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Praxair, Inc. (NYSE:PX)

Q2 2014 Results Earnings Conference Call

July 23, 2014 11:00 a.m. ET

Executives

Kelcey E. Hoyt – Director, IR

Matthew White – SVP and CFO

Elizabeth T. Hirsch – Vice President and Controller

Analysts

David L. Begleiter - Deutsche Bank AG, Research Division

Laurence Alexander - Jefferies LLC, Research Division

James Sheehan – SunTrust

Bob Koort - Goldman Sachs

Donald Carson - Susquehanna Financial

Vincent Andrews – Morgan Stanley

Mark Gulley – BGC Financial

Michael Sison - KeyBanc Capital Markets

Mike Harrison - First Analysis

P. J. Juvekar – Citigroup

Operator

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

Kelcey E. Hoyt

Thanks, Deric. Good morning, and thank you for attending our second quarter earnings call and webcast. I'm 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 the website at praxair.com in the investor’s section. Please read the forward-looking statement disclosure on Page 2 of the slide and note it applies to all statements made during this teleconference.

In addition, please note that full-year, year-over-year guidance comparison include adjustments in 2013 and the reconciliation to the U.S. GAAP reported numbers on the appendix to this presentation in press release. Matt and I will now review Praxair’s second quarter results including the current business environment, and updated earnings guidance. At the end of the prepared remarks, we will be available to answer questions but in the interest of time and others waiting in the queue. Please limit you question to just one with a quick follow-up in the end.

Matthew White

Thank you Kelcey and good morning everyone. Praxair had a solid second quarter and once again delivered strong operating leverage down the income statement. Excluding negative foreign currency translation impact, sales grew 5% and operating profit grew 7%. We achieve these results despite challenging conditions in our Mexican and Brazilian businesses. Growth trends continuing to improve across other key geographies, including the U.S. By maintaining price and cost discipline, we grew operating margins and held our industry leading return on capital. All these efforts resulted in a very strong operating cash flow at 27% of sales.

Please now turn to slide number 3 for our consolidated results. Sales for the quarter were $3.1 billion dollars, an organic growth of 4% came primarily from price execution across all operating segments and higher volumes from new planned startups in North America and Asia. Baseline growth in North America, Europe and Asia was offset mostly by volume contractions in Brazil and energy customers in Mexico.

Acquisitions contributed 1% growth primarily in North America and Europe. Sequentially, sales grew 2% ex currency. From higher volumes in North America Europe and Asia partially offset by weaker volumes in Latin America.

EBITDA was $1 billion. An operating profit was $697 million. Both 5% above the prior year quarter. Excluding currency, operating profit growth of 7% which is driven by higher price, productivity gains and fixed cost management. The EBITDA and operating margins were strong at 32.1% and 22.4% respectively. Net income of $467 million grew 5% from the prior year in line with operating profit growth. Our key leverage metrics slightly improved from last quarter with the debt to capital ratio at 54.5% and the debt to EBITDA ratio at 2.3 times. Earnings per share of a $1.58 with 6% above the prior year and grew faster than net income due to 1% reduction in the number of diluted share outstanding as a result of net repurchases of common stock.

Casual from operations was a very strong $847 million. This funded $425 million of capital expenditures and acquisitions to support growth. $190 million of dividends and $140 million of stock purchases net of issuances. This aligns with our capital allocation strategy. A funding growth and shareholder returns from operating cash flow.

Our after tax return on capital this quarter was 12.6% in line with the first quarter. We expect return on capital to improve towards the end of 2014. As earnings grow faster than the capital base. For the quarter, our return on equity was 28.3%. Our project backlog which we defined as projects with CapEx greater than $5 million and associate with a fully executed customer supply contract remains solid at $1.9 billion and is comprised of 28 projects.

During the quarter, we started plants in Asia and North America and signed the new long-term contract for an on-site plant located in China. Our project backlog is well diversified across all geographies and end markets. Serving a balanced set of high quality customers in the energy, chemical, manufacturing, electronics and metals industries.

I addition to these projects we are developing new opportunities to feel growth. Especially in more active regions such as Asia and the U.S. Gulf Coast. While many opportunities exist, we are being selective on our bidding to ensure we achieve an attractive return for the risk and that we meet our discipline investment criteria in the core geographies. We are not capital constrained but we will remain prudent on how we allocate our capital.

And mow Kelcey will take you through the segment results.

Kelcey E. Hoyt

Thanks Matt. Please turn to slide 4 for our results in North America. Sales in North America were $1.6 billion, 5% above the prior quarter and up 7% excluding negative currency translation. Higher onsite volumes from hydrogen project start-ups supplying refinery customers and higher pricing drove organic sales growth of 5%. Acquisitions, primarily U.S. packaged gas distributors contributed 1% growth.

Higher cost pass-through, largely higher natural gas prices pass through the hydrogen customers increase sales by 1%. Sequentially, organic sales increase 4% driven by overall volume growth in the United States and Canada, partially offset by lower oil well services volumes in Mexico. U.S. merchant volumes grew at low single digit rate year-over-year and a mid-single digit rate sequentially with growth across most end markets.

Sequentially, Canadian merchant volumes were positive ex-liquid nitrogen for packing which were seasonally lower during the second quarter consistent with the spring. This quarter we saw significant softness in our Mexican oil well services businesses. As our key customer Pemex has limited production at certain fields due to the budget constraints and uncertainty regarding the secondary laws of the energy reform.

Volumes to old well services customers declined double digit percentages year-over-year and sequentially. Excluding the energy market impact, organic sales to other Mexican end markets such as manufacturing have performed well. U.S. package Gas’ organic sales grew by 5% year-over-year and 3% sequentially. Acquisitions contributed 3% growth year-over-year and 2% sequentially to the U.S. package gas business.

Second quarter growth continue to be driven by gas and rent which were mid single digits year-over-year while hard goods were steady. However, as the quarter progressed, the trends improved steadily such that during May and June, hard goods growth turned positive year-over-year for the first time in more than a year.

The organic U.S. package gas growth came from customers and transportations including rail, metal fabrication, energy, chemicals, health services, universities and manufacturing. Sales to construction customers stabilized while large equipment and machinery remained weak.

The North American operating profit was $398 million, 4% above the prior quarter and up 6% excluding negative currency translation impact. The increase was primarily driven by higher pricing and higher volumes. Operating process volumes in the U.S. and Canada was partially offset by the weaker volumes to Mexico energy customers.

(inaudible) operating margin was 24.4%. The higher cost passed through year-over-year primarily natural gas, increased sales with minimal impact on operating profits and reduced the operating margin percentage by 20 basis points year-over-year.

The price environment remains positive and they are obtaining traction on our recent price announcements. During the quarter we started up 5000 tons per day plant serving Deacero in northern Mexican steel company. The state of the art energy efficient plant increases Praxair’s product capacity and distribution density across the Northern Mexico. Under a long term contract Praxair is supplying oxygen to and Deacero (inaudible) in Northern Mexico which produces more than one million tons of steel annually.

The additional supply also enables Praxair to meet growing demands regionally. For gases and liquid oxygen, nitrogen and argon, primarily in the metal production, metal fabrication, glass and automated markets.

Proposal activity for new on-site plants in North America remain solid and the chemicals and energy markets located primarily in the Gulf Coast region as well as smaller on-site plants for manufacturing.

Now please turn to Page 5 for our results in Europe. Sales in Europe were 7% above the prior quarter and grew 4% excluding currency in cost pass-through. Acquisitions contributed 3% primarily delay in technology gases and industrial gas company that serves the global off-shore oil and gas industry which we acquired in May of last year. Organic sales were 1% above the prior year quarter due to price attainments. Volumes were steady year-over-year as modest volume growth in Northern Europe and Russia with mostly offset by greater days impact in Southern Europe from Easter.

Overall volumes have stabilized in our European business and we are encouraged to see pockets of modest growth. This will allow us to continue to obtain strong operating leverage from existing assets.

Sequentially, organic sales increased 3% on higher price of 1% and stronger volumes of 2%. Sequential volume growth was primarily based in Northern Europe and driven by energy and metals markets. Operating profit of $78 million with up 8% for the second quarter excluding foreign currency impact. Acquisitions contributed 3% growth. Higher pricing and volume increased operating profit by 9% continue to demonstrate strong operating leverage even at steady volumes. New project activities improving in Northern Europe with opportunities to expand existing pipeline supply and further build density, as well as opportunities for small on-site plants for manufacturing customers.

Page 6 shows our result in South America. South American segment sales are $509 million, 3% above the prior-year quarter excluding negative currency translation impact of 8%. Organic sales grew 2% as higher pricing was partially offset by lower volumes in Brazil and we’re steady sequentially.

The estimated industrial production decline of 4% for the second quarter was more negative than expected. Even factoring in the World Cup Holiday impact. The end market volumes to metals and chemicals were weaker year-over-year and sequentially. However, this was partially offset by volume growth to healthcare, propane paper and glass customers.

Within the South American segment, about 20% of sales come from 8countires outside of Brazil. Volumes in these regions were up 7% year-over-year driven by food and beverage, healthcare and metals.

Operating profit in South America increased 1% excluding currency effects as higher pricing was partially offset by weaker volumes in Brazil and cost inflation.

Our expectations for the second half of the year in Brazil are for currency translation effects to be stable year-over-year with little impact at current rate. However, the presidential election in fourth quarter to create further currency volatility and now that the World Cup is over, we expect to see our package and merchant businesses rebound modestly in the third quarter. In addition, we continue to find new customers with application technologies.

Consensus IP is currently forecast at negative 0.9% for the full year in Brazil which implies flat to slightly negative volumes for the back half of the year. The business has and will continue to take actions as needed to adjust the changing economic conditions including cost reductions and continued discipline and execution of price and productivity program.

Please turn to slide 7 for our results in Asia. Sales of $394 million grew 6% from the prior year quarter excluding negative currency impacts and lower cost pass through. Volume growth of 5% was primarily driven by new project start-up in India, China and Korea. Merchant volumes grew 4% year-over-year. By end market the strongest sales came from metals and energy.

Sequentially volume decrease 1% as underlying growth in China, India and Thailand was mitigated by prior quarter's spot sales and chemical customer outages in China. Price contributed to 1% increase in sales and was primarily due to helium and specialty gases.

Asia’s operating profit of $76 million increased 25% in the prior year quarter due to the impact of higher volume and pricing. During the quarter, we started up supply to a glass customer in Korea via pipeline from an existing air separation plant. In addition, we recently announced a new on site project for our 900 tonne plant to supply chemical customer under a long term contract that is expected to start-up in 2016 and will build our presence in the chemical part in East China.

Looking forward, on-site project bidding activity in Asia includes energy, metals, electronics, chemical and smaller on-site plants from environmental benefit such as waste water treatment and the manufacturing end markets.

Our results for Surface Technologies are shown on page 8. Surface Technologies sales for the quarter were $174 million, organic sales growth of 4% primarily due to higher pricing. Volume for steady as commercial aviation growth was offset by weaker industrial gas industrial coatings. Operating profit of $32 million increased 3% on higher pricing. And now I will turn the call back to Matt to discuss our updated earnings guidance.

Matthew White

Please turn to slide 9. Our earnings guidance for the third quarter is for EPS in the range of $1.58 to $1.65 which represents 5% to 9% growth year-over-year. We expect sequential growth to come from continued improvement in the United States on-site merchant and package gas volumes.

In Latin America, we are expecting moderate recovery in Mexico oil well service volumes and Brazil. The third quarter is always seasonally weaker in Europe with the summer holiday and we expect underlying Asia to perform consistent with the second quarter. We are updating estimated full year 2014 EPS guidance to a range of $6.30 to $6.45 representing 6% to 9% year-over-year growth. This includes approximately 2% negative currency translation. Therefore this guidance results in 8% to 11% year-over-year EPS growth excluding foreign currency impact.

We have taken the top end of the guidance down the nickel but let the bottom unchanged. This is the function of the current environment in the Mexican energy market and Brazil. Well we believe these are both cyclical challenges they will take time to fully recover. Despite this, we are confident in our ability to manage the aspects of the business that are under our control.

We have been executing all year on our key initiatives of growth, operating profit leverage, strong cash flow generation, and capital discipline. We have acquired several core industrial gas tuck-in acquisitions including five U.S. package gas distributors, four ownership of our U.S. mid-Atlantic joint venture, and Messer’s Italian business. Year-to-date we have expanded the operating margin by 50 basis points to our relentless focus on price and productivity and generated operating cash flow of 23% of sales. This operate show excellence is what drives our consistent industry leadership and operating margins and return on capital. With that I would like to now turn the call over to Q&A.

Question-And-Answer-Session

Operator

[Operator Instructions] Our first question will be from line of David Begleiter from Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

Thank you. Good morning. Matt just on Brazil has your longer term view of the underlying growth in that country come down over last year or two given whats happened down there?

Matthew White

No David. We still feel good about the long-term prospects in Brazil. You look at country like Brazil they have today and will have a wealth of natural resources. And there is still significant infrastructure opportunities as you have a growing middle class and the increase of the wealth. And I think those sort of structural aspects are still there. Right now what you have got going on is you got some challenges with this quarter we had negative 4% IP growth and when you look across the quarter, April and May were pretty much in line with what we expected and we are pretty consistent with what we saw in the first quarter. But June was very challenging. So the primary poor performance rest this quarter was really around June and as we have come into July here, the first couple of weeks were also little soft and we have been picking up in the back half now as we have kind of got into World Cup. So it remains to be seen but we are expecting some sequential recovery here and the elections will be a big impact here in the fourth quarter depending on who wins and what direction it goes at least for the near term.

David L. Begleiter - Deutsche Bank AG, Research Division

And Matt just quickly as a backlog keeps on creeping down, are you seeing any increase competitive intensity in bidding for projects either globally or in chives specifically? There is ultimately backlog coming off little bit here.

Matthew White

I don't think anything is changed that significant from what we have been saying over the last few years. I think there are a lot of opportunities out there but we continued to be disciplined in terms of what we want to go after. What you are seeing and I think we have been seeing is decisions to just taking longer for our customer base. You look at places like the Gulf Coast while things will be built and there will be more projects announced, there is a high cost of construction and it just takes time to get permitting in the front engineering done in the approval and think in Asia you are seeing, especially in China, just a longer decision process given some of the approaches around the environmental, approaches around the capacity and that's just going to take longer before decision to make but at this point when I wouldn't characterize it as any significant change in competitive intensity.

David L. Begleiter - Deutsche Bank AG, Research Division

Thank you very much.

Operator

Your next question will be from line of Laurence Alexander from Jefferies.

Laurence Alexander - Jefferies LLC, Research Division

Good morning, two questions. Can you sort of update your thinking around pricing dynamics in the US in the merchant business and possibility for that market to tighten? Secondly, on the M&A pipeline, can you characterize what the opportunity set looks like in three areas, in coatings, in regional asset swaps, and (inaudible) in the US?

Matthew White

Okay. So first on the merchant. I think in the US the pricing environment is good. For North America we have shown 1% price but when you look specifically in the US, in merchant package we are seeing low-to-mid single digit pricing that we are achieving. And that's for the merchant package. So on-site, the escalation is not part of price. So that will affect the dynamic on the equation. So US overall I think is good. And capacity utilization in the US is creeping up a bit. We are running at 80 for a while I will say we are low 80s now. So I think those going well, for the US overall merchant market. Regarding the M&A side, it think I guess the taking order here you know coding for us that's not really a core part of our business. We run it well but something that will continue to run well but at this point we are not looking for a whole lot of M&A activity in the coating side. Packaged gas is consistent with what we have said before. There is still specially in the US a large contingency of independent distributors out there and we are the ones that makes sense in the regions that we are in. we will continue to pursue those acquisitions where it makes sense. And we need to get the synergies and justified honest synergies before we would go ahead and make that acquisition. But we have as you know many ways to enter into market other than just acquisitions in our packaged business. So I think it still looks good. As you have seen we have continued to roll up acquisitions we are also seeing small package acquisition opportunities in places like Europe and South America as well. So those will continue. I think on the swaps, that's something we are still actively interested in. so we are continuing working with other potential parties to look for swap opportunities. Its just something that we need that other willing party to be able to accomplish.

Laurence Alexander - Jefferies LLC, Research Division

Thank you.

Operator

Your next question will be from the line of James Sheehan from SunTrust.

James Sheehan – SunTrust

Good morning. I was just wondering if you could comment on the 2015 potential impact from earnings from new plant startups, given your outlook on the backlog coming down a little bit, do you think that the earnings impacts will be higher or lower next year than it was in 2014?

Matthew White

I think at this point still in the same range we have set. We have laid out for kind of 2015, 2016, 2017 anywhere in the $0.20 to $0.30 EPS impact from projects. Clearly that will sort of move up or down depending on timing when the project start-up and also if we add what I will call shorter term projects today that could go up in the end of ’16 but right now we still feel good about the $0.20 to $0.30 and we still feel good in the 3% to 4% range on top line growth going forward. So no change at this point and as you know in the current backlog we just happen to have more project start-up than we added in this quarter but this can change by few hundred million dollars each quarter depending upon what we have signed and what we start-up.

James Sheehan - SunTrust

Thank you and also thanks for the color on Brazil and your expectations in the second half. On a related note, geopolitical events in Russia are changing the situation in that region. Just wondering how your three- to five-year outlook is changing there and are any of your projects that are under consideration now, have you officially postponed the timeline for any of those?

Matthew White

So I think first on the 3 to 5 year outlook when we entered Russia there was a lot of very strong secular drivers in Russia that were attractive. A couple of the key ones were that resources, they have some of the lowest cost producers and things like steel in the world. In addition there are some very old inefficient air suppression units that they decades that need replacement and that are looking to be what we call decaped where the customers looking for industrial gas partner to come in build the new one and own and operate it. All those secular drivers still exists. So from that perspective we still firmly believe in our outlook and we haven’t really wavered too much on that. Regarding the risk, we knew going in Russia would-- there would be risks. So as I mentioned in prior calls, we have taken a lot of mitigating steps, contractual protection, we are taking protection from the ruble and those are all playing out today. So as far as what we are seeing on the ground now, based on some of the recent events, initially the impact us has been slightly positive because with the border Ukraine shut down, you are not getting import of product from Ukraine and we don't operate in Ukraine. But what that does is it puts more demand on local Russian product. So that's. So that's actually been some upside for us. In addition, the power has gone up in Russia which makes the efficiency of the ASUS even more important for our customer base. So that is also created a greater demand for higher efficient ASUs. So from that aspect, I think they have been slightly positive and we haven’t seen much of change on the ground with our interaction with our Russian customers. I think if anything what could happen you could get inflation, you could get recessionary conditions, there is sanctions were to become severe. But I don't think that would be drastically different than what you could see in other geographies with either stagflation or recession. So we do have inflation protection on our contract. So we have done something upfront to try and mitigate this but clearly we are being more cautious. We are being more selective and we will just continue to scrutinize any incremental investments there but it's not a big piece of our portfolio at this point.

James Sheehan - SunTrust

Thanks a lot Matthew.

Operator

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

Bob Koort - Goldman Sachs

Good morning guys.

Kelcey Hoyt

Morning.

Matthew White

How are you?

Bob Koort - Goldman Sachs

Good. One question I had when I look at your incremental margins in Asia they are terrific. In Europe they are quite strong but in the US there really wasn’t a lot of incremental lift. I am wondering if you can talk about why that occurred and then maybe what we should expect in the future?

Matthew White

Yes. So you are referring to year-over-year or sequential?

Bob Koort - Goldman Sachs

That's right, year-over-year. I think in the US there is sort of flattish even down a little bit in Asia they were up dramatically and up –

Matthew White

Yes. So the North American basis, a couple of key drivers, first natural gas is higher. So while that's just the past they are component it's raising our top line and I talk about 10% to 15% so that's a headwind about 20 basis points on our margins year-over-year. In addition, as you know we started up our HyCO assets from last year to this year that was a big driver of our project growth and HyCO on a IRI basis, while it's fairly consistent with what we expect on our ASUS investment it tends to be lower margin base because it's more of a pass-through component of energy than what we have in the ASUS. So just the mix effect that is also reduce the margins a bit. And then finally with this significant impact to our Mexican oil and gas service business that is down double digit sequentially and year-over-year and that tends to be a bit higher margin. So with that loss that's a little bit diluted as well. So those are kind of the three big drivers I would say, two out of three are just structural in terms of how the pass-through of energy works and the third one is a mix issue for us.

Bob Koort - Goldman Sachs

Matt, can you help me out on your hydrogen business, how much of that is -- do you carry the gas cost in your revenue line versus just the customer buying the gas? Then, secondly, could you size what the spot sales of hydrogen are? Should we view those as a one-off opportunistic sale? Is it something that should be more recurring given that you've got that flexibility?

Matthew White

Okay. So I think the first question, we are probably still more than half has energy pass-through in HyCO, all of the ones we have recently started up in the gulf have energy pass-through. We do have a few that are to your point pure tolling arrangements where the customer manages the methane or natural gas and we simply paid a tolling fee to operate the asset. So I would say the ones that have been starting up they have been energy pass-through and it still is more than half of our hydrogen assets have that component. As far as the spot sales, we do actually get that consistently. What we tend to see though is bigger spikes either when other sources of hydrogen are down, we can get spot opportunities when either out customers or other users of hydrogen that may not be our customers are having a larger need due to their production slate, we can get spot opportunities to sales. So we leverage not just our network but our cavern to be able to deliver the instantaneous pressure, quality and quantity that they need and that is something that’s the function of our own going which is happening to see larger sales in some quarters than other based on both our customers and other industries need at that time.

Bob Koort - Goldman Sachs

Got it, that's helpful. Thank you.

Operator

Your next question will be from the line of Duffy Fischer from Barclays.

Duffy Fischer - Barclays

Good morning. I was wondering if you could breakout a little bit the very nice margin improvement you saw in Asia maybe between how much of that was self help stuff, how much of that was just the market getting better and how much of that was maybe mix effect from new business.

Matthew White

Well I think first it's about probably $4 million that was related to insurance you see that about two years ago we had some outages and some excess cost and we were able to recover it. So that's a little bit of it. But the reminder of it is couple key things, pricing well pricing is challenging in Asia. We have been able to achieve some pricing on both helium and some of the rare gases and the specialty gases. In addition, we have been making a very concerted effort to move our merchant business more direct. So we are picking up some favorable mix which is helping the margin. It may cost us a little on the top line growth but as you can see from this operating leverage it is worth it. So I think that also is a fairly significant part and we are just trying to be more tight on cost and productivity. We have had a very renewed effort in Asia to manage the cost and productivity. So I would say at this point it's kind of equally distributed among those things with the efforts that we are undertaking.

Duffy Fischer - Barclays Capital, Research Division

Okay. And then how would you look at helium effecting your business kind of first half of the year versus second half of the year? Do you think there have been meaningful moves there?

Matthew White

Well, there is clearly being some capacity that come on stream. You have Qatar 2 which is now running really an excess of nameplate capacity. You have had some additional sources come on. So I think that stabilized the market. You are seeing less and less shortages or outages and I think for the most part the helium contingency and allocations have ended. So the balance is a little better now. Now going forward, you still have the uncertainty around both the Algerian and Qatar trends as they go up and down that could change the dynamics also the BLM the Bureau of Land Management, with the Hugoton fields depending upon what they take out of the dome and helium and the depletion of that will also impact it. So I think well now it's fairly stable. It is something that can move up or down all based on the supply situation.

Duffy Fischer - Barclays Capital, Research Division

Great. Thanks guys.

Operator

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

Donald Carson - Susquehanna Financial

Matt, you have got a competitor with a new CEO who is kind of signaling that they are going to be more capital and bump up hurdle rates as they look at bidding on new projects. What impact, if any, do you think that has on your business? Has that been an issue in the past where -- I know you have been disciplined. Has that caused you to walk away from a lot of projects that others have been more aggressive on?

Matthew White

Well, I can't comment specifically on the competitor. I think in general, any time competitors become more discipline that's a good thing for the industry. As far as reactions or interactions in past projects, I think you have seen some of our competitors pursue other avenues of investment that we simply haven’t. So clearly there, there is no competitive impact us because we are simply not in those geographies or not serving those markets. But in general it should be positive for the industry and thus positive for us as participant in that industry.

Donald Carson - Susquehanna Financial

And j ust a follow-up on the tone of business in the US, Kelcey talked about hardgoods turning positive in May and June for the first positive year-over-year comparisons in some time. Is this just a catch up from the weather issues in the first quarter or is this symptomatic of. of a turn in business and did you see a pickup in your merchant volumes in June as well?

Matthew White

Yes, we have seen a pickup in merchant volumes and when you look at a business like PDI, although weather could impact it, they can recover much quicker, right? They have the ability that the customers we supply can work weekends, they can work other hours. They tend not to be 24x7 operations. So I don't think the weather impact in our package business was that significant and what impact that had was fairly quickly made up in the first quarter. So when I look at the trends we have seen and I think they are a positive underlying direction. When Kelcey talked about the markets we’re seeing improvements in, it’s virtually across almost every end market with the exception of heavy machinery and some of the mining type industries. So we are seeing some broad-based improvements, we are seeing improvements in the consumables of the hard goods and equipment while it’s lumpy we’re still seeing customers interested in buying large automation equipment.

So I think the trend has been good. We will see if it continues but we’ve been fairly pleased with the performance of that that business.

Operator

Your next question will be from the line of Vincent Andrews, Morgan Stanley.

Vincent Andrews – Morgan Stanley

Matt, if I heard your commentary correctly on the merchant business, it sounds like your utilization rates may be in excess of the industry average. If that's the case, can you talk about whether you think that trend continues or if that sort of economic growth picks up that you might see some sort of deceleration in your utilization growth relative to what the industry might do?

Matthew White

Well, I think when you look at – there is a couple of key things when you think about utilization. First, you obviously have inventory, you can manage for swings up and down but more importantly, second, you have the ability to convert liquid accounts to small on-site. So there always is an ability that if you grow beyond what that plant, the radius it serves you could either build a new liquid plant, you could truck other liquid from a farther plant away or you could put a small on-site there to replace that liquid and essentially delever or reduce the capacity of consumption of that plant. So there are lot of options. I'm not worried about hitting a capacity wall from any perspective and as you can imagine while we try to give you average numbers, it's very different across regions. And you see certain regions that are pushing in the mid-90s to high 90s and there are other parts and regions in the country that could be in the 70s or low 70s. So it is spotty in terms of what regions are stronger than others but we’re not concerned about capacity; it’s more just the management of your logistical costs and whether you want to have a liquid tank or whether you can supply with a small on-site gaseous form.

Vincent Andrews – Morgan Stanley

Okay. It's nothing related to sort of your strength in certain end markets relative to other end markets, it sounds more broad-based. Is that correct?

Matthew White

Well I think it’s broad based but one market that we have seen a recent improvement and has been the oil well service in the US. We've seen some significant pickup in that area for liquid nitrogen, so that has created a larger usage of that product. So that been a nice sort of pick up, I would say.

Operator

Your next question will be from the line of Mark Gulley, BGC.

Mark Gulley – BGC Financial

You mentioned in the comments on Pemex, I would have thought that the reforms that they are doing in the hydrocarbon industry would be a long-term positive for companies like Praxair and yet the short term seems to be bumpy. Can you kind of resolve how long the short term pressure is going to last and whether or not my premise about long-term benefits is true?

Matthew White

Well, first, I do agree. I think mid to long term it is positive. I think in my view when you look at President Nieto came in toward the end of ‘12 and wanted to put in several reforms and sort of improve, if you want to call it the government involvement in Mexico. And so that we've seen is sort of industries that don't really have much of a government influence, and think automotive, manufacturing that tend to be export related have done quite well. And you can see that in the trends, in the industrial production trends. Industries that tend – that have a heavy-hand in Mexico like construction and oil and gas have been flat to soft. And I think part of it is some of the uncertainty around especially in the energy space, the secondary laws for the energy reform now, supposedly they will be sort of clarified here in the next few months. But in addition, there has been some budgetary constraints across a lot of government entities which has also created some social unrest in some of the localities.

So the combination of those things I think are – I view it as sort of they’re sacrificing maybe the short-term for the better outcome in the mid-and long-term. So we do believe it’s positive. I do think these are cyclical issues in these government sponsored type industries but we continue to see very good strengths in automotive and manufacturing, it's just these other areas that are soft. So I think that it'll improve. Right now probably back end of this year and we still think ’15 will be a good year.

Mark Gulley – BGC Financial

And switching to PDI, it sounds like you are seeing a better pipeline of acquisition opportunity. Can you identify why you think things are loosening up a bit and then perhaps the transaction backlog will convert to deals?

Matthew White

Well, you could imagine, we have a long list of potential deals that we’ve been pursuing for many years. So we know they’re mostly family-owned and operated, we know them quite well. We meet with them frequently. We supply them in a lot of cases. So we're just finding that that more families are willing to sell today. I think also what you saw – and you got to remember the timeframe, in the end of 2012 there was a big frontloading or an acceleration of acquisitions due to the tax law changes. So we saw, I would call an abnormally high amount of deals and then ’13 was a bit dry because you pulled all those forward prior to tax law change.

So now I would say we’re getting back to what I’d consider more of a normal run rate. So while it may feel like a step-up from what we saw in ’13, I think it's fairly consistent with what we normally would see.

Operator

Your next question will be from the line of Michael Sison, KeyBanc Capital Markets.

Michael Sison - KeyBanc Capital Markets

Nice quarter given the tough headwinds. In Brazil, it looks like there's roughly three major projects left in your backlog. Can you talk about maybe how bidding activity is there compared to the past and what you think needs to happen for that part of the business to improve longer term?

Matthew White

So right now it’s mostly small, small on-site, I’d say the biggest things we’re seeing are either improvement in more consumer driven industries, what we’ll do small on-site or trying to make existing large on-site customers, think like steel, more competitive. Those are kind the main projects we are seeing today, so not a lot of big projects at this point. I think there are potential investments on the refining front, it remains to be seen whether or not those happen. That could be an area of future growth. But right now I think for that to change, I think there's going to be a lot of people that are just waiting on their investment cycle to determine what happens in the elections.

Right now at least our opinion is if Dilma is reelected you may see a bit of a sell-off in the real and that’s why we had mentioned we think there's some uncertainty in the real. And I think you might just see ‘15 as a continuation of kind of what we saw in ’14. If there is a new candidate elected I think you will see some potential confidence just in the change itself that might improve some of the foreign investment. But regardless of who wins, they still have significant infrastructure needs for that country. So projects do have to happen, they just are expensive, there is high taxes, there is high labor content rules and I think some of the policies need to be eased to make it more competitive. Now the project we had with CSP they did ease some of those local content rules. Some of the refining projects that we’re in the midst of looking at, they are looking at easing those local content rules. So I think there's some short-term measures they can take now to make projects more competitive by setting up free-trade zones, reducing the need for local content, reducing some of the tax burden, but longer-range they just need to improve the legislation and tax environment.

Michael Sison - KeyBanc Capital Markets

And then one quick one on Europe. It looks like that business is stable. Any thoughts there as you head into the second half of the year? Do you think that region has turned a corner?

Matthew White

Well, consistent to what we said last quarter, it’s clearly stabilized in southern Europe. We’re seeing some form of positive growth in price and volume and it's been quite stable which has been good. So from that perspective I’d say yes, it’s turned the corner in the fact that it is not declining, it’s stable, it is more predictable. And with that I think we’re very comfortable with our position there and our cost position there in terms of the capacity we have available and the margins we’re able to achieve. Northern Europe, we’re still seeing some good activity, not just Russia but some of the other Benelux areas and Scandinavia, investments in steel, investments in chemicals, investments in energy, so we’re still seeing some customers there that want to be more efficient, more cost competitive and we’re able to bring those solutions. So it's not growing at the same rate of let’s say US Gulf Coast or Asia but we are seeing some modest growth.

Operator

Your next question will be from the line of Mike Harrison, First Analysis.

Mike Harrison - First Analysis

You mentioned that you are focusing a little bit more on trying to get some of the merchant business in China converted over to contractual customers rather than wholesale. How easy is that and I guess how -- what's the timing look like in terms of when we could see some improvement from that?

Matthew White

From my perspective I guess there is a couple dynamics that will drive it, right? First is what’s the availability of liquid, so you have not just industrial gas producers like us that have liquid capability but you also have some customer owned assets. So as long as liquid is available there it will create an opportunity for that distributor market to operate but if the country is serious about rationalizing steel assets, and if you do see some capacity that is shut in, that would be positive to help reduce that distributor market. I think from our perspective the things we can control, the key thing is showing the end customer the value and that comes with application technologies. A distributor is exactly what it says. They pick up product, they drop off product. That’s all they do.

For some customers, right now that might seem like something that works for them but as they find out from an efficiency standpoint, cost standpoint for them to be more competitive, they need someone to come in and help them on how to best utilize their gases, what blends of gases, where in their applications can they use things in certain equipment in delivery. So that is where we can bring that component and we can control and operate and maintain their tank system which from a distributor perspective they won’t do that. And if your tank goes down in a lot of cases your customer goes down. And reliability is crucial. So if a distributor doesn’t own their own gas supply and that supply goes down, then their customer goes down.

So I think there is a lot of things from a liability, applications technology and then just the overall market as you see capacity sort of be reduced over time should all help this conversion and we have been seeing it. It’s been – it’s a long-range process we are doing but we're improving on it.

So I think we have time for one more question.

Operator

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

P. J. Juvekar – Citigroup

Matt, your chemical volumes were down 3%, possibly due to some turnarounds, but given the high utilization in the US, where do you see those volumes going? And what is your win rate in new plants as some of these projects go from feed into construction stage?

Matthew White

So I think definitely we see that going up, and to your point that the reason it’s down this quarter is more of some outages and turnarounds we had in some of our largest chemical customers and that’s not just US, that was globally in some regions. But clearly it’s an opportunity and that's something that we have a significant amount of our letters of intent sort of preengineering work right now underway, that is not in the backlog but that’s something that would be future backlog. So we still feel very comfortable but for us what had to happen is this -- first phase had to play out first, which is more sort of the monetization of the olefins, whether they’re taking methane and ethane and propane and basically putting crackers or de-hydrogenation units and those are not really that gas intensive but it is the next phase where we are seeing significant activity which is taking it further down the plastic stream into things like ethylene oxide or propylene, and also ammonia. So it’s the next phases where we are seeing opportunities and we are in the bidding phases at this point.

P. J. Juvekar – Citigroup

Quickly last question, your India volumes are up 10%. I know there's a lot of excitement there with the new government, so when do you think that would translate into new business for you?

Matthew White

Well, at this point we’ve actually had a lot of interesting projects we have been working toward in India, primarily in refining and steel space. And I think with the new government and some of the new confidence in the country, I hope that those investment decisions might accelerate. So at this point I feel fairly good about India and if Modi can deliver on the promises that they have laid out, I think that will bode well, and I think we can see some good growth there.

Kelcey Hoyt

Okay. Thank you again for participating in our second quarter earnings call. Our third quarter earnings call will be held on October 29 and if you have any further questions, please feel to reach out to me directly. Thank you.

Operator

And that concludes today’s conference. We thank you for your participation. You may now disconnect. Have a great day.

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