so it actually went up when it was expected to go down. So that's the good news. And I think you mentioned that you added 3 projects and took out 6 projects out of the backlog, and the backlog went up. So is the size of the projects going up?

Matthew J. White

Yes. Yes, you're exactly right. We took out 6 and added 3, but the net number went up. So on a dollar basis, the 3 were slightly larger than the 6 that came out.

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. One, in Brazil, generally speaking, a weak currency has had a positive impact on their competitiveness, and that should lead to more demand, let's say, for exports. Is that going to happen this time, or are the internal dynamics in Brazil still kind of sluggish?

Matthew J. White

Yes, Mark, it's a good question. It's hard to give a definitive answer. But I think, Brazil, most of their exports are natural resources and agricultural products, and that should make this beneficial. With our recent project here with CSP, that will make it more cost effective for Vale's ore to go into the steel. In addition, Braskem recently stated about a week or so ago that this weaker real will make them more competitive on chemicals, and they anticipate stronger exports for them to grow faster than the sort of estimated 2% IP. So I think certain industries clearly should benefit from this. The big question for us in Brazil, and this is why we sort of look at it as uneven, is there's a couple of macroeconomic headwinds, they've raised interest rates, but there's also some positive underlying aspects, infrastructure projects around elections and, just to your point, some export opportunities.

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

Okay. And secondly, switching geographies here, you have -- Russia has come up a couple of times. You talked about it in your prepared remarks, a lot of volatility, a lot of uncertainty, a lot of things going on in that part of the world. Has that lessened your appetite to expand in Russia? Or did you kind of see that going in, and you're just going to live with it?

Matthew J. White

Yes. Clearly, when we went in, we anticipated volatility. We have to bake that into our contract terms and conditions as well as our expected returns. So looking at Russia, I'd say we were more than pleasantly surprised with the opportunities, greater than what we thought. I think execution on the ground was a little more difficult than we thought. But we're learning with each project and we're getting better. And I think from all respects, the way we structured contracts, we've more than anticipated this type of volatility.

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

And if I can, going back to Brazil, price offset some of the currency weakness. With the 10% currency hit you see this year, can you get more price this year?

Matthew J. White

Yes. Generally, our -- I mean, we're clearly going to go after more price. Our price is more of a function of local inflation and also contractual opportunities. But yes, we definitely will continue, we believe, to get strong pricing in South America. I think we have time for one more question.

Operator

And your final question comes from the line of John Roberts with UBS.

John Roberts - UBS Investment Bank, Research Division

Back to the backlog question again. Slide 14 has the 14 largest projects in the backlog, but I think you said there's 32 projects total in the backlog. So what percent would these largest 14 projects be at the dollar value? Is there an 80-20 rule here, that projects that you actually list account for, let's say, 80% of the dollar value?

Matthew J. White

Yes, clearly, these 14 would be more than half, but I don't have the exact number. But it would be more than half of the dollar value.

Kelcey E. Hoyt

Yes. And John, I mean -- it's Kelcey. I mean, the ones that we show here on and have listed on the slide, they're the ones we've done press releases on. So from time to time, you have a situation where a customer doesn't want to be named in a press release. So it's not really just a function of the size, it's also just the press release and what's publicly out there.

John E. Roberts - The Buckingham Research Group Incorporated

That's right. I noticed some of them are smaller projects. And then the electronics industry performance data on Slide 15 seemed a little weaker than what we've seen at your products in DuPont, Dow and some of the other companies with electronics exposure. Is there any reason why you might be lagging a little bit there?

Matthew J. White

Well, I think, for us, electronics is probably about 8% of our sales. About half of that is really on-site high-purity nitrogen. So that half really doesn't move that much with the underlying electronic conditions. So only the other half of the portion is something that I'd say is a little more volatile, so to speak. And that really serves about 3/4 in the semiconductor and the remainder sort of between the solar and the display. So from our view, we're not that exposed to electronics, and of the portion that we are, we just didn't drop as hard, I think. And we are seeing some recovery in semiconductors, especially memory. But for the most part, we're kind of flat.

Kelcey E. Hoyt

Thank you. Okay. And thanks again for participating in our fourth quarter earnings call. Our first quarter earnings call will be held on April 23. And if you have any further questions, please feel free to reach out to me directly. Thank you.

Matthew J. White

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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