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Praxair, Inc. (NYSE:PX)

Q1 2014 Earnings Conference Call

April 23, 2014 11:00 AM ET

Executives

Kelcey Hoyt – Director, IR

Matthew White – SVP and CFO

Analysts

Mark Gulley – BGC Financial

Vincent Andrews – Morgan Stanley

Don Carson – Susquehanna Financial

Robert Koort – Goldman Sachs

P. J. Juvekar – Citigroup

Jeff Zekauskas – JP Morgan

James Sheehan – SunTrust

John Roberts – UBS

Kevin McCarthy – Bank of America Merrill Lynch

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2014 Praxair Earnings Conference Call. My name is Philip, and I will be your operator for today. At this time all participants are in a listen-only mode. Later we will be conducting a question-and-answer session. (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 of Investor Relations. Please proceed.

Kelcey Hoyt

Thanks, Philip. Good morning, and thank you for attending our first 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. In addition, please note that sequential and year-over-year comparison including an adjustment in 2013, and reconciliation to the US GAAP reported numbers are in the appendices to this presentation and the press release.

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

Matthew White

Thank you, Kelcey, and good morning, everyone. Please turn to slide number 3 for our consolidated results.

Praxair had a solid first quarter and delivered strong operating leverage down the income statement with sales growth of 5%, operating profit growth of 8%, and EPS growth of 9%. In addition, operating cash flow grew 14% year-over-year.

Excluding negative foreign currency translation impacts, primarily the Brazilian Real, Mexican Peso, and Canadian Dollar, sales grew 9% and operating profit grew 12%. We continue to achieve double digit underlying profit growth despite moderate economic growth.

Sales for the quarter were $3 billion, an organic growth of 6% coming primarily from higher sales to energy, chemicals, metals and manufacturing customers globally, including new plant start-ups in North America and Asia. Acquisitions contributed 2% growth, primarily the NuCO2 acquisition in the US, which closed March 1st of last year. Excluding currency sequential sales grew 2% from higher pricing in most operating segments and higher costs pass-through, primarily natural gas in North America.

Operating profit was $675 million, 8% above the prior-year quarter. Excluding currency, operating profit growth of 12% was driven by higher volumes, higher price, productivity gains and acquisitions. The EBITDA and operating margins were strong at 32% and 22.3% respectively. Net income of $448 million, grew 8% from the prior year, in line with operating profit growth.

During the first quarter, we issued a 6-year €600 million denominated bonds with a 1.5% coupon rate to refinance existing debt. About 85% of our debt is now termed out with long-term securities. Our debt-to-capital ratio for the quarter was 55.9%, and debt-to-EBITDA was 2.3 times. We are comfortable with current debt levels and expect the leverage ratios to improve overtime with higher earnings and cash flow.

During the quarter we continue to execute on our strategy of improving production and distribution density in core industrial gases with the acquisition of several US packaged gas distributors, the divestment of underperforming assets in France, and the acquisition of Messer’s assets in Italy. While the European actions will have minimal impact on sales, we grow overtime to improve operational efficiencies and operating margins in the European business.

Earnings per share of $1.51, up 9% from the prior year grew faster than net income 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 $237 million of stock, net of issuances. A total of $1.6 billion remained available under the authorized share repurchase programs. Our after-tax return-on-capital this quarter is 12.6%, this was suppressed by the prior year acquisition of NuCO2, in addition to the larger than normal backlog that did not begin to contribute to earnings until recently.

Capital projects spend, as well as the acquisitions, are typically dilutive to our total return on capital for the first few years. However, we expect Praxair’s return on capital to trend upward towards the end of 2014 as earnings contribution grows and the capital base depreciates. For the quarter, our return-on-equity improved to 28.7%. Our project backlog, which we define as projects with CapEx greater than $5 million and associated with a fully executed customer supply contract, remained solid at $2 billion and is comprised of 30 projects.

During the quarter we started plants in Asia and North America, and signed a contract for new long-term on-site plant located in South America. Our backlog is geographically diverse with projects in North America representing about 35% and projects in Asia representing about 30% of the capital 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.

And now Kelcey will take you through the segment results.

Kelcey Hoyt

Thanks, Matt. Please turn to slide 4 for our results in North America. Sales in North America were $1.6 billion, 8% above the prior year quarter and up 10% excluding negative currency translation. Higher on-site volumes from hydrogen project start-ups supplying refinery customers under long-term contracts and higher pricing drove underlying sales growth of 5%. Acquisitions contributed 3% growth, primarily from NuCO2, the micro-bulk carbon dioxide acquisitions in last year.

Higher costs pass-through, primarily higher natural gas prices pass-through hydrating [ph] customers increased sales by 2%. Sequentially organic sales were steady as higher pricing offset lower volumes, primarily due to refinery customer turnaround and lower demand from merchant liquid nitrogen for Oil Well Services. We are seeing modest positive traction in base merchant volumes in the United States and Mexico. However, the Canadian merchant in packaged gas volumes were weaker. We are seeing softer demand due to more challenging macroeconomic conditions as manufacturing customers in Canada are less competitive than the United States and Mexico.

U.S. packaged gas organic sales grew by 3% year-over-year and 1% sequentially. U.S. packaged gas acquisitions contributed 1% growth year-over-year and sequentially. First quarter growth continued to be driven by gas and rent which were up mid-single digits year-over-year, while hard goods declined at a lesser rate. The organic growth came from metal fabrication, health services, universities, energy and chemicals customers. Government, primarily defense related sales and construction customer sales remained weaker.

During the quarter we enhanced production and distribution density with acquisitions of three U.S. packaged gas distributors located in Texas, Oklahoma, and Western Michigan. For combined annualized total, a $50 million in sales. We also completed the acquisition of Praxair Distribution Mid-Atlantic, the largest industrial gas distributor in the US Mid-Atlantic region of which we had previously held a majority share.

North America operating profit was $370 million, 6% above the prior year quarter, and up 9% excluding negative currency translation impact. The increase in operating profit was driven by higher volumes, higher pricing, acquisitions, and productivity savings, partially offset by increased costs. The severe weather that caught over the headwinds on North American business, some on-site customers idled equipment during the extreme temperatures to avoid potential damage, and our merchant and package volumes suffered when our trucks could not travel on the roads, and customers couldn’t get to work to run plants. Incremental costs were incurred with higher rates in the northeast, overtime and maintenance.

Segment operating margin was 23.9%. The higher cost pass-through, primarily natural gas, increased sales with minimal impact on operating profit and reduced the operating margin percentage by 50 basis points year-over-year and sequentially. North America has several plants scheduled for start-up during 2014 for manufacturing customers in the United States and Mexico, and metals customers in Canada. Proposal activity for new on-site plants in North America remained strong in the chemicals and energy markets, as well as smaller plants for manufacturing.

The pipeline of activity for U.S. packaged gas distributor acquisitions remained healthy but we remain disciplined on valuation and the timing of the payment on the circumstances of each individual distributor.

Now please turn to page 5 for our results in Europe. Sales in Europe were 7% above the prior year quarter. Cost pass-through reduced sales in the quarter by 2% due to reduced energy costs, and was offset by positive currency translation. Acquisitions contributed 5%, primarily Dominion Technology Gases, an industrial gas company that serves the offshore oil and gas industry which we acquired in May of last year. Organic sales were 2% above the prior year quarter due to price attainment as well as modest volume growth in Germany, Scandinavia, and Russia.

Operating profit of $79 million was up 24% for the first quarter, excluding foreign currency impact. Acquisitions contributed 6% operating profit growth. Higher pricing z volume increased operating profit by 12% demonstrating strong operating leverage even with only modest volume growth. Operating profit also benefited from the recovery of energy cost in Italy. During the first quarter we repositioned some businesses in Europe which should further improve our cost positions. We sold our underperforming assets in France to Messer and purchased Messer’s liquid carbon dioxide, oxygen, nitrogen, and argon, and packaged gas business in Italy, so we have a more meaningful presence. This will drive further production and distribution density, as well as productivity gains.

Given the recent events in Russia, we’d like to update our position there. Our business in Russia is currently in expansion mode. In 2013, full year sales were $25 million. We are building production and distribution density, primarily in two industrial regions, the Gatlinburg and Volgograd through our integrated business model of on-site, merchant and packaged gases. We have five small to mid-size plants operating and three plants in the backlog under construction. Our local business has not experienced any significant impact or change in day-to-day operations, and we still believe Russia has good secular growth drivers for the medium to long-term. It’s impossible to eliminate all risks but some of the proactive approaches we took when we entered Russia include on-site supply to multinational customers, and obtaining parent company guarantees, indexation of on-site contracts to US Dollar or Euro to reduce devaluation risk, and European Law for contract to speed resolution, just to name a few.

We remain positive yet cautious on the region and will continue to monitor the situation closely as we do in every country in which we operate.

Page 6 shows our results in South America. South American sales were $488 million, 8% below the prior year quarter due to negative currency translation impact of 15%. Underlying sales grew 7% from higher volumes and higher pricing year-over-year. Organic sales grew 5% sequentially. Volumes were higher to on-site, merchant and packaged gas customers and improved contribution with new project start-ups. High end market, year-over-year sales increased to manufacturing, metals, chemicals, and food and beverage customers.

Within the South American segment, about 20% of sales come from 8 countries outside of Brazil. Volumes in these regions were up 9% year-over-year driven by food and beverage, healthcare, and metals. Operating profit in South America decreased 1% in the first quarter. Excluding negative currency effects, operating profit increased 16% from higher volumes and higher pricing. During the first quarter we added a project to our backlog for a new long-term supply contract for an expansion and a new existing glassware and packaging customer in Brazil.

From a macro perspective, inflation in Brazil has been holding at about 6%. Interest rates are currently at about 11%. The Real has strengthened a little more than 5% in the last few weeks, yet still remains a headwind year-over-year from a translation perspective. In addition to the economic environment there are a few key events this year that may also impact industrial output in Brazil, currently forecast at a low single digit growth rate. The World Cup occurring in mid June to mid July will likely slowdown manufacturing for small-to-medium sized customers who may close during the game-related holidays for host city. Furthermore, the election in October will likely create some volatility around government spending, consistent with prior Presidential elections.

The combination of these events and the current economic conditions are why we believe that Brazilian economy will be under [ph] this year. However, our volume strengthened coming out of the early March Carnival holiday as we expected, and we continue to see moderate growth year-over-year across most end-markets including metals, manufacturing, healthcare, and food and beverage driven by continued local consumption and expanded infrastructure investment.

Please turn to slide 7 for our results in Asia. Sales of $392 million grew 9% versus the prior year quarter, excluding negative currency impacts. Strong volume growth of 9% was primarily driven by new project start-ups in China, India and Korea. Merchant volumes grew 4% year-over-year. By end market, the strongest sales came from metals, energy and electronics customers.

Sequentially volumes declined 1% due to the Lunar New Year holiday. Coming out of the Lunar New Year holiday we saw volumes pick up to normal levels, with base volumes growing about mid-single digits. Price contributed to a 2% increase in sales and was primarily due to helium and rare gases. Liquid merchant prices in China were stable.

Asia’s operating profit of $75 million increased 19% from the prior year quarter due to the impact of higher volumes and pricing. During the quarter we started our plants to supply a steel customer in India, and an electronics customer in Korea. In addition, we recently announced an on-site project for a chemical customer that will expand existing supply to a chemical park in China. Looking forward, on-site project training activity in Asia includes energy, metals, electronics, chemical, and small manufacturing end markets.

Our results for Surface Technologies are shown on page 8. Surface Technologies sales for the quarter were $169 million, 3% above the prior year excluding currency, due primarily to stronger demand for aviation coatings and higher pricing. Operating profit of $30 million increased 15% with operating leverage on improved volumes, higher pricing, and productivity gains which more than offset inflation.

And now I’ll turn the call back to Matt to discuss our earnings guidance for 2014.

Matthew White

Please turn to slide 9. Our earnings guidance for the second quarter is for EPS of $1.55 to $1.60. We expect sequential growth to come from seasonal volume improvement in Asia and South America. In North America, we expect on-site customers to return to higher operating levels and we are expecting modest growth in packaged gas in the U.S. and Mexico, driven by manufacturing and energy.

Southern Europe, appears to have stabilized and look forward to continued strong operating leverage in the business. For the remainder of the year we are expecting a continuation of the same base business trend experienced in the first quarter, and are narrowing our earnings guidance range. We now estimate full year EPS of $6.30 to $6.50 for 2014, representing 6% to 10% year-over-year growth.

Despite the moderate top line outlook, we still expect to achieve strong operating leverage and double digit underlying earnings growth from a disciplined investment process, intelligent price and cost management.

With that, I would 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 with First Analysis [ph].

Unidentified Analyst

Hi, good morning.

Matthew White

Good morning, Mike.

Unidentified Analyst

Looking at PDI, there is obviously some weather impact in North America and we also have Easter falling in Q2 instead of Q1 but stripping out those impacts, can you just comment on what you were seeing an underlying demand trends as we look, you know, January, February when we have the weather impact, in the March and now as we’re into April?

Matthew White

Sure. March, definitely the strongest month of the quarter. We did have a little bit of weather impact but we were able to catch some. We’re seeing gas grow in mid-single digit in the U.S. and hard goods are still a shrinking low single digit. And Kelcey had talked about some of the industry as we continue to see some pick up in, we’re seeing some regional pick up in MetFab, still seeing some good performance in education and university, some softness areas, still seem to be government or defense related, and still some weakness in construction and softness in the heavy manufacturing. So from our perspective, its bit of a continuation to what we saw in Q4, still seeing that mid-digit gas growth.

And when you look at the U.S. industrial production, for the quarter it grew little over 4% but when you strip it out, I think about 18% or so is utilities which really don’t impact our business, then you had almost another 10% in some mining. Actual manufacturing only grew about 1.7% for the quarter in the U.S., and I think that’s attributed to some of the first couple of months of sluggishness. So we had a good March, we expect to sequentially continue to improve into Q2 here, we do get some seasonal pick up normally, and at this point we still feel good about the business.

Unidentified Analyst

All right, and then a couple of questions on Asia, first of all, can you talk about the energy opportunity there? You mentioned that it was a strong point this quarter in an area where you are seeing a lot of proposal activity, but if I look at the end market mix in the past, it’s been sort of a rounding error in terms of percent of sales into Asia. So as we look out 10 years or so, does energy become 5% or it makes 10% more than that? What is the opportunity it looks like?

Matthew White

Well, I think in Asia energy and chemicals into some extent overlap a bit depending upon the application and what the customer is doing. As you will know, some of the big projects are around really monetizing the coal assets in the country, and depending on how we classify that as chemicals or energy really depends on what the customers end application is. But at this point we’re still seeing pretty good proposal activity but decision making is still slow. There is, I think with – just – a reluctance to make quick decisions given some of the headwinds on the environmental to permitting, I’m just understanding the economics of the projects that are undertaking. So we still feel good in general in Asia with some of the opportunities but I think, especially China, that they are going to be a little slower. When you look to India, we’re seeing still some good steel, we’re seeing some refining opportunities, and a lot of the things we see in India today are really around customers becoming more efficient and more costs competitive.

Unidentified Analyst

So it sounds like overall when it comes to energy, you’re thinking that it’s going to be more coal driven versus refinery hydrogen driven in Asia?

Matthew White

I would say in China, yes, and India, no. India, there are still opportunities around refinery hydrogen. In China, more coal.

Unidentified Analyst

Got it, okay. And then last question I had is on China, your competitors talked this morning about the dynamics related to the wholesale market there. Is that an area where you’re participating, selling on more of a stock basis or are you guys a little bit more insulated from it because your capacity tends to be more contractually obligated?

Matthew White

We – in our merchant business we do sell both into the distributor market, as well as, if you want to call it a wholesale or direct market. We also have been, I think similar to several industrial gas companies continuing to work more towards a direct model. So we do have both and we are transitioning more direct which as you can imagine gives you better economics with the customer, it gives you better connection to application technology, and further industrial gas intensity for that customer.

Unidentified Analyst

All right, thanks very much.

Operator

And your next question comes from the line of Edward from Oppenheimer [ph]. Please proceed.

Unidentified Analyst

Hi, good morning guys.

Matthew White

Good morning.

Unidentified Analyst

Matt – Kelcey, just following up on the China comments and the wholesale market there. You know, Kelcey had to comment that you’re seeing stable liquid merchant prices in China. So again, going back to the air products comments, recognizing that you might not play in the same markets as there it’s a big country. Are you also seeing some pricing – similar dynamics and in terms of understanding that market, what’s the price gap between the wholesale market and you’re regular contractual market, and how big is that market as a percentage of the total market?

Matthew White

Well, as far as the exact numbers, I don’t have them in front of me now but clearly the direct market is going to be better pricing than the distributor market. So you can climb up on your margins if you’re able to do more of a direct model. I think looking at the overall pricing dynamics though, and consistent with Kelcey’s comments in the prepared remarks, from the atmospheric side, we’re seeing fairly stable pricing. You may recall last quarter, we had negative 1%, we talked a little bit about some argon pricing dislocation, that this quarter is kind of rebounded a bit and then stable. We did show positive pricing in Asia segment this quarter and it was really driven primarily by two things, helium, which we have some contract roll over that we were able to get some price, and then some rare gases which were a little more spot opportunities in the electronic industry. So, the helium should be more of a longer range price improvement. The rare gases are probably more temporary, but when you add it all together we’re seeing either flat to slightly positive pricing opportunities in the general market, and then to your point, as you migrate from a distribution model to a direct model, you should climb up on average selling price just with the direct.

Unidentified Analyst

Okay. And – thank you for that. On the – your comments around Russia, you mentioned you had five plants that are operating there currently, if you do see somewhat of a slowdown over there due to some of the political issues there, are those customers operating near [ph] take or pay volumes or are they well above, just want to gauge how you’ll be protected on the downside.

Matthew White

Yes, so at this point we haven’t seen any material impact on the business activity. And from a take or pay perspective, I don’t believe any of them are below it. We do have a strong take or pay structure but at this point we haven’t needed it. So the challenge would be – from a perspective that Russia does have – is more isolated you actually anticipate more of a domestic ramp up to make up for lost production. On the flipside, if there are recessionary conditions inside Russia then that could have a negative implication consistent with any other geography we operate in. So at this point we haven’t seen anything negative or any negative impact or headwind but clearly, we’re going to keep our eyes on it and make sure we’re close to it.

Unidentified Analyst

Thank you, Matt.

Operator

Our next question comes from the line of Mark Gulley from BGC Financial. Please proceed.

Mark Gulley – BGC Financial

Hey, good morning.

Matthew White

Hi Mark.

Mark Gulley – BGC Financial

My question really is on the portfolio, a lot of moves here in terms of acquisitions and divestitures. Matt, do you see further opportunities for what I will call asset swaps in Europe as – if slow growth continues and people try to get better density like U.S.?

Matthew White

Well, I think you’re right Mark. Although these are smaller actions they do add up, and we are trying to enhance the portfolio, we are trying to get synergies where we can get density and frankly, exit areas where we just don’t believe we can get density. So, in our mind they are out there, they exist but it takes two willing parties. So clearly we found an opportunity with Messer in Europe. We’re going to continue to look for opportunities for these types of arrangements in the future. And as long as there is another willing party, and the deal makes sense for both sides we’ll continue to do that, but there are opportunities.

Mark Gulley – BGC Financial

Secondly, I think you said that a $2 billion backlog is sufficient to drive pretty good tonnage growth but would you like to see a higher backlog? Are you sort of unhappy with the $2 billion backlog or sets – I think from maybe $2.3 billion somewhat recently?

Matthew White

Well, first the backlog will move up or it will move down, as you know, it’s going to kind of bounce around the place, and we don’t have a desire to have the biggest possible backlog, that’s not our goal, we want to have a high quality backlog. So to answer your question, there is a high quality project out there, we’re going to go after it aggressively. And from that perspective we’re fine with $2 billion backlog. In the next quarter depending upon which projects we sign and start-up, it could move up or down in a couple of hundred millions. But we’re going to continue to stick to our return criteria, and we’ll use that in terms of what projects we decide to accept.

Mark Gulley – BGC Financial

And then, finally on oil field activity in North America, you noted that that was a little bit on the soft side, was it weather related? Would you expect a stronger activity given the very high natural gas cost that the U.S. has at least for this year?

Matthew White

Well, when you look to Canada, really it was the Canadian and Mexican comment. So in Canada, up to Northern Alberta, they had a record quarter last year, so they had a pretty high bar. In addition, they did have some weather challenges in Northern Alberta, so I think that played a little bit into it. Mexico is not as much weather related, it is more just Pemex and Pemex’s programs. So these are cyclical pieces of the business, it’s just the nature of the oil activity. So we expect that they will rebound, now Canada goes into what they call breakup here in Q2 and that’s a normal seasonal pattern as the ground pause, but we expect some pickup in Mexico with Pemex’s programs.

Mark Gulley – BGC Financial

Thanks, Matt.

Operator

Our next question is from the line of Vincent Andrews from Morgan Stanley. Please proceed.

Vincent Andrews – Morgan Stanley

Thanks, and good morning. Maybe just to talk a little bit about the U.S. Gulf Coast and I guess, I keep seeing new intention announcements – it seems like every month, when do you think your – I guess the conversations are lively or – my words, but when do you think some of that activity will get formally executed? And within that, I read a lot or hear a lot about CapEx cost inflation for those projects and I’m wondering if you are hearing or seeing the same thing for both, those customers and for yourself, and how that would play into your decision making and in terms of going forward with those projects?

Matthew White

Okay. So, first on the activity, we’re actively engaged in several projects. We have our business development and sales resources working on several different initiatives. So we still feel fairly comfortable in our prior comments of three to five type wins with a couple of hundred million CapEx spend that would occur over the next five years. I think to your point on the announcements which you tend to see are people announcing their decisions, permitting process, but the actual upfront engineering the decision to sign a contract with a sub-contractor takes more time, so we would not announce anything until we have an executed contract. Some of the other announcements I think you see on things like crackers and so forth might be their intention to build or their intention to get a permit. So that’s probably why the timing I would think might be a little different. But to your point, decisions are taking longer than normal because of the costs, the costs are real, and above they are significant are they are growing. And if you would add all of the projects that are slated, there is just not enough skilled labor to execute it. So I think that as a big part of the decision process for our customers, and it needs to be because these are very capital intensive projects. And how we look at that is – as we negotiate with our customer, we want to make sure that we have certain types of protections against this, because clearly if we’re doing the project as a sub-contractor, our customer is going to be much larger, they’re going to pull on the same resources we need. So, part of the way to manage this is how you do your upfront contract with the customer which is something we work very closely in the negotiation process. So it’s a big issue and it’s something that’s weighed on the decision making and it will just take time I think for people to be comfortable to pull the trigger on their project.

Vincent Andrews – Morgan Stanley

Okay. And as a follow-up, you mentioned the Brazilian election, sort of the impact it would have on – and I guess, if you think beyond the election and if we just make the assumption that there is a new administration, any thoughts on what that might mean for your business down there, now that’s kind of a –

Matthew White

Well, we were down at Brazil couple of weeks ago and meet with a lot of folks that are heavily involved in the economic and financial markets, and the impression we intend to get is, if there is a new administration that would probably reflect positively on the economy. I think they are just looking for some change, they are looking for little bit more pro-business. So if that were to happen, we probably view it as positive, the current administration stayed, it would probably be a continuation of kind of what we’ve been seen at least for another year or so, that’s at least the best guess we have at this point.

Vincent Andrews – Morgan Stanley

Okay, thanks very much.

Operator

All right. Our next question comes from the line of Don Carson from Susquehanna Financial. Please proceed.

Don Carson – Susquehanna Financial

Yes, couple of questions on North America. I wanted to follow-up on the acquisition pipeline, what kind of multiples have you been paying and are you seeing for the – sort of – types of package gas service that you are interested in buying? And then, Kelcey, did you quantify the cost of these weather issues in the quarter?

Matthew White

Well, I think I can first address the weather question. Last quarter we said probably $0.01 to $0.02 and we’re still roughly in that range we believe for first quarter.

Don Carson – Susquehanna Financial

Okay.

Matthew White

And regarding the acquisition multiples, they’re going to be times where the multiples will get rich and if they are higher than what we believe we can deliver on synergies to get our return, we’re going to walk. And as you got to imagine, we can enter a packaged gas market in a variety of ways, and acquisitions are just one. We could build a branch, we could add territory managers, so we’re going to look at all of our avenues in terms of how to penetrate the market with an acquisition being one of several. And we’re going to go with what we believe is the most cost effective way to serve that market that will give us the best return. So when we look at acquisitions, we’re going to look at synergies that we’re very confident we can get, and we’re going to base the price that we’ll pay on that. And if it’s within our investment range, we’ll buy it, and if it’s not, we’ll pass.

Don Carson – Susquehanna Financial

And then just a follow-up on the weather issue. That $0.01 to $0.02, was that all just logistics either because you couldn’t deliver, your customer wasn’t open or did you also see issues where there is a lag on recovering higher fuel and power costs?

Matthew White

It will be combination. I think right now, probably the biggest thing that’s impact us is how Lake Michigan and Lake Superior really frozen over. So, that’s really limited with our customer base, primarily the steel customers in the Great Lakes, the ability that we – sea borne deliveries of ore. So that’s essentially reduced the volumes, and that’s more of a sustained problem. There were clearly to your pointing some spot problems of weather, we do run an outdoor sport here, so you have that issue. Clearly there were some power spikes and we’re in the midst of recovering them, we’re not going to get all of them in Q1 but the ability to recover for us really comes down to strength of contract and execution and that some people were fairly comfortable with and familiar with and we’re just in the process of continuing to manage that. So, I think its bit of a combination of one that’s probably persisting the most impact on the delivery of ore for any Great Lake based steel manufacturer.

Don Carson – Susquehanna Financial

Thank you.

Operator

All right. Our next question comes from the line of Robert Koort from Goldman Sachs.

Robert Koort – Goldman Sachs

Good morning.

Matthew White

Good morning.

Robert Koort – Goldman Sachs

Well, I was wondering if you could help out a little on – I continue to be surprised to sort of a general progress U.S. industrial trends have had and for the lack of flow through to meaningful volumes in the PDI business, is that a function of particular line markets that haven’t really accelerated yet, you need construction, look at the Shale revolution creating this manufacturing renaissance. Are we going to see this expressed more in PDI or do you think it’s such a diversified customer base, then market base that it’s going to continue to be sort of low mid-single digit growth?

Matthew White

Well, clearly it is quite diversified as you stated. And as I mentioned earlier, when you look at the industrial production for the first quarter in U.S., manufacturing only was about 1.7%. So the piece that would really drive the growth was a little softer and weather was part of that. I think when you look at the industry’s that are performing well, we are seeing some good strength in oil and gas still, although it slowed a bit from the levels it was at before that’s still running well. MetFab has picked up in some areas, its bit spotty because you can imagine it’s geographic in nature, but we still have some headwinds in the heavy industry, there is still some headwinds in the non-res like you mentioned. So if those pieces were to pick up and hit, that would be beneficial. We just need I think, more of a manufacturing construction environment which is where – really we start to see the strong growth rates. And our hard goods are still down a bit, they are down low single digit. So, we’ve been fairly comfortable with our gas growth rates, especially in light of the underlying growth rates, but hard goods is a little softer and that’s something that we’re just continuing to manage and work through.

Robert Koort – Goldman Sachs

And if I might ask in particular, as you look at Gulf Coast opportunities in the U.S. and the fears of project execution delays, labor inflation, those sorts of things that – if somebody came to you and wanted a new on-site plant today, how would that cost compared to what it might have been a year ago?

Matthew White

Definitely up. You know, the exact percentage would be difficult to gauge since I’d have to compare kind of exact plant style. But – easily double digit percent I think is what you’ve probably see. And as more projects initiate, it’s just going to make things tougher. So it’s really going to be an availability of labor. Now that being said, this is not something we’re unaccustomed to. Now around the world, we executed several projects in very, very high demand areas and high demand regions, and we’ve seen labor rates swell, we’ve seen productivity factors get much worse because of that, we’ve faced very challenging union contracts. So while it is getting more difficult cost effectively execute a project in the U.S. Gulf Coast, this is not something that we’re new to. And there are many techniques to manage that, everything from modular building to where you build off-site, to how you structure your contract, to having your customer do the civil work, now you really want to avoid strict [ph] building as much as you can and do more modular building. So a lot of these things are things we’re well familiar with and we’re going to continue to do.

Robert Koort – Goldman Sachs

That is helpful, thank you.

Operator

All right. Our next question comes from the line of P. J. Juvekar from Citigroup. Please proceed.

P. J. Juvekar – Citigroup

Yes, thank you. I think you mentioned strong Germany and Scandinavia and Europe, these are traditionally strong markets and economies. Are you seeing any positive signs in Southern Europe where you have a bigger share?

Matthew White

I would answer that by saying we’re not seeing negative signs in Southern Europe. We’ve been stable now a couple of quarters in a row, we’re seeing some slight improvements in volume and we are seeing some positive pricing tractions. So the fact that we’ve had several quarters in a row now of stability and we’re starting to get a little bit of price is what’s encouraging. And we expect that trend to sort of continue. We never really expected Southern Europe to gap up out of this, we felt it would be a slow climb. And so far that’s what we’re seeing.

P. J. Juvekar – Citigroup

Thank you. And Matt, I think your asset swap with Messer seems like a win-win, in this stage [ph] you want to do more of these. Are there opportunities like that in the U.S. for asset swaps?

Matthew White

It depends who the counter party is, there could be. It would have to be something that would probably be two different types of assets, either two different type distribution I would think or two different type of – whether it happened us here or profits [ph], I think it would be more difficult to fit with the same type of assets but not to say it’s not something that we would be evaluating and trying to do.

P. J. Juvekar – Citigroup

Thank you. And just on the housekeeping, Kelcey, did you mention the EPS impact about the new projects in 2014? Thank you.

Kelcey Hoyt

No, I mean it’s similar to what we are seeing in January where we talked about this which is kind of top line growth of about 3%, that’s not changed.

P. J. Juvekar – Citigroup

Thank you.

Operator

All right. Our next question comes from the line of Jeff Zekauskas from JP Morgan. Please proceed.

Jeff Zekauskas – JP Morgan

Hi, good morning.

Matthew White

Hello Jeff.

Jeff Zekauskas – JP Morgan

I guess two things. You have that large 3000 ton per day Evraz plant in Russia. Do you still expect that to come on in the second half and if so, when? And then in terms of your overall volumes, I think they were 4% for the quarter. Do you expect that volume – that rate of volume growth to increase successively in the second, third and fourth quarter year-over-year or no?

Matthew White

So first on Evraz, it’s well under construction. We follow the progress of the construction each month. And our expectation is towards the back half of this year to start-up. With any project there could be a couple of months here and there on delay, but right now we’re still expecting probably late third quarter-ish or into fourth quarter timeframe for that start-up.

Jeff Zekauskas – JP Morgan

Okay.

Matthew White

Regarding the volumes, you look at the 4% we had now, a portion of that is, our project start-ups. So those lap, that overtime won’t start to decline a bit. We do have some underlying organic that will pick up a bit. So I think we’ll still be kind of low single digit to mid-single digit growth in that area, it just depends on some of the projects as they come off and new ones come on but we’ll be around that area I’d say, kind of 3%, 4% into the off quarters.

Jeff Zekauskas – JP Morgan

Okay. And then secondly, I think your inventory, I’m sorry, you’re working capital was maybe negative through seven day for the quarter, well it seems on the high side and part of that I think was some downward movement on the liability side. Can you explain what happened and what your outlook for working capital is this year?

Matthew White

Sure. I think it was all the AP and accruals about $116 million if I recall. And there is really – I’ll break it down into three pieces. About a third of it is taxes. So actually that short-term taxes, if you look below at the other long-term items, we picked up almost $100 million. So really you’ve got the long-term differs improving short-term payables, getting worse, that all sort of net. Another third is interest payment timing. It just so happen the way that calendar year work, we actually made interest payments on a cash basis this year whereas last year they slipped into Q2. So that is really just the timing of the interest true payments related to our bonds. The last third is that I call operational accruals and AP. A part of that is just bonuses, bonuses were a little higher year-over-year, and part of that is just with a little bit of less CapEx. We have less accounts payable to sort of stretch on a DPO basis. So, our DPO was a little bit worse.

Jeff Zekauskas – JP Morgan

Okay. And for the year, did you…

Matthew White

Including year, clearly the pieces that are sort of temporary in nature in Q1 like the bonus and the interest will recover. And the taxes are kind of, as you can imagine, up and down long-term and short-term. So I think it should be no different than what we’ve seen in the prior years, as CapEx is a little lower, our payables will probably be a little lower as well. But we had a strong receivable performance this quarter and we expect that to continue throughout.

Jeff Zekauskas – JP Morgan

Okay. Thank you very much.

Operator

All right. Our next question comes from the line of James Sheehan from SunTrust. Please proceed.

James Sheehan – SunTrust

Thank you. Just wondering on your lim-locks [ph] business in the U.S. and U.S. merchant, how do you see operating rates and your operating leverage in that business progressing through the year?

Matthew White

So right now we’re still around, say 80% in the utilization, and we do expect some growth there. I think when you look at North America merchant is, maybe a little flattish, we’re getting some positive growth in U.S. and Mexico and Canada is not as much given the challenges in Canada. But with the U.S. some of that growth we get we think we’ll get some good margin accretion. And you look at the operating margins this first quarter in the U.S. and they were a little bit depressed, and part of that is the natural gas pass-through which is an on-site component, a part was weather, a part where some of the turnarounds we had in our hydrogen business were scheduled turnarounds, and part where the sickle calary [ph] we talked about in the oil well service business but as these things start to sort of lap and recover into the quarter and especially the ones like the turnarounds and weather which were more of a first quarter component, we do expect the margins in North America to pick up a little bit from this level and any incremental lim-lock [ph] should be fairly highly accretive at our normal kind of variable margin rates they should drop down to the operating profit level.

James Sheehan – SunTrust

Thank you. And just on the creativity you’re showing with the asset swaps, so just wondering if you have similar opportunities to increase your density and increase your efficiency by buying out JV partners and things like that?

Matthew White

Well, we did buyout a JV partner in the first quarter if you may recall.

James Sheehan – SunTrust

Yes, in another regions [ph].

Matthew White

So that’s something we’re always interested in doing. Some contract structures will allow us to have an option to buy when a certain date is reached, other ones there is no tight structure. So we’re always be looking to increase ownership, one that makes sense and one we can. The challenge is that the JV partners, especially in some of the international markets tend to be family oriented, they tend to be on a different type decision process. So it takes time but that’s something we’re always looking to do.

James Sheehan – SunTrust

Thank you, Matt.

Matthew White

Welcome.

Operator

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

John Roberts – UBS

Good afternoon – or morning I guess still. You called out the Canadian manufacturing customers as an area of weakness and it sounded like it was some structural issues they were having. So, maybe you could comment a little more on that. Do we need to have some right sizing or restructuring while you could sort of adjust for that?

Matthew White

Well, we did already do some right sizing and restructuring in the end of last year, it was not something we announced but it happened, and the team is continually evaluating next steps but at this point I would say there are some that I’ll call structural challenges. In Canada, I think there is really two drivers. The first driver is on the eastern part of a country you have a very intensive manufacturing base, and primarily Ontario and Quebec. And that’s a historic manufacturing base that really was mostly U.S. Companies taking advantage of it at that time when it was a weak, probably back when it was at a 30% discount to the dollar. Now when it’s – it went to parity for a period of time and now it’s about 10% weak or it’s still not – you don’t have that sort of arbitrage on a labor basis and there hasn’t been a lot of productivity invested in the Canadian manufacturers. So as U.S. Great Lake states are starting to lower labor backed and even Mexico is becoming much more competitive, you’re seeing that manufacturing sector in the eastern part of a country shrink. I mean there is problem for sometime and it continues to exacerbate, so I think that’s number one, it’s the manufacturing customer base there in Canada is a bit shrinking and they need to either further weak in loony [ph] or get more investment in productivity.

The second challenge is, Canada has a very large mining minerals and oil and gas business, and the mining pieces has been a little sluggish, given the global mining, especially with China’s consumption being reduced and some of the other emerging markets reducing their consumption. And with the oil and gas side, I think the U.S. Shale play has created a little bit of a damper on some of the Canadian exports into the U.S. So the combination of those items has put a little bit of a structural change. I think eventually they will work through it but it may take a year or more to get kind of through this. So we’ll see, but I think it’s been flat kind of invest in Canada, and the business team there is actively looking at which steps they need to take.

John Roberts – UBS

Thank you.

Matthew White

I think we have time for one more question.

Operator

All right. And our next question comes from the line of Kevin McCarthy from Bank of America Merrill Lynch.

Kevin McCarthy – Bank of America Merrill Lynch

Yes, good morning. Thanks for squeezing me in. Matt, and you have pack and schaves [ph], so I think you mentioned hard goods was declining at somewhat lesser rate. I’m wondering if you could comment on the leading indicators there such as some of the bigger tickets, hard goods and what you’re seeing.

Matthew White

So from an equipment perspective, down a little bit, I think it’s probably more consumables are down than equipment in some areas. I think in general, what you have gone on here and this is like a leading indicator, it’s a little bit tough. I think while people are seeing opportunities to automate, they are taking advantage of that and that means bringing the equipment in, it saves on labor and it just makes more predictable costs for them, especially if they are seeing tightening the labor resources on skilled labor. Consumables are a bit down, and I think a part of that challenge too is, we’re just still not seeing people want to build inventories, I think there is little bit of reluctance to do that and people continue to just build towards what they need. Anybody that has government or defense exposure is having a bit of a challenge right now and I think as we mentioned earlier, anyone with a non-residential construction or that feels that market is still probably a little bit sluggish. So that’s kind of what we’re seeing now but the leading indicator aspect has been tough because we’ve been in this situation now for over a year on the hard goods and we still haven’t seen much softness on gas.

Kevin McCarthy – Bank of America Merrill Lynch

Thanks for that. And as a follow-up, how much of your $2 billion project backlog is Russia, specifically?

Matthew White

So – we don’t disclose Russia specifically, but I could tell you Europe is about 18% in our total backlog. So off that Russia is probably little more than half.

Kevin McCarthy – Bank of America Merrill Lynch

Okay. And then, last one if you don’t mind, just to squeeze in on slide number 12 in your appendix. Usually we think of food and beverage as quite stable, I think it was up 2% year-over-year, last quarter it seems to have accelerated to plus 7%. Is there anything kind of interesting going on there?

Matthew White

Well I think the acquisitions have been adjusted out here. One thing we’re seeing, especially in South America is very strong food and beverage, and healthcare as well, lot of consumer driven growth there. So I think that’s been driving a bit of it, and we’re just seeing emerging market food and beverage continue to do well. I think U.S. growth rate is fairly consistent, that has not grown very much, but the emerging market one is where I think we’ve been seeing as a greater than normal type growth.

Kevin McCarthy – Bank of America Merrill Lynch

Okay. Thanks for the color.

Matthew White

Thank you.

Operator

All right, ladies and gentlemen, that concludes today’s question-and-answer portion of today’s call. And now I would like to turn it back over to Kelcey Hoyt for closing remarks.

Kelcey Hoyt

Thank you again for participating in our first quarter earnings call. Our second quarter earnings call will be held on July 23rd. And 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 all for your participation. You may all now disconnect. Have a wonderful day.

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