Praxair's (PX) Q1 2016 Results - Earnings Call Transcript

| About: Praxair, Inc. (PX)
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Praxair, Inc. (NYSE:PX) Q1 2016 Earnings Conference Call April 29, 2016 11:00 AM ET

Executives

Kelcey Hoyt - Director, Investor Relations

Matt White - Senior Vice President and Chief Financial Officer

Liz Hirsch - Vice President and Controller

Analysts

P.J. Juvekar - Citigroup

Matt Andrejkovics - Morgan Stanley

Mike Harrison - Seaport Global Securities

Laurence Alexander - Jefferies

Bob Koort - Goldman Sachs

Duffy Fischer - Barclays

Emily Wagner - Susquehanna Financial

James Sheehan - SunTrust

John Roberts - UBS Securities

Mike Sison - KeyBanc

Jeff Zekauskas - JPMorgan

Christopher Parkinson - Credit Suisse

Operator

Good day, ladies and gentlemen and welcome to the First Quarter 2016 Praxair Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, Ms. Kelcey Hoyt, Director of Investor Relations. Ma’am, you may begin.

Kelcey Hoyt

Thanks, Ayela. Good morning and thank you for attending our first quarter earnings call and webcast. I am joined this morning by Matt White, Senior Vice President and Chief Financial Officer and Liz Hirsch, our Vice President and Controller.

Today’s presentation materials are available on our website at praxair.com in the Investors section. Please read the forward-looking statement disclosure on Page 2 of the slide and note that it applies to all statements made during this teleconference. In addition, please note that year-over-year and sequential comparisons exclude a bond redemption charge in the first quarter. The reconciliation to the U.S. GAAP reported numbers are in the appendix to this presentation and the press release.

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

Matt White

Good morning, everyone and thanks for attending. First quarter EPS finished at $1.28, which was at the higher end of our expectations. Cost management and foreign exchange rates in March were better than we originally anticipated. Global volume trends were a bit mixed as we saw certain end markets improving, with others remaining at fairly low levels. By the second half of this year, we will start to lap some of the more difficult prior year comparisons. So, I anticipate year-over-year trends should improve.

Starting in North America, volumes were weaker across our major industrial end markets of energy, metals, chemicals, and manufacturing. Chemicals and downstream energy were primarily driven by extensive turnaround activity in the U.S. Gulf Coast, which we expect to improve over the next few quarters. Metals, manufacturing and upstream energy trends have been driven by the commodity price collapse coupled with the strong dollar impact to our U.S. market. I expect upstream energy to remain fairly sluggish as most wells are not being completed therefore deferring the need for any nitrogen. We have seen some recent uptick in our steel customers as a combination of import duties and lower inventories have resulted in higher production volumes.

On the manufacturing front, while we have seen some sequential improvement in our onsite and merchant business units. U.S. packaged gas volumes have still been quite weak, especially hardgoods. In fact, U.S. hardgoods alone are driving our volumes down a full percentage point on the global results. Part of this is from weaker demand due to the slower investment cycle and part from us not participating in some low margin hardgood business. We have seen this late cycle reaction in our PDI business in the past. So, it seems consistent with our prior experience.

Looking forward, we may have a few more quarters to go with difficult U.S. packaged gas conditions, but the onsite and merchant businesses seem to be improving modestly. Canada continues to improve in the Eastern part of the country from a weaker Canadian dollar, especially in the food, manufacturing and healthcare end markets, while the west and north continue to struggle from low commodity pricing. And excluding the energy market, Mexico is growing mid single-digits from a weak peso and a very strong manufacturing base.

In South America, the volume decline appears to be stabilizing, but it’s quite difficult to predict anything there right now. While there has been a flurry of financial market activity related to the political situation in Brazil, we really haven’t seen much change on the ground regarding industrial activity. We did see some sequential volume improvement in merchant and packaged gases off a very weak fourth quarter. Brazilian markets of healthcare and food and beverage are growing double-digits from prior year, while industrial markets continue to struggle. We are achieving mid single-digit pricing in our merchant and packaged gas businesses, but it isn’t enough to overcome current inflation. So, we are initiating new price actions for this year and continuing our cost containment efforts.

Margins have eroded from a combination of lower volumes, higher cost and continued excess dislocation costs from CO2 sourced outages. First quarter is always the weakest due to carnival and summer holiday, but we did see volumes pickup in March and we anticipate further seasonal growth into the second quarter. Europe has been steadily improving each quarter. Year-over-year volumes have increased a few percentage points supported by project startups and some volume growth in Southern Europe. Almost all end markets are up over last year, with the exception of upstream energy. We have been able to capitalize this and achieve a steady improvement in operating margins, up to 19.4% for the quarter.

We anticipate second quarter volumes will sequentially increase from project startups and the Yara acquisition. This acquisition will significantly grow our supply network and density for CO2 serving key Brazilian markets throughout Continental Europe. In our Asia segment, we continue to see mid single-digit volume growth, but a challenging price environment in China. The first quarter is seasonally the weakest in Asia due to the Lunar New Year, yet we still were able to achieve 6% volume growth, primarily from project startups. In China, industrial end markets continue to be plagued with overcapacity as the economy attempts to shift to more consumer and service driven growth. We haven’t seen much impact yet on steel capacity reduction, but we feel good about our Tier 1 steel customers as they continue to run their operations throughout this period.

Other infrastructure-related industries are also struggling as capacity is being rationalized. So, we have seen our glass customers lower their production rates. And while Western expansion of coal to liquid projects has been significantly curtailed, we have limited our exposure there and instead focused on coal to chemical projects with highly competitive customers in the East. As such, chemical and electronic markets are growing well and we are increasing our focus toward food, healthcare and environmental applications. Our Indian business is growing mid single-digits driven by combination of project startups and stronger industrial activity. Korea performed as expected from consumer electronic trends and our Thai business has been growing in the food and transportation end markets.

I will wrap it up with our Surface Technologies business, which as you all know, is a global business. PST serves three key end markets of aerospace, energy and industrial. The energy business has weighed negatively on the results due to collapse in oil price and subsequent reduction in coatings for oilfield equipment, although we have recently seen positive trends for coatings to industrial gas turbines. Industrial segment growth rates have also been lower due to global trends. Aerospace however continues to be a bright spot through our strong customer partnerships and air travel trends. We also have seen very high growth rates in our metal powders business serving the 3D printing market. Finally, we expect to startup our GE Aviation joint venture by middle of this year, which should improve the business growth rates.

On balance, I would say our first quarter trends were slightly better than we expected. We still have several challenged end markets and the late cycle laggers, but we are seeing some positive volume trends in key geographies. And while our EPS is still down year-over-year from a combination of negative foreign currency translation and softer volumes, this is the second quarter in a row that our operating cash flow has grown over prior year. Furthermore, we continue to tightly manage our CapEx spending resulting in 100% increase in first quarter free cash flow.

I will now hand it over to Kelcey to walk through the financial results.

Kelcey Hoyt

Thanks, Matt. Now, please turn to Slide #4 for our consolidated results. Overall, sales were $2.5 billion, 1% lower than last year, excluding currency and cost pass-through. Price attainment contributed 1% growth and was achieved in most reporting segments. The majority of volume growth from new project startups occurred in Asia, with the remainder of revenue contribution largely in Europe. We continue to see solid growth out of the more resilient end markets globally with food and beverage and healthcare growing 7% and 3% respectively. The volume decline year-over-year net of project contribution was primarily driven by weaker base volumes in North America, largely in the energy, manufacturing and metals end markets. Sequentially, volumes were down 1% versus the fourth quarter as the improvement in South America was offset by seasonal declines in Asia and the timing of customer turnaround in North America.

By operating segment, North America organic sales declined 4% year-over-year and 2% sequentially. The business achieved price improvement from merchant and packaged gases. Weaker packaged gas volumes drove about half of the 5% volume decline, largely hard goods. The remaining volume softness included continued lower upstream energy and metal sales year-over-year. In addition, chemical and refinery volumes were negatively impacted by the timing of customer turnarounds. Sequentially, organic growth to metals and manufacturing customers was more than offset by the impact of customer turnarounds, as well as modest further weakness in packaged gases.

In Europe, organic sales grew 2% year-over-year and were down 2% sequentially. Year-over-year growth was primarily driven by project contribution in Russia and higher base volumes in Southern Europe. Sequential volume declines include the seasonal impact of the Easter holiday, as well as further weakness in upstream energy. South America’s organic sales grew 1% year-over-year as price attainment offset the impact of lower volumes. Year-over-year volumes again outperformed local industrial production as growth in healthcare and food and beverage mitigated volume declines and manufacturing. Sequentially, organic growth of 8% included 3% from new price actions, as well as volume growth from healthcare, food and beverage and even a modest improvement in manufacturing off of a very weak fourth quarter base.

Organic sales in Asia were 5% higher than last year, primarily driven by new project startups in China to chemical customers and in India to metals customers. Sequentially, volumes included the seasonal impact of Lunar New Year. Surface Technologies organic sales were down 5% year-over-year and 2% sequentially, driven by energy and industrial end markets.

Operating profit of $554 million was down 4% from the prior year period, excluding currency. Higher pricing increased operating profit, but was more than offset by lower volumes. Operating margin was 22.1% and the EBITDA margin grew 30 basis points to 33.3%. Earnings per share of $1.28 was down 3% excluding foreign currency. Through relentless operational discipline, we generated strong operating cash flow of $547 million, 22% of sales. This funded acquisitions of $63 million and capital expenditures of $323 million, about 65% of which was in North America given its greater share of projects in the backlog. In addition, the company paid $240 million of dividend.

Our capital allocation process is consistent and disciplined. The remaining cash that we have after growth investments and dividends is directed towards stock repurchases. We continue to expect to spend approximately $500 million on acquisitions this year, including the Yara European carbon dioxide assets and the purchase of the remaining shares in our Yara-Praxair joint venture. Given that we anticipate more capital will be allocated towards accretive acquisitions, we have temporarily reduced our stock repurchases. Our project backlog, which we define as projects with CapEx greater than $5 million and associated with the fully executed customer supply contract, is currently $1.5 billion comprised of 17 projects. During the first quarter, we added a project located in the U.S. Gulf Coast region for expansion of carbon monoxide supply to the chemical end market and started projects in South America and Europe. Existing backlog projects will start up and contribute to growth during 2016 through 2018 as shown on Slide 13. North America continues to reflect about 55% in the backlog.

And now I will turn the call back to Matt to discuss our earnings guidance located on Slide #5.

Matt White

Before I jump into the numbers, I want to make a few comments about our foreign exchange rate assumptions. It’s safe to say that FX markets are volatile and likely will remain that way for the foreseeable future. In years past, we were able to rely on spot and forward rates as good indicators for near-term future rates and thus incorporated them into our guidance. However, these have not proven to be very useful over the last several quarters, as many currencies seem to be trading more in binary events than fundamentals. Speculation on political decisions or interest rate increases can move currency rates several percentage points in one day. In light of this, our current second quarter guidance reflects the recently improved foreign currency spot rates, but the back half of the year uses rates closer to the first quarter average rates given the uncertainty.

For the second quarter guidance, we are estimating EPS in the range of $1.32 to $1.39. Sequentially, we are anticipating volumes to improve from a combination of seasonal patterns and current run rates from March. We still have some volume headwinds in specific end markets, but I anticipate prior year comparisons will ease by the second half. Looking at the full year, EPS guidance is in the range of $5.35 to $5.70. We raised the range $0.05 to account for updated currency impact for the first half, but we then took the top end back down $0.05 in light of the North American volume trends, primarily related to U.S. packaged gas volumes. I believe we have a few more quarters of this late cycle impact, which will reduce some of the upside potential for the next six months to nine months. Capital expenditures are anticipated to be $1.5 billion, which is consistent with our prior guidance. We continue to manage capital spending prudently, so I hope to improve on this number.

In summary, our first quarter ended a little better than expected. Some of the macroeconomic headwinds have started to stabilize, but one quarter doesn’t make a trend. Overall, we are executing the strategy, optimize the base business, prudently allocate capital for profitable growth and manage the things within our control to create long-term intangible shareholder value.

I would now like to open up the call for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from P.J. Juvekar from Citigroup. Your line is now open.

P.J. Juvekar

Yes. Hi, good morning Matt.

Matt White

Good morning P.J.

P.J. Juvekar

As CapEx cycle slows down around the world, do you imagine a scenario that Praxair’s backlog continues to decline, but your free cash flow improves and you can buyback more and more shares?

Matt White

Well, I would say looking at our CapEx spending, we continue to see based on current numbers, probably two-thirds of it roughly is associated with growth projects. So if the assumption were that large capital expenditures of our customers would either be delayed or deferred into future years, then yes, our free cash flow would continue to grow. And you have seen that over the last 18 months, frankly. We have had some very high free cash flow numbers and a lot of that’s been attributed to the reduced CapEx spend. But when I do look at the project opportunities, we still do see some U.S. Gulf Coast, pretty large scale projects that we are working on diligently. So I would say, as the projects are coming in, they will be larger and lumpier than they have in the past. We are seeing projects that tend to be both process and atmospheric gases. So you tend to have larger investments than I would say some of the normal investments we have seen. But to your scenario, yes lower CapEx will mean higher free cash flow. And if we are not spending it on acquisitions, which are clearly another synergistic growth area for us, we will just continue to raise the dividends and use any excess for some buyback.

P.J. Juvekar

And as a follow-up, on coal to chemical projects in China, historically, I think Praxair was a bit more skeptical of those projects. I think you said that they are now ramping up and they are more – a bit more viable today and is that due to lower coal prices? Thank you.

Matt White

Well, since we are not participating in any, I will call it, at the mine of the mouth coal, especially coal to liquid, coal to synthetic natural gas or some of those coal to olefin projects in places like Inner Mongolia we are not in there. So, I can’t speak to those projects specifically. To your point, we did not participate in those projects. But what I would say we are seeing on the ground in general is this. First of all, these are very high CapEx projects. They take a significant amount of capital for the gasifiers to basically gasify that coal and make whatever product you are looking to make. I think it’s pretty clear and pretty well known that the liquidity situation for a lot of companies in China is not very strong. There has been a lot of stimulus that especially this most recent month or two that’s not sustainable. So, our view is if the project is permitted, there is a good chance it should be finished and built. For project that’s not permitted in this space, our belief is it probably will not get built in any foreseeable future. Then the question is, if it’s built, will it run given the low coal price? And that’s just the function, I think of the more profitable ones, with liquidity will run and the ones that may have some financial difficulties may or may not run. So, that remains to be seen. But our customers that we supply, they are large global chemical players. They are mostly in integrated parks. So, there is multiple integrated pet chem chain and they continue to run.

P.J. Juvekar

Thank you.

Operator

Our next question comes from Vincent Andrews from Morgan Stanley. Your line is now open.

Matt Andrejkovics

Hi, good morning. This is actually Matt Andrejkovics on for Vincent. Thanks for taking the call. Just in North America, the 1% price gain while volume was down 5%, what’s driving that? Is that perhaps a mix shift because some of the volume decline was in the lower margin hardgoods?

Matt White

There maybe a little bit of that, that mix shift. We have been announcing price increases. North America is one of the few regions in the world, where they are publicly announced price increases. You may have seen some through the press releases. So, we are getting some price in merchant. We are getting some price in packaged. Clearly, there is a mix benefit with less hardgoods. However, there is also a mix hurt with less merchant going into energy and what’s called supplemental liquid that would go into places like metals that may run stronger or liquid argon that may go into places like stainless steel. So, I would say on balance probably not a lot of mix effect, this is really more a function of the price increases. They are low single-digit. And then when we show our price, it has a function of the entire revenue. So, the number tends to always show a little lower, because you have onsite in the denominator and we don’t count onsite as pricing. So, we are still getting low single-digit pricing in both packaged and merchant overall and this I think pretty much reflects that.

Matt Andrejkovics

Got it. Thanks. And then just to follow-up, are you seeing any pickup in packaged gas M&A post the pending Airgas deal and then have valuation ideas changed at all given the watermark that they have established? Thanks.

Matt White

Well, I would say from a valuation perspective, we haven’t seen much change at all and we are not changing our criteria. So, I will start with that statement. Yes, we did a few last quarter three or four, we executed another three or so this quarter, all U.S. packaged gas. So, we continue to see some good, small synergistic tuck-in opportunities, very consistent with the rollup strategy we have been performing. Clearly, there are some headwinds in U.S. packaged gas today. That also presents some opportunities for acquisitions and it can make the valuations a little bit better. So, we continue to pursue that, but we are still well underway in some of our independent rollup strategy.

Matt Andrejkovics

Thank you.

Operator

Our next question comes from Mike Harrison from Seaport Global Securities. Your line is now open.

Mike Harrison

Hi, good morning.

Matt White

Good morning, Mike.

Mike Harrison

Yes. I was hoping you kind of addressed this in your discussion about North America pricing, but can you just talk a little bit about what you are seeing in underlying supply and demand dynamics in LOX/LIN and particularly in LAR as we see maybe some improving utilization at some of the steel customers.

Matt White

Sure. What I can start with were some of the headwinds we are facing and then talk a little bit about were some pickup. So, with LOX, one area that’s a headwind there is you tend to have and I mentioned it earlier, supplemental oxygen on a liquid base as you can supply the steel mills. So, when steel mills run very hard, especially areas like tubular steel, they will actually take liquid in addition to any onsite oxygen they have. Clearly that, on a year-over-year basis is a headwind. Those volumes are definitely down. Similarly, LIN is the primary product that we put downhaul for fracturing in the Oilwell service business. And that from Canada to U.S. to Mexico is down significantly given the challenges in the upstream energy business and the low oil price. So, those are both down significantly in those end markets. Excluding those, we are starting to see some pickup, areas that are resilient like LIN for food, CO2, which I know you didn’t ask about, but CO2 was actually growing quite well.

We have been securing a lot of sources for CO2, if that is a game that’s all about very integrated supply chain and we are seeing a lot of strength there in food and beverage, especially things like our new CO2 business usage there for carbonated beverages. But other than that, we are seeing some moderate growth in LIN/LOX when you exclude those two sort of cyclical demand areas. On the LAR front, stainless is a little bit down year-over-year. We had some strong stainless last year, so you have got some comps here lapping there and met fab is a little down, given the trends I spoke about in PDI. So from that perspective, I would say LAR is down a bit, but LAR is still tight overall. As you imagine, when you have onsite customers that are oxygen baseloads running lower, you have to make more premium argon. So, argon is still a tight product despite the volumes being down in some of the end markets. And then liquid hydrogen is something that continues to be quite strong. We are seeing a lot of applications there whether it’s for space exploration or areas in some of the hydrogen powered things like fork trucks. So, hydrogen continues to be a pretty good growth product as well.

Mike Harrison

Alright. Thanks for the color there. And just in terms of the South America business, can you update us on what portion of your onsite customers are running below take-or-pay minimums? Thank you.

Matt White

Sure. So, I won’t give a specific number, but consistent with what we have said in the prior quarters, we definitely do have some several steel customers that are running below and they continue to pay. This quarter is a little more difficult simply because you have carnival and you have summer holidays. So, we always tend to see a few more customers even on a normal year, excluding what’s going on in the ground, did below MTOPs, similar to what you see in Asia with the Lunar New Year. So, that’s more I will call seasonal dip. But primarily steel customers, they are paying. And as you have seen from our numbers, we did see some sequential improvements, especially from a very low December. So, I think that aspect has been pretty good. In fact, we had a couple of that were below MTOP last quarter and now they are above MTOP in Q1.

Mike Harrison

Thanks very much.

Operator

Our next question comes from Laurence Alexander from Jefferies. Your line is now open.

Laurence Alexander

Good morning. To get the question on consolidation and I guess self-identity longer term, are there any regions where you see an opportunity to leapfrog, I am thinking similar to like what you started doing in the Middle East when you did the ROC acquisition in 2010 as competitors are whittling down portfolios? And related to that, how do you see sort of longer term opportunity, if any, in around as it opens up?

Matt White

Okay. So, I will start on a high level. I think Laurence, we are constantly reviewing our geographic portfolio around the world to evaluate, do we have the density that we believe we need to achieve the type of returns in the quality and the reliability of the business model that we need. So that is always an ongoing effort. And as you stated, we entered into certain countries in the Middle East. And I would say the countries that we are in, we do have a fairly meaningful density model, but not where we want it to be and we are not participating in Saudi Arabia, which is the largest country in the Middle East. So we continue to evaluate Middle East and see what options we want to take there, but that’s something our portfolio will always evaluate. Russia is another area, we have been building some density given the situation in Russia today. We slowed that process down, but we have built some pretty strong density in the Volga region as well as out in Ekaterinburg. And the assets that we do have on the ground there are running as expected and running fairly well. So those are two regions that we do see some opportunity to modify our portfolio one way or the other, but we will continue to evaluate that. As far as Iran, we will clearly work with the U.S. situation there and what they allow with companies. But to say the least, the Europeans will have a head start on that just given the U.S. relationship with Iran versus, I would say the European relationships will probably soften first. So we will keep our eye on it, but it will be tough I think for American companies to get in there before any European companies.

Laurence Alexander

Thank you.

Operator

Our next question comes from Bob Koort from Goldman Sachs. Your line is now open.

Bob Koort

Thanks. Good morning Matt.

Matt White

Good morning Bob.

Bob Koort

I was wondering if you could comment, Praxair areas is always well-regarded for your efficiency and productivity moves and I am wondering we have had a pretty extended malaise in a lot of your markets I assume will come into the end of what you can do, how many more levers can you guys pull if we stay in this sort of muddling along end markets environment?

Matt White

Well, I think Bob clearly, let’s remember, we took out about 7% to 8% of the workforce here towards Q2, Q3 of last year. So we haven’t quite even had the anniversary of that yet, but that was a series of actions we took. And frankly before we took that action, people were asking us that same question. What can we do, we have seemed to have run out of levers. I am not saying that we would go to another action of that nature. We feel that the actions we have taken are well in line with the market we are seeing. But I would also say that we continually look for productivity opportunities. As the markets change whether volumes go down or volumes go up, it makes new opportunities in our logistics management. You are seeing mill rates around the world change quite differently and it makes projects, in some cases more viable that we may not have done in prior years whether it’s an increase in mill rates or in some cases the decrease in mill rates. And so as the dynamics change on these type of input costs for us, as the dynamics change in terms of the customers we serve, it can create new productivity opportunities that may not have given us a sufficient return under prior scenarios. So we are always looking at these changes. We are always trying to evaluate how long that they will be like this. And then we would attempt to take prudent actions. But we have had to have a lot of productivity just to sustain the margin levels we have had. As you know every time we lose volume, it falls at pretty high margins. So we need to take a lot of actions in productivity and pricing to negate that effect and that’s what we have been doing. So we look to continue to do that. I am not anticipating any headcount action at this point given how we are seeing the markets. But I am anticipating we will continue to push productivity the way we always have and we will continue to try and find some opportunities around that.

Bob Koort

And if I could follow-up, do you have any sense of a changing dynamic in sort of the industry growth rates relative to GDP or industrial production on a go-forward basis relative to what we had in the last decade, I hear from some investors some concern that we had sort of a basic materials in emerging markets halo for the last decade that won’t repeat and therefore, may be the growth rates of the industry have changed, what are your thoughts on that?

Matt White

Well, I think when we look at the growth rates from a high level, I still firmly believe it’s consistent with how we have laid it out in prior years and I think how most of the industries laid it out in prior years. But the growth rates are really going to be a function of, I will call it four basic things if you are looking at the top line, it will be price. And price tends to be, in my mind, more tied towards inflation. So if we do see some inflation here that should help. We have seen in prior year with inflation. We have seen it in markets with inflation. It tends to be tied with acquisition activity. We are seeing more rollup opportunities in this environment and we are an example of some of the acquisitions we are doing. And then it’s a function of both projects and organic volume. So on the project side, it’s clear, backlogs are going down. Customers or potential customers are not making the capital investments they had. This is part of the cycle you see in the capital cycle. So that is something that if that returns or when that returns, especially in some industries that have been fairly muted for a while, like mining, heavy equipment and areas like that, that will give growth. But if that doesn’t return anytime soon, then that will be an area of growth that will still be a little sluggish. And then finally to your point, is this organic that we usually used IP as a proxy. And to your point, what we have always found is emerging markets IP multiples, almost always tend to be stronger than developed market IP growth multiples. And it makes logical sense, because in an emerging market it tends to be more infrastructure related growth. You tend to have a lot more application related growth. That gets to that whole intensity of industrial gas per capita and that is a real thing we see. So when the emerging markets slowed and the commodity markets slowed, you saw a portion of the backlog projects be reduced as customers didn’t spend money. You saw the highest IP multiple markets be reduced, in fact all negative and the combination of those things really did make the, call growth algorithm weaker. But the question is do you believe emerging markets are out forever, I personally don’t believe that. I think we are in cycles like any other cycles. Some of the issues we have today are demand driven. There are one or two that might be supply driven. But when it does rebound, you get back to those multiples you have seen and in prior years. Developed markets in my mind, tend to be more closer to IP, a little bit above IP, but that’s kind of how I view it. So those are the factors of growth. And right now, yes we are in a position where a lot of people are not making investment. Emerging markets are struggling and that’s created some dampening effect on the growth. But I do expect that will recover and return, when, I don’t know. But we have seen these cycles in the past.

Bob Koort

Great. Thanks for your thoughts.

Operator

Our next question comes from Duffy Fischer from Barclays. Your line is now open.

Duffy Fischer

Yes. Good morning. First question just around currency, if we actually held currencies constant with where they are at today what would be the delta in the back half where we are actually using more of a Q1 estimate?

Matt White

Yes. Duffy, I can maybe put that this way because I don’t want to throw a bunch of numbers out there, given just the complete uncertainty. I mean as you know, June will be another Fed decision. So our view is basically that we felt, I will use the word comfortable enough to take spot rates and some forward rates as they stood a few weeks ago to call it for Q2. Come June, kind of all bets are off because we just don’t know what could happen with the Fed decision. And frankly, we don’t know what will happen tomorrow, let alone come June. But clearly if rates are better our spot rates hold, all de novo is equal, we will have better EPS than what the guidance says and that’s holding our people. So there clearly is some upside. I would rather not get into numbers because what spot rates, what day, what currency, there is a lot of moving parts there. But you could probably do the math from what you get from our 10-Q we will file, you will see what the average rates were and then you could plug in whatever spot rate assumption you want, it probably would be a fairly rough proxy but it will be – it can get you close enough.

Duffy Fischer

Okay, thanks. And then in general, historically when hardgoods have diverged this much from the underlying gases, were the hardgoods of the leading indicator or the lag indicator?

Matt White

Yes. We always go around on this internally. My opinion is this. The equipment portion of hardgoods does tend to be a leading indicator. Clearly, if people stop buying large automated equipment, if our customers are not confident in their backlog of growth prospects, they will not invest in new capital equipment, so we saw that drop off first over the last, I will call it nine months or so. What we are seeing now is some of the equipment, but also just consumables. And consumables in my mind tend to move with gas to an extent as far as how they drop. If you need less shielding gas, you probably use less contact tips, you use less wire those things tend to run together. So, I would say at this point we have already seen some of the leading indicators on equipment and now we are kind of just seeing with gas in the consumables kind of down together.

Duffy Fischer

Great, thank you.

Operator

Our next question comes from Don Carson from Susquehanna Financial. Your line is now open.

Emily Wagner

Good morning. This is actually Emily Wagner on for Don. We are wondering if you could discuss the underlying tone of business in Brazil, have you seen any impact from the Petrobras scandal on your project or is it more of slow oil impact?

Matt White

Yes. So, we don’t have any projects with Petrobras. In fact, we have very, very little business directed to Petrobras. What I would say the impact of the carwash situation and the Petrobras situation in general is just in an overall kind of paralysis on any industrial investment. I mean, Petrobras, like the Pemex in Mexico, is a very, very big part of the economy. It creates a very large supplier chain network of many various industrial companies that supply Petrobras directly and indirectly. So, there are many customers that we supply that supply Petrobras. And clearly, they are not doing as well. A perfect example, a steel company that makes tubular steel, they are not making much anymore given Petrobras. But in my mind, the situation on that has been baked into our results for a year now. That’s – they are sort of negative reaction from carwash and some of the curtailment in their activity has already been reflected in several quarters.

I think when you look at Brazil now question we get is what’s going on with the potential impeachment? Would that make any difference? And right now, we just don’t know, we just don’t know. Clearly, the financial markets have been reacting positively. If you look at the real, if you look at the Bovespa, but we haven’t seen much industrial change yet. But I would say, on an overall basis, the fact that they are trying to rude out layers of corruption is a good thing and that should position them well for a long-term improvement in the economy. And we are seeing some positive developments in Argentina with Macri coming in, with his ability to resolve some of the bond situation his ability to issue bonds is creating a positive effect and renewed interest in Argentina. So, I hope with Brazil, we can get over this hump, but it’s going to still take time to play out and we will have to see. We are not anticipating much recovery in Brazil this year and we will have to reevaluate for next year based on how we see the next few quarters play out.

Emily Wagner

Thank you.

Operator

Our next question comes from James Sheehan from SunTrust. Your line is now open.

James Sheehan

Thank you. Could you comment on the situation in Europe give us a little color on what you are seeing in sort of the sub-regions there? Where we are seeing kind of a gradual macro recovery and yet your volumes haven’t really picked up. So, when would you expect to see any improvement in organic growth in Europe?

Matt White

Yes. So, we have been seeing, I will call it slow and steady improvement, but very incremental. We have had project pickup. On an organic volume basis, we have been seeing some good strength in Spain. Italy has not been as strong, but I would say overall, for Europe, it’s kind of continued to improve slowly, where we have the biggest headwind right now has been in our upstream energy business primarily around the North Sea and that has been a continual headwind. That’s really offsetting some of the organic growth rates in the rest of Continental Europe. So, I would say when you exclude that upstream energy, we are getting organic growth in addition to our project contribution. So, that part has been good. And you see some of it in the margins as well as we have been able to get the value of that volume contribution and capture with some improved margins. I would say Scandinavia in general is a little weaker as you would imagine given it’s an oil-based economy. We continue to see interest and investments and strong volumes in Port of Antwerp area, which would make sense given the euro is a little weaker, given oil is a little lower and see shipping costs are much lower. And that really helps the competitiveness of that pet chem enclave.

And in Southern Europe, like I mentioned, Spain has continued to improve here. We will have to see with the election situation where that ends up, but it’s still been improving. Our medical business, which we have a fairly large medical business is quite strong across all of Europe. In fact, we just did some recent acquisitions, one in Italy in the medical and also the NOxBOX, which was UK which will serve more global. So, that has been good. And I would say, in general in Russia, the onsite assets we have are running well as our customers are globally competitive, especially at this lower ruble. And the merchant business and packaged business is somewhat soft as you would expect in a stag inflationary economy, which they still are today. So in general, the Northern in Benelux is doing well, Southern doing well, Scandinavia is weak, Russia on the ground is still a little weak and anything upstream energy is quite weak, but slow and steady improvement is the general view we have.

James Sheehan

Thank you.

Operator

Our next question comes from John Roberts from UBS Securities. Your line is now open.

John Roberts

Thank you. Do you have regulatory approval yet on that GE JV? And are there any modeling changes that we should be aware of here? I believe you have majority interest, so there is no change to revenues. I assume the minority interest line will be material?

Matt White

Yes. So, we hope to finalize that here in a few months. So, we are still going through the last remaining requirements. I don’t anticipate any significant obstacles on that. We would still consolidate it, but to your point there would be a minority interest impact with that JV structure. So, that is – yes, that would be the way to model it. Inversely with Yara, we would take what today is a minority interest impact and that would go away with the consolidation of the JV and then with the Yara CO2 that would obviously be just a brand new consolidated acquisition. And with the Yara version, we just have one more real regulatory hurdle here that we are not overly concerned about, which should be fine. So, I expect both of those buyback into Q2. Hopefully, it should be finalized, but you never know what the timing, so we just need to keep it open.

John Roberts

Okay. And is there a material part of your North America onsite business that’s at minimum take-or-pay volumes?

Matt White

North America, I would say, metals, there are few metals customers that will be below take-or-pay. I will say that we are getting paid in all of them around the world frankly, we are getting paid, but a few in metals. And some when you see turnarounds in the golf, but again, that’s more seasonal as their turnarounds, they fall below and we see that each turnaround season. So, there is no concern on that front.

John Roberts

Thank you.

Operator

Our next question comes from Mike Sison from KeyBanc. Your line is now open.

Mike Sison

Hey, nice start to the year there. In terms of South America, volumes being down 2%, I just wanted to get a better feel for how that sort of flushes through. It sounds like your industrial businesses are doing worse and the growth in the healthcare is doing really well. So, is the industrial part kind of more in line with the Brazil industrial production, you noted down 12% and you kind of have double-digits from healthcare and food and beverages driving the outperformance?

Matt White

Well, we do have double-digits from food and healthcare, probably 10%, 15% kind of growth rates. On the metals, yes, it’s dropping at a rate, I would say consistent, if not more than industrial production, but remember, we have take-or-pay structures. So, they will mitigate that from a contractual standpoint. So, what we are seeing is from my view, on the industrial site, the customer volume levels are fairly consistent with what you are seeing in the overall results, but our contract structure helps mitigate that. And then on the more resilient industries, we continue to see very strong results. And when you add that together plus the price, you are getting with some of the inflation impacts there. It is allowing the organic growth to still be fairly respectable. But we still need more work in that area. As I mentioned, we are still going to work more on the pricing side. And we will have to see how volumes fare out in these coming quarters, but so far with April as expected coming out of the March results.

Mike Sison

Okay. And one quick one on Yara, is that included in the guidance or I mean is that potentially upside?

Matt White

I would say, in general we have Yara encapsulated more back half. I would anticipate much contribution in Q2 here. But from a back half perspective, we are accounting for a general bucket of the acquisitions and I would say, Yara is one of them. But so yes, it would be in there.

Mike Sison

Great. Thank you.

Operator

Our next question comes from Jeff Zekauskas from JPMorgan. Your line is now open.

Jeff Zekauskas

Thanks very much. The industrial gas companies tend to have about 1% year-over-year price increase, is that price increase pretty evenly distributed across all of your industry end markets or does it turn out that it’s more concentrated in certain ones where Europe pricing is maybe above 1% and then in certain areas, your pricing is below, I realized that you have different geographies that you sell to, so maybe if you could discuss that in terms of the United States?

Matt White

Okay, yes. Because my first answer would have been the pricing is more geographic dependent in a lot of cases as we know. So with in the U.S., I would say and we had this discussion a little bit earlier, there will be some mix effect that could influence that when you have some higher margin sales that are going away and we have seen some of that. So that could negatively influence that. But I would say pricing is still very, very regional, within a couple of hundred mile radius and it tends to be a function of any contracts that may be renewing and/or new opportunities that could be coming up in that region. And it will just be a function of the product supply available for that. But it’s very, very small transaction by transaction and that’s why every time we continue to look at this, what we tend to see is at the top of the house, inflation tends to be a fairly good proxy for it. There are some regional differences that could be driven either by geographic differences even within the U.S., right where product might be tight or on the looser. And there could be some industry perspectives where for example a certain end market may get extreme high value out of the product and the pricing might be a little better than say another end market where there are alternate substitutes, maybe different than industrial gas. So from that perspective, I would say it is not too different than what you may see in other industries. But given that contractual nature and given the proximity of supply, really on the top of the house, inflation still tends to be a good proxy in my mind.

Jeff Zekauskas

So if your category in the United States was called a price mix instead of price and you have the 1%, how would you divide it in terms of price and mix?

Matt White

Yes. I would rather not go down there, Jeff. How people define mix of itself is a whole another equation. So we tend to do straight volume on molecules and then the balance goes there which we consider mix because there is customer mix and there is product mix, right, so there is two types of sharing. So rather than getting into that on this call, let’s just say it’s all in there.

Jeff Zekauskas

Okay. Thank you so much, Matt.

Matt White

Okay. I think we have time for one more question.

Operator

Our final question comes from Christopher Parkinson from Credit Suisse. Your line is now open.

Christopher Parkinson

Perfect. Thank you very much. You have clearly made some efforts to increase your exposure in food and beverage, healthcare, some other defensible end markets, naturally some of the cyclicals in manufacturing has been weaker on a relative basis, but when you look at your end market portfolio 2 years to 3 years down the road, does that all tie into your views of regional growth and how should we thing about this when you look at your, let’s say large project backlog versus your own desire to end market exposure or do you simply just think about it 100% from a return perspective? Thank you.

Matt White

Sure. Clearly we continue to look at every market and we continue to look at it from a return perspective and an opportunity set. So our focus on Brazilian markets doesn’t mean we are ignoring industrial markets. What it really means is this. When we look out at least in the near-term and it’s no surprise that there is a bit of a commodity and an emerging market retrenchment going on right now, that some of these more cyclical markets could take some time before they will show any new growth opportunities, right. A rebound of lows, were already connected to them. Our pipe is already there. Our tank is already there. So coming off of a low and rebounding we will just automatically get without focusing or without investment, right. They are still under contract. So there is no worries that the rebound we wouldn’t be capturing. The focus is more on new investments. So where is money being spent today, there is a good amount being spent in some of these resilient areas. The growth trajectories in those resilient areas are greater, excluding the rebound effect on some of the more cyclicals. So that’s why our focus has been there. But it doesn’t mean we are not focusing on all the growth opportunities we have. For example, in South America, we still see some opportunities for decapping in some areas that would be cyclical.

And we have done that in the 90s and it was very successful for us. And we will do it again now. So those kind of things continue to happen. But when we look at healthcare, we look at food and beverage. We look at some consumer related end markets like refining and electronics, they are growing well. We are focusing our applications technology, our sales force and even some of our acquisitions towards those resilient markets. And they will give us a nice compounded growth that’s more based on either demographics or more resilient trends than kind of ups and downs that we will see in some cycles. So the view is if we have more focus on there, we get those compound growth rate and cycles return, you can get a pretty strong growth and a growth rate that is a little more stable. So that’s how we have been doing it. By no means do we regret any of the exposures we have had. They have served us quite well and they continue to service well. It’s just that the growth opportunities in those areas are not as great right now, in this current environment.

Christopher Parkinson

That’s all I had. Thank you very much.

Matt White

You’re welcome.

Kelcey Hoyt

Okay. Thanks again for participating in our first quarter earnings call. And if you have any questions, please feel free to reach out to me directly. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. You may all disconnect. Everyone have a great day.

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