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Praxair Inc. (NYSE:PX)

Q1 FY08 Earnings Call

April 23, 2008, 11:00 AM ET

Executives

James S. Sawyer - EVP & CFO

Patrick M. Clark - VP and Controller

Elizabeth T. Hirsch - Director of IR

Analysts

Sergey Vasnetsov - Lehman Brothers

David Begleiter - Deutsche Bank

P.J. Juvekar - Citi

Xin Zhang - Goldman Sachs

Michael Sison - KeyBanc Capital Markets

Edward Yang - Oppenheimer

Kevin McCarthy - Banc of America Securities

Chris Shaw - UBS

Donald Carson - Merrill Lynch

Laurence Alexander - Jefferies and Company

Mark Gulley - Soleil Securities

Michael Harrison - First Analysis

Jeffrey Zekauskas - JPMorgan

Michael Judd - Greenwich Consultants

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Praxair earnings conference call. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

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

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

Thank you. Good morning, and thank you all for attending our first quarter earnings call and webcast. Pat Clark, Vice President and Controller and Liz Hirsch, Director of Investor Relations are with me this morning. Liz will review our first quarter results and afterward, I'll discuss our business outlook and our earnings guidance for the second quarter and the full-year 2008. We'll then be able to answer questions and when the question period comes, I would appreciate if you would limit your questions to one question with one follow-up and not three or four follows-up. Liz?

Elizabeth T. Hirsch - Director of Investor Relations

Thanks, Jim. Good morning. Today's presentation materials are available on our website at www.praxair.com in the investor section. Please read the forward-looking statements disclosure on page two and note that it applies to all statements made during this teleconference.

Please turn to page three for a summary of our first quarter results. The discussion and presentation of our first quarter results, including the quarter-over-quarter comparison, exclude the impact of a $17 million pension settlement charge related to lump sum benefit payments made to several recently retired senior managers in accordance with FAS Statement 88. The after-tax impact of this charge was $11 million or $0.03 per share. You'll recall that our first quarter and full-year earnings guidance which we gave you last quarter excluded this charge.

Praxair had a very strong first quarter. We achieved solid year-over-year growth in sales and operating profit in all our geographic regions. Net income and diluted earnings per share grew 20% and 22% respectively. We are continuing to see moderate growth in our US-based business despite mix economic conditions, and new business activity is strong. Growth in Asia and South America continues to be very robust.

Sales grew 22% to $2.66 billion. Currency appreciation contributed 7% to sales growth, but underlying organic growth was a solid 11% from higher volumes and higher prices. Volumes grew versus the prior year in all our geographies with Asia and South America producing the largest increases. In addition, the impact of several acquisitions which we made last year added 3% to our sales growth this quarter. Globally, sales growth was highest to the energy, general manufacturing and electronic end markets.

Adjusted operating profit was a record $499 million, 24% above the first quarter of 2007. The faster growth in operating profit as compared to sales was due to good control of fixed expenses, including SG&A which declined as a percent of sales versus the prior year.

Adjusted net income was $318 million, 20% above the prior year quarter. The slower growth in net income as compared to operating profit reflects two factors: First, higher interest expense due to higher debt levels, resulting primarily from acquisitions and our common stock buyback. And second, a higher effective tax rate of 28% versus 26% in 2007.

Adjusted EPS in the quarter was $0.99 as compared to $0.81 in the prior year. EPS was 22% from strong growth in net income and fewer average shares outstanding due to the stock repurchases. EPS would have grown 26% with an equivalent tax rate in both years. This demonstrates that we continue to achieve strong underlying operating leverage in the business.

Cash flow from operations of $379 million in the quarter increased $81 million versus 2007. This increase was primarily result of higher net income. Capital expenditures were $344 million in the quarter, most of which financed on-site production plants for customers. We invested a small amount $40 million in acquisitions, primarily two packaged gas distributors in North America. We also made additional stock repurchases, net of issuances of $227 million. We have now completed 838 million of the 1 billion stock buyback program we announced last July.

Our strong cash flow a result of our high return on capital has allowed us to accomplish this alongside a record level of capital investment in new customer supply system. Our overall debt increased slightly and our debt-to-capital ratio this quarter was 45.2%. After-tax return on capital was 14.8%, a bit lower than last quarter due largely to the higher tax rate.

Please refer to pages four and five for our results in North America. Sales in North America were $1.45 billion, 21% above the prior year quarter. Several acquisitions which we made last year contributed 6% to sales growth. Underlying growth from higher volumes and price was 10% versus prior year. This growth reflects strong sales to our energy, manufacturing and chemicals end market.

In the energy sector, we have strong demand from refiners for hydrogen. Sales of nitrogen and carbon dioxide to the oil well services market were strong in US, Canada and Mexico. High natural gas prices have continued to support robust oil and gas well drilling activity. Sales to chemicals were up, partly a result of better customer operating rate. Our sales to manufacturing markets were 8% above last year, excluding any currency or acquisition effect. Some observers may find this surprising given the reported slowdown in US industrial production. But there are many segments of manufacturing that are growing nicely, including, for example, agriculture, energy and mining equipment where customer demand is still strong.

Our business in Mexico had a very strong quarter, with sales up 23% versus 2007. The acquisition of Linde's industrial gas business last year contributed 10% to sales growth, but the underlying business showed strong growth. On-site and merchant liquids grew from new business in oil well services, oxy-fuel combustion applications, food and metal.

On-site sales were 32% above the prior year, driven primarily by hydrogen sales to refining customers. Our Gulf Coast customers are running well and refining large amounts of metal distilled due to strong demand and higher margins. The refining of these heavier fuels is very hydrogen intensive. Volume growth in on-site atmospheric gases, oxygen and nitrogen, was 8% from solid demand from chemicals, refining and primary metals customer.

Merchant liquid sales grew 13% from moderately higher volumes and higher pricing. Production capacity still remains tight in many locations, particularly for argon, helium and rare gases, such as xenon. Helium demand is strong for electronics and healthcare applications, and global supplies are limited. As I just mentioned, we had a strong quarter in oil well services so Canada is now in our seasonally slow period due to the warming weather. We expect this business to stay strong throughout the year because of high demand and prices for natural gas.

Liquid nitrogen and oxygen volume growth is also coming from new business and new applications in food, metals and manufacturing. Argon sales continue to be strong for stainless steel and welding related to non-residential construction. Business in Eastern Canada is soft due to weakness in the automotive industry and the strong Canadian dollar. Overall sales of packaged gases in North America grew 21% from the prior year. Acquisitions contributed 14% of this growth.

In PDI, our US and Canadian business, same-store sales growth was 6%. Gases growth was 9% versus prior year, but hard good sales were softer in both the US and Canada. Specialty gases are growing nicely, with sales up 20% from last year. Overall volume growth in US is steady. The pockets where we have seen some weakness are automotive, transportation and construction, but offsetting this has been growth in new business in agriculture, equipment, energy, mining and metal. We announced a price increase last week to keep pace with rising distribution and fuel costs. And we also closed two small acquisitions this quarter. Operating profit in North America grew 21% to $262 million, an 18% operating margin on sales from volume growth and higher pricing.

Please turn to page six to review our business in Europe. Sales in Europe of $390 million grew 18% from prior year, with currency appreciation contributing 13%. On-site, merchant, and packaged gases all showed moderate underlying growth. Reported growth was muted by fewer working days this quarter versus 2007, due to the timing of the Easter holidays. Our on-site and merchant sales to steel and chemical customers along our German pipeline grew. In Italy, the outlook is improving a bit and merchant volumes were up 7%. In Spain, overall gases sales grew 6% ex-currency. Our home care business showed strong growth. Operating profit of $87 million grew 21%. We are working hard to stay ahead of power cost increases and higher transportation costs with our prices. On April 1st, we closed the sale of our joint venture in Israel. This will reduce Europe's segment sales by about $27 million annually, with an immaterial impact on operating profit.

Please look at page seven for our results in South America. Sales in South America were $466 million this quarter, up 34%. Ex-currency growth was 15%. Domestic demand is accelerating across South America from strong industrial production growth. Brazil IP growth in the fourth quarter of 2007 was a historical high and is expected to continue to be very strong. In South America, merchant gases sales grew 23%, excluding currency effects and packaged gases sales grew 25%, fueled by strong consumer and industrial demand and new applications across the spectrum of end market.

Growth in on-site sales is currently more moderate, limited by our large customers in metals, petrochemicals, glass and paper who are operating near-full capacity because of strong demand from domestic and export markets. Many of these industries are planning to add capacity over the next few years.

New investment in refining and petrochemical is forecasted to be $90 billion through 2010 and investment in primary metals $27 billion. These projects will require industrial gas supply, and we are bidding on a record number of new business opportunities in the region. Projects in our backlog, which are currently under construction, will support strong sales growth in 2009 and 2010. Our LNG business with Petrobras continues to grow as we contract with more customers for liquid gas, and we are also moving rapidly to develop the market for packaged natural gas or CNG. Operating profit of $89 million grew 35% from prior year. Strong productivity results and pricing initiatives continue to exceed cost inflation.

Page eight summarizes our results in Asia this quarter. Asia's results were strong. Sales of $211 million were up 26% from last year's quarter, driven by strong volume growth. On-site sales in China and Korea were strong and merchant and packaged gases grew across the region. Electronics sales rose 38% on the strong demand for helium, specialty and rare gases, like xylene and xenon for the flat panel display and solar module manufacturing market.

Outside of electronics, we are growing sales for a variety of merchant application, such as water treatment. We recently announced two contracts with the municipality of Beijing to supply oxygen for waste water treatment as well as to supply an ozone system to replace chlorine, thereby improving the quality of drinking water in the Beijing area. We believe that environmental applications will provide strong future growth for gases in Asia.

We have a large number of projects, which will start up in Asia in 2008 and our pipeline of new on-site project is strong in China, India and Korea. These opportunities are quite diversified by end market and continue to support the infrastructure build-out in the industrializing economies.

This quarter we added four new projects to our backlog in the region, including two new oxygen plants for Meishan Steel. Operating profit of $37 million grew 37%, improving the operating margin to 17.5%. Sales and OP comparisons with the fourth quarter, typically reflects the seasonal slowdown due to the Chinese New Year holiday.

Please turn to page nine for Surface Technologies. Surface Technologies sales grew 14% to a $142 million and 7% excluding currency effects. Coatings for industrial gas turbines and oilfield drilling parts and components continue to be strong. Coatings volumes for next generation aircraft engines were slower than expected, but we expect this will pick up. Demand in Europe for general industry markets, such as printing and textiles, is soft. Overall energy and electronics markets present opportunities for new applications development. Operating profit grew 14% to $24 million. Operating margin dipped sequentially from the fourth quarter due to lower volume.

Now I will turn this over to Jim who will discuss our global end market trends in more detail, our business outlook and our updated earnings guidance.

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

Thanks, Liz. Please turn to page 10 which highlights our sales growth in the first quarter for our principal end markets. Sales to the energy sector continue to be strong and we are up 39% in the quarter, excluding the effect of higher natural gas price pass-through in our hydrogen business. The growth is largely from higher sales to refineries in North America. As Liz, mentioned, our oil well service business in the US, Canada and Mexico was very strong as well. $9 natural gas prices and strong demand for drilling activity are helping us a lot. We expect that we will continue to see very strong growth from this market. We will be bringing new hydrogen plants on-stream in 2009 and 2010, and are optimistic that some of the gas projects under feasibility studies by our customers will result in significant opportunities for us.

Global electronics was also very strong this quarter and our longer-term outlook is positive. Sales growth was 20%, driven by the start-up of two plants in Asia. One that was SMIC in Shanghai and one was Samsung in Korea, and then another start-up supplying a polysilicon producer in the United States.

Industry forecast for chip production this year are turning down, but we're seeing strong demand for gases from the flat panel display manufacturers in Asia. And the solar cell market is relatively small today, but growing rapidly. We are also developing deposition materials for this market. We have signed a number of new contracts including a contract to supply gases, equipment and gas management services to Silfab's solar grade polysilicon manufacturing in Italy.

Sales to chemical sector were up 19%. Growth was strong in all regions. Our US customers are operating better than year ago. Sales in Germany along our pipeline were very strong and in Asia, we are ramping up sales in the two chemical industrial parks that we supply in Shanghai and (inaudible). We expect future growth will come from new investment by our customers in China.

Sales to the metals market were up 15% in the quarter, mostly from higher sales in South America. US volumes were steady and in line with overall steel production. Brazil, India and China are all adding to production capacity, as they are advantaged globally in production costs. Steel and non-ferrous metals are large users of oxygen for combustion and we're seeing an abundance of new business opportunities in this sector.

Manufacturing was one of our strongest markets this quarter, with sales up 32%. But this growth included some acquisitions and currency, but you should know that our organic growth underlying price and volume for manufacturing was 11%. It's a strong number, with growth above 20% in emerging markets and holding about 5% in United States.

Growth is still coming from government and business capital spending, infrastructure spending and so forth. In the US, transportation and non-residential construction are little weaker than year ago, but are still experiencing pretty good growth for us and we are looking at winning new projects and applications.

Global healthcare sales grew 10% coming from our businesses in Spain, Brazil and our US hospital business. US home care business remains under significant pressure from rate cuts, but our people are operating it very well and it's doing quite nicely. Sales to aerospace were flat this quarter, reflecting the lower than expected volume of coatings work at our Surface Technologies business for the next generation jet engine manufacturers. We expect this business to pick up substantially in 2009, as Boeing brings deliveries of the 787 Dreamliner on and we will be providing coatings for both engine manufacturers that will go on to this plant. Food and beverage market continues to be very resistant to a very resilient and non-cyclical and we're signing new business in food freezing, beverage in all regions and geography.

Please turn to page 11 for a financial outlook and earnings guidance. For the balance of 2008, our outlook is positive in a mixed global economy. US fundamentals are reasonably strong, particularly in the markets which we serve like energy, mining, equipment and infrastructure. We expect moderate growth in our base business in North America, Europe and augmented by new projects start-ups and new business promotion applications. In South America and Asia, we expect strong double-digit growth to continue. So for the second quarter, earnings guidance is a range of $1.2 to a $1.6 per share on a fully diluted basis. This represents 15% to 19% growth from the second quarter of 2007.

For the full year, we now expect year-over-year sales growth to be 13% to 16%. This increase from our prior guidance is based on the stronger underlying business trends we've seen and the currency appreciation over the past two quarters. The reason that our full-year sales guidance growth percentage on a comparable basis is lower than what we reported in the first is the fact that our currency benefit of 7% this quarter and acquisitions of 3% this quarter get lapped over the remaining three quarters of the year. The acquisitions get lapped in the second quarter and the currency appreciation in the third and fourth quarter.

We are raising the upper end of our earnings guidance for the full year of 2008 by a nickel to range of $4.10 to $4.25 per share, excluding the $0.03 pension settlement charge in the first quarter. This is 13% to 17% above 2007. The earnings guidance assumes a full-year effective tax rate of 28%, 2% above we had in 2007, which is a $0.12 negative impact for us year-over-year and without that, we will be talking about 16% to 20% EPS growth.

Our CapEx forecast is $1.5 billion based on new projects which we continue to win at good returns and which will support future revenue and earnings growth. We are staying focused on simultaneously achieving our two financial goals, higher return on capital and high growth, as we believe this will continue to produce significant returns for our shareholders. We are executing well in the marketplace. We are winning a high percentage of business at good returns in the geographies where we're focused. And we are generating strong cash flow which will fund the record number of projects in our backlog that will come on-stream over the next three years. We are confident in our ability to produce strong double-digit earnings growth for this foreseeable future.

And now, I will now open this call to questions.

Question And Answer

Operator

(Operator Instructions) Your first question comes from the line of Sergey Vasnetsov of Lehman Brothers.

Sergey Vasnetsov - Lehman Brothers

Good morning.

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

Good morning.

Sergey Vasnetsov - Lehman Brothers

Jim, you mentioned that have active pipeline for acquisitions for the US in merchant business. Can you help us to understand the amount of fire power you have or the likelihood of deals that you see in front of you signing for those?

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

I am sorry, I don't understand the question.

Elizabeth T. Hirsch - Director of Investor Relations

Sergey, do you mean packaged gas acquisition?

Sergey Vasnetsov - Lehman Brothers

Yes, sorry.

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

Okay. We'll continue to be looking at packaged gas acquisitions in other places, but we won't put them into the forecast until we'd actually close them.

Sergey Vasnetsov - Lehman Brothers

Okay. And on your taxes, your guidance as of past quarter was say 26% to 28%, so you are still within this range, what's on the high end. What are the factor that drive you to the high tax rate?

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

Well, to try to explain it in a nutshell, we have a kind of finite size of deductions, but our taxable income is growing. And so, we're really kind of growing out of those deductions. And so it looks like it will be around 28% for the year and next year as well.

Sergey Vasnetsov - Lehman Brothers

Okay, thank you.

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

Okay.

Operator

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

David Begleiter - Deutsche Bank

Thank you. Jim, can you give us the large project backlog, what was added, what was started up in the quarter?

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

Yes. We talked about 42 projects in the backlog which were under construction and under contract. That's now moved up to 43, with 6 projects starting up in the first quarter and 7 new contract signings in the beginning of new projects. And I will tell you that the capital in new 7 is double the capital in the 6 that came on stream just because of our larger projects.

David Begleiter - Deutsche Bank

And Jim on the $1.5 billion CapEx, how much is for growth and what are the returns in either in the backlog or the CapEx projects?

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

Right. The way we look at the returns in the backlog are basically about 16% to 18% IRR after-tax and but that's an IRR discounted cash flow type of number. And that represents about $1.1 billion of the total CapEx, with the other $400 million going into cost reduction projects and maintenance.

David Begleiter - Deutsche Bank

Thank you very much.

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

Okay.

Operator

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

P.J. Juvekar - Citi

Yes, hi. Good morning. Another question on the pipeline, would you say that about half of your pipeline is related to energy? And then, can you just give us a breakdown of how much is it related to metals, particularly steel?

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

There was a large portion that's related to energy. That would be the number one. Second would be probably metals, if you include steel and copper projects in metals. So, quite a few copper projects. And then, there is couple of… maybe five or six semiconductor projects and then a handful of all kinds of others.

P.J. Juvekar - Citi

Okay. And you sounded more positive on this call Jim, compared to your fourth quarter call, when you talked about the slowing economy, was this change in your tune intentional?

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

Yeah. I mean we had a strong quarter and we saw good volumes pretty much everywhere where we operate and did some. I am definitely more optimistic at least for our business. The economy has, it's a mixed economy now. There are some big holes in the economy, obviously in banking, housing, automotive off about 12%, appliances off 15%, textiles off 15% and retailing off. But on the other hand, there are some industries that are doing very well. Business IT spending up 10%, communications equipment about 10%, metals, energy, drilling and all that up about 10%, and airplane deliveries up about 10% and set to grow faster going forward. So, it really depends on I think what industries you are in and we have some sales into the losing industries, but not that much.

P.J. Juvekar - Citi

And lastly, you talked about agriculture a few times today. Is that mostly related to fertilizer? And how big is that field?

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

No. That's related to welding tractors.

P.J. Juvekar - Citi

Welding tractors. Okay.

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

And stuff like that, equipment.

P.J. Juvekar - Citi

Okay. All right. Thank you.

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

Yeah.

Operator

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

Xin Zhang - Goldman Sachs

Good morning. This is Xin Zhang [ph] sitting for Bob. I have two questions. The first one, that Asia might have showed some pretty encouraging rebound in first quarter '08 versus 1Q '07 and also last quarter, perhaps the highest levels since the beginning of '07. But if I look at the sales trend this quarter versus last quarter essentially is a flat. So, I am wondering what's the drivers there for this margin outperformance for this quarter? And then also, do you think this might end up all sustainable throughout this year?

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

It's going to bounce around, because this business for us is still really a kind of a start-up business. It's relatively small and we're adding projects at a rapid pace. 13 of the projects in the backlog are in Asia. And so, as we incur start-up expenses for those and fixed costs for those, that's going to hurt the operating margin as they start up, most of them will be in the 20s to 25% operating margin. So, it will bounce around. But ultimately, we'll be doubling the size of the business here very quickly and then it will be more stable.

Xin Zhang - Goldman Sachs

Okay. And then the second question, can you just give us a little bit more color on the margin trends both on the year-over-year basis and the sequential basis regarding your margin in the pipeline business?

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

I am not sure I understand the question. You want to know the margin in the pipeline business.

Xin Zhang - Goldman Sachs

Yeah. The margin and also the pipeline business both year-over-year basis and also sequential basis?

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

Okay.

Xin Zhang - Goldman Sachs

Basically I just want to know is there any contraction on the year-over-year basis or sequential basis or do you still see expansion?

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

Okay. Well, we don't report the margins on those businesses by region and the thing about it is that almost all the merchant product comes from on-site plants, okay. And so you could make that margin by whatever price you transfer in your calculations or your accounting from on-site to merchant. You could shift that margin back and forth anywhere where you wanted to. It doesn't make sense reporting a margin separately for the on-site business and separately for the merchant business, because they are on the same plant and the same production cost.

Xin Zhang - Goldman Sachs

Okay, thank you.

Operator

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

Michael Sison - KeyBanc Capital Markets

Hey, good morning. In terms of pricing for the total company continues to be pretty strong here. Are you getting any incremental pricing there to profitability? Or is that most of it to cover increasing costs?

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

No, we're getting incremental pricing above costs. For example, our average electricity cost was up about 4%, 5% year-over-year and we got pricing than that year-over-year and then in the particularly scarce project, products like helium, prices up 20%; argon, prices up very significantly because we're having to put people on allocation for these products.

Michael Sison - KeyBanc Capital Markets

Okay. Then shifting really quick to PDI, continues to perform pretty well or very well considering the environment. Do you expect that same-store sales number to sort of stay at around the same level? You have seen a lot of price increases, maybe that increases that. And on the hard good side, metal prices are going up. Can you pass on those consumables I guess metal-based consumables when they go up?

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

We can and we do, absolutely. But looking forward, I think the same-store sales number will be going over, because we have both hard goods and gases in the same-store sales number and the hard goods was really very low, 1% to 2% and the gases was very high. And what we're seeing as we move along is that people are buying less hard goods, people are not buying welding equipment and capital equipment in the hard goods areas and so we will pretty quickly see I think negative growth in hard goods on a same-store sales basis, okay. But we are starting up sales and making acquisitions and so forth, and that will keep the top line and the operating profit rolling.

Michael Sison - KeyBanc Capital Markets

Great, thank you.

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

Yes.

Operator

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

Edward Yang - Oppenheimer

Good morning, Jim. My question is on South America. At your Analyst Day last month, you were looking for South America to grow about 12% to 15% ex-currency to 2010. Does this target look conservative now, it sounds like you do expect the on-site growth to accelerate?

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

It's about where we think it will be. The consumer part of the economy is accelerating right now and there is a lot of goods being consumed there and there is a lot of factories in production equipment is being built there. But actually, I think the limiting factor just maybe the available capacity and just how quickly you can get projects built there. We've got 8 project in our backlog in South America, about half of them in Brazil and the other half outside of Brazil.

Edward Yang - Oppenheimer

Your volumes are already growing about 9% this quarter and you are getting pricing on top of that, could you quantify what those additional projects in '09-'10 is going to be additive to volumes?

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

I can't give you specific number on that.

Edward Yang - Oppenheimer

Fair enough. Thank you.

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

Okay.

Operator

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

Kevin McCarthy - Banc of America Securities

Yes, good morning. Jim, you mentioned the US home care business remains under some pressure from rate cuts. It's been a factor for everyone in the industry. Can you give us an update on the strategy there? And will you be amenable to strategic combination to take costs out of that business?

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

Let me answer it this way. We're committed to the business. It has an inferior pricing model to the rest of our business, in the sense that the rest of our business we have a lot of influence on our price because we contract it, whereas in home care business the price is dictated to you. So, it's just an inferior business from that revenue model point of view. And the other thing that's different about it is that it's really a people business. Your success in this business is all about how good your people are and how you manage your people and that's really where our focus is more than anything right now. And unfortunately, we've looked at other industry combinations, but the combination was somebody else would just be bringing a bigger black hole in. So, we're not going to do that.

Kevin McCarthy - Banc of America Securities

Understood. And then second question, if I may on foreign exchange. What percentage of your international contracts or dollar index, wonder if I could take your 7% top line impact and try to do some math and come out with the bottom line impact?

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

I would say that the… actually it's embedded in the 7% top line number, because the index contract to dollars. So for example the Real getting stronger, but we're paying in dollars, we wish in second thought we hadn't done that, but it's a way of hedging the currency. But it shows up in sales line. So you don't need to do any different than the 7%.

Kevin McCarthy - Banc of America Securities

Okay. So I can just flow that through and come up with maybe something like $0.07, maybe $0.08 in the bottom line?

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

Yeah. Exactly.

Kevin McCarthy - Banc of America Securities

Thank you very much.

Operator

Your next question comes from the line of Chris Shaw of UBS.

Chris Shaw - UBS

Hey, good morning. In terms of the qualitative questions that people are somewhat satisfy with the quarter. But I'll ask something… just could you tell me what's the, things seem to be going pretty well, what's the most major threat that you guys can see on horizon and is it the fact that one of the competitors might be bidding irrationally and have you seen any of that?

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

Not, there is always a competition in the industry. There is competition, there is competition in every, and it all two competitors to be and that will always be out there. But I think there is enough business out there that we're not getting crowded out. We've got a much bigger backlog proportionately than our competitors do and that's a sign that we're winning more business and at better returns. So it's really about execution, it's really about being very discipline in how you price, how you build the contracts, how you execute in terms of brining the project in on-time and on-schedule and getting the on-time, very close to 100%. So it's really about execution and we depend on our people, we have very good people, we depend on them a lot, lot of them are stretched because of the amount of work they were doing, but I don't see that as a threat either.

Chris Shaw - UBS

There is nothing else worrying you near-term significantly?

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

No.

Chris Shaw - UBS

Okay, that's it. Thanks.

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

Okay.

Operator

Your next question comes from the line of Don Carson of Merrill Lynch.

Donald Carson - Merrill Lynch

Thank you. Jim, just a question on sustainability of the strength you are seeing in the US merchant business. You commented that obviously that different industries are seeing different growth rates. But I am wondering in your more traditional sort of metal fabrication customers, your general industrial customers. Is oxy-fuel combustion still a strong driver of merchant volumes?

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

Well, oxy-fuel combustion is actually probably more in on-site than merchant.

Donald Carson - Merrill Lynch

But I was thinking more just using liquid oxygen as an alternative to atmosphere air in a wide variety of combustion processes?

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

Right. But you're using generally a large enough combustion process that a VPSA plant or an on-site plant rather than a merchant plant.

Donald Carson - Merrill Lynch

Okay. So that's really not a factor in your merchant strength then?

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

No.

Donald Carson - Merrill Lynch

Okay. And then on the energy side, you had very strong North American energy volumes. Just wondering, is this… are these relatively easy comps, since I guess you've got the Mexican, the Pemex [ph] start-up which would certainly benefit both volumes and I guess even more so on margin? And then BP, I guess had easy comps a year ago, just so is this a comp issue or just wondering exactly what's driving that?

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

We had two huge projects come on-stream during the year the Bolero [ph] refinery and the Pemex [ph] project. And in addition to that, the cavern that we built is getting very actively used by refiners and what it allows them to do is to at the drop of a hat request a big boost in their supply of hydrogen and they pay a premium cost for that. So that's also helping the sales out down there.

Donald Carson - Merrill Lynch

And how about on BP, has there been any material change in their takes, are they still running a relatively sweet crude slate and not using as much hydrogen as they potentially could, is that a --?

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

That's still the status.

Donald Carson - Merrill Lynch

All right, okay. Thank you.

Operator

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

Laurence Alexander - Jefferies and Company

Good morning. I guess, first of all just a question on the backlog… on the CapEx spending, you have been increasing the CapEx budget by slightly more than $200 million a year for the last several years. As you look at the current backlog, it would have been reasonable to assume that your CapEx spending is going to sort of accelerate a little bit over the few years rather than just maintaining that trend line?

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

It will be going up, I am sure it will accelerate. But it will be going up.

Laurence Alexander - Jefferies and Company

And I guess secondly, in the last couple of conference calls you've been highlighting some of the helium, argon, the rare gases, the specialty gases, the scarcity in all of those. If you took those as a bucket, I mean how much does that represent of your overall business?

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

The whole bucket of helium and specialty gases and rare gases is about $650 million.

Laurence Alexander - Jefferies and Company

And in Europe, the last couple of quarters you've highlighted that pricing has been lagging energy costs. Is there some sot of a structural change that you will now begin to see there? Or can you just walk us through why that's happening?

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

No, Europe is not, Europe is just not use to putting through price increase. So as a generalization, it's hard to get people to do price increases in Europe. And so, despite the fact the power cost is up, we're not doing this well there in recovering it as we are in all the rest of the continents.

Laurence Alexander - Jefferies and Company

Okay. And I guess just lastly, can you give sort of an update on your thoughts on possibly extending into additional geographies beyond the geographies that you are currently in?

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

We are looking at a couple of other geographies. We as you know extended into Norway with the Yara joint venture and we're looking at couple of other geographies right now, but I can't tell you specifically what they are.

Laurence Alexander - Jefferies and Company

Okay, thank you.

Operator

Your next question comes from the line of Mark Gulley of Soleil Securities.

Mark Gulley - Soleil Securities

Yes, good morning. Couple of things. One, when the Dreamliner finally begins to shift in quantity, can you give us any idea of what kind of boost in PST sales and earnings we might see from the higher activity?

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

I can't give you specific idea about… I would like to see PST growing at 15% to 20% a year. One of the problems though is that the aerospace only represents about 40% of the business, energy represents only 20 to 25, those are great, but the rest is in printing and textiles and things that are actually going down in terms of their industry economy. So, we have… we always will have this negative drag from textiles and paper and printing going down.

Mark Gulley - Soleil Securities

Okay. I want to come back to the refining question, particularly with very high gasoline prices that sometimes seems if refining operating grades are not what they should be and they are not providing enough supply. Going back to BP, is the crude throughput about what it should be, it's just the question of the sweet sour and when could they get more sour and therefore consume more hydrogen?

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

I don't know the answer to that. The only thing I can tell you is that refinery margins are squeezed right now because cost of crude is going up more than retail gasoline price.

Mark Gulley - Soleil Securities

Okay. But one way to solve that is to acquire lower cost crudes, i.e., have your --?

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

I totally understand that, but I can't speak for BP and where they are sourcing their crude and what capacity they are running their refinery out and so forth, I just don't know.

Mark Gulley - Soleil Securities

Okay. Thanks, Jim.

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

Yes.

Operator

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

Michael Harrison - First Analysis

Hi, good morning. I was wondering if you could talk on the PDI side, you mentioned hard goods sales pretty weak in the 1% to 2% range. Was that across the Board or were there some regions maybe where the weakness was more pronounced than in others?

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

Yeah, they are definitely regions. Ontario is the worst, because Ontario is the home to lot of auto parts manufacturing, so Ontario is the worst and then pretty much strong and the South is very strong, the East is kind of weak, the Midwest is strong and Pacific Northwest is strong.

Michael Harrison - First Analysis

And then as you look at how PDI appears to be performing, I am not going to speculate whether we are already into recession or not, but how it's performing relative to past recession? Can you give us kind of a status report maybe with particular regard with to how pricing as holding up?

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

Well, this recession is very different from the one that we went through in 10 years ago, 2000, 2001, 2002. And it's also very good the one that we went through in 1992 because this one's basically being caused as much, it's just the banking sectors started the recession, okay. That wasn't what happened before, it was industry and consumer demand which started the recession. So the baking industry started the recession and the question is how much is that spread to the rest of the world. The other big difference is that we have limits to growth in energy and raw materials now. And so for us a recession which has huge amount of growth in energy and raw materials isn't going to be so bad, as it was when we had a recession just because consumer demand was up.

Michael Harrison - First Analysis

And then was also hoping you could address in a little more detail your comments about US non-residential construction being a little bit weaker than a year ago. Is that a reflection of just the general economic slowdown, are you seeing may some infrastructure projects getting delayed or canceled? Or is it possible that maybe there is additional competition there and maybe you are even losing some share?

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

No, in fact I don't have a hard number on that. I am just kind of going by good feel because obviously residential construction is in pits. But business capital spending and business equipment is strong. What's in the middle, I think is commercial construction of strip malls and stuff like that and I just have to guess if that's getting weaker.

Michael Harrison - First Analysis

All right. Then last question I had on the compressed natural gas business in South America, can you talk about how the economics of transporting natural gas compare to other packaged gases? Is it something that you can feasibly transport over a longer distances? Or in the future, are you going to need to build out your (inaudible) indication and cylinder network in order to improve your geographic coverage?

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

Right. Well, it's really about the same process in terms of transporting in liquid, transporting natural gas versus transporting other gases, it's not and the cost structure is not all that different. And but what does go on down there is the alcohol is also a substitute fuel down there and so if alcohol is cheap people use less natural gas in their cars and so on.

Michael Harrison - First Analysis

And what kind of pricing dynamics have you seen between the two recently, presumably natural gas is quite a bit more expensive relative to alcohol?

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

Well, it's actually a seasonal, in fact if you really want to get into it, because they harvest the cane in the alcohol in their summer which is our winter and prices are low and then you get to the other half side of the year, our summer, their winter, prices of ethanol tend to go up, so it's hard to follow.

Michael Harrison - First Analysis

All right. Thanks very much.

Operator

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

Jeffrey Zekauskas - JPMorgan

Hi, good morning, Jim. You obviously reported a splendid quarter, your volumes were up and pricing was very good. Your gross profit margin was down a 100 basis points, why is that?

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

That is just purely because of a mix of hydrogen in the sales because as you know we sell atmospheric gases. We have a very, very high gross margin because we don't have any feedstock costs. In hydrogen business, you invested $1 capital and you get $2 of sales, but $1.80 of those sales is just passing through the cost of natural gas in this contract to the customer. So those hydrogen sales just have much lower gross margins than atmospheric gases sales.

Jeffrey Zekauskas - JPMorgan

I appreciate that. For my one follow-up, your minority interest number is I think up about 65% and your equity income more than doubled. Can you count, can you comment on that and talk about the sustainability of those trends for the year?

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

I am not sure that they will go up that fast through the year, but we got the Yara joint venture which we don't consolidate and that's equity income. We got the Shanghai joint venture, which is growing very rapidly, which comes into equity income. And then on the minority side, we have got couple of things. If the business is growing if you got a minority on then your minority is going up. So it should be going up.

Jeffrey Zekauskas - JPMorgan

So why did that equity investment double, equity income double?

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

Yeah.

Jeffrey Zekauskas - JPMorgan

Okay, thanks very much.

Operator

And your final question comes from the line of Mike Judd of Greenwich Consultants.

Michael Judd - Greenwich Consultants

My question has been answered. Thank you.

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

Okay. Well thank you all for attending the call and I look forward to another conference call in July. Take care and have a good spring.

Operator

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

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