Good day, ladies and gentlemen, and welcome to the 2nd Quarter 2018 FactSet Earnings Conference Call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded today, July 26, 2018. I would now like to introduce your host for today's conference, Len Pless, Director of Investor Relations.
You may begin.
Thanks, Ezra. Good morning, and thank you for attending our 2nd quarter earnings call and webcast. I am joined this morning by Matt White, Senior Vice President And Chief Financial Officer and Kelsey Hoyt, Vice President And Controller. Today's presentation materials are available on our website proraxair.com in the Investors section. Please read the forward looking statement disclosure on page 2 of the slides and note that it applies to all statements made during this teleconference.
In addition, please note that year over year and sequential comparisons exclude transaction costs related to the potential merger with Linde. The reconciliations to the U. S. GAAP reported numbers are in the appendix of this presentation and the press release. Matt and I will now review Praxair's 2nd quarter results, including the current business environment.
We will then be available to answer
The strong momentum continued into the 2nd quarter as sales and EBITDA exceeded $3,000,000,000 $1,000,000,000, respectively. Organic sales growth of 7% is consistent with recent trends, and we successfully increased operating and EBITDA margins for the 5th consecutive quarter as incremental volume growth and pricing actions more than offset the effects of cost inflation The culmination of these efforts led to a record significant use percent return on capital The organization achieved this performance and captured incremental including pricing cost management, prudent investments in the project backlog, and a focused and disciplined capital allocation process owned by all employees. And we continue to position ourselves for future growth by winning 3 new on-site projects, increasing the project backlog to $1,700,000,000 of capital spend all underpinned by high quality customer contracts. Overall, the economic landscape for industrial gases has remained quite positive. Which are 2 of has steadily improved several quarters in a row as U.
S. Industrial production rates have grown 3% to 4%. Approximately a year ago, we anticipated a recovery in the U. S. Packaged gas market, which we have experienced with recent growth rates ranging from high single to double digits for both cylinder gases and hard goods.
In fact, the manufacturing and industrial recovery in North America has supported increased gas consumption across all supply have been the fastest growing end markets due The metals end market has been steadily increasing as customer run rates improve, and the resilient end markets of food, beverage, and health care continue to grow in line with demographic trends. The North American energy market was softer versus prior year, as we experienced Pricing improvement of 2% is offsetting cost inflation, enabling operating margin to exceed 27%. Finally, we added another project to the backlog and are confident in especially in the U S. Gulf Coast. So in summary, North America remains a strong market and we anticipate these trends to continue.
Asia is the fastest growing segment with sales and operating profit Similar to North America, higher levels of industrial activity coupled with cost inflation have enabled price attainment and volume growth across every end market and supply mode. Metals Manufacturing And Electronic end market improvements drove sales growth. But we also experienced a substantial increase The pricing improvement of 3 Korea and India also have seen price improvements in line with inflation trends. Project backlog opportunities remain healthy as we signed 2 new projects supporting the chemical and electronic end markets. The Europe segment at 15% of sales continues to demonstrate positive growth on a very stable base business.
As most end markets have been steadily improving, led by metals and manufacturing. But more importantly, the pricing improvement of 3% is a clear demonstration of the team efforts to recover from prior year, but this includes a 90 basis point headwind from higher cost pass through. Therefore, underlying margins improved 120 basis points from pricing actions in excess of inflation. Also in the second quarter, We had supply disruptions from our crude CO2 suppliers, primarily due to unanticipated shutdowns of ammonia plants. Which negatively affected margins from higher dislocation costs.
We do not expect rest of the world due to sluggish economic conditions in Brazil. While volume levels grew 4% due to higher steel mill operating rates, The manufacturing end market was quite weak from a nationwide Brazilian trucker strike that contributed to a negative 7% year over year industrial production rate for the month of May. Of the Argentine Peso and Brazilian real, resulting in a 10% year over year currency headwind for the quarter. While conditions are expected to remain with 27 percent EBITDA margins and high cash generation. The PST business posted good results with year over year sales You may recall last quarter, the ramp up costs incurred to increase coder capacity in support of the aviation end market.
Now we are selling from that We anticipate further growth as more capacity comes online to serve the large backlog of engine parts required for jet orders So in summary, I'd say we are firing on 4 out of 5 cylinders, a strong performance across most segments more than offsets the weak South America. It's clear that all Praxair employees have maintained focus to deliver value, which you can find on Slide 5. The current focus of both organizations can be boiled down to 2 major areas. First, to obtain regulatory approvals, including potential divestiture agreements. And second, to accelerate merger planning efforts.
As you've seen from recent announcements, there have been a few key accomplishments on the regulatory front. At this stage, there are 6 remaining regulatory approvals required under the BCA. As we recently received clearance in Mexico. Milestones are being completed toward closing the transaction Fraxair and Linda each announced executed agreements to sell their respective European and America's assets in support of ongoing regulatory negotiation Now, while the completion of these agreements does not assure approval from the relevant regulators, we continue to work constructively through the process. In parallel with antitrust efforts, we are conducting integration planning activities in order to prepare for the merger close date.
Since we are still competitors, we're unable to begin integration, but we can develop detailed plans for day 1 readiness. Examples include plans for organization structure and talent selection, operating rhythm, IT systems, accounting filings and several other initiatives. As you can imagine, with the merger of this size, there is a substantial amount of work and complexity. But we continue to have positive interactions between both companies as we move forward. Similar to prior quarters, we are not in a position to provide any details on the process.
So I appreciate your efforts to refrain from asking merger related questions. I'd now like to hand it back to Juan to review the 2nd quarter results.
Thanks, Matt. Please turn to Slide 6 in our presentation for our consolidated results. Sales of $3,100,000,000 were 8% higher Volume was the largest contributor with growth of 5%, of which 40% came from project startups, and a balance from organic although metals, manufacturing, chemicals and electronics led the way. Additionally, at 4% of our total sales, ARospace was another significant contributor to the overall growth, up 16% year over year. For the past 6 quarters, this end market has been growing at healthy rates, primarily led by sales to space technology companies in the U.
S. That demand large amounts of atmospheric and processed gases for manufacturing and launches, as well as coating to aviation engines, mainly through our PST business. Price contributed to a 2% increase in sales for the quarter, driven primarily by strong price actions in Asia, Europe and North America on both merchant and package. Sequentially, volume growth of 3% was broad based across all end markets, but led by food and beverage, primarily North America and Europe due to seasonality. In Europe alone, food and beverage grew 17% sequentially given our strong network in the region.
Currencies translation was flat year over year, but negative 2% sequentially as major currencies weakened versus the U. S. Dollar. The strengthening of the U. S.
Economy coupled with global trade concerns and political uncertainty have contributed to this trend. And we anticipate it will continue through the back half of the year. Operating profit of $713,000,000 was $92,000,000 or 15 percent better than last year, and $41,000,000 or 6% better than the 1st quarter. Operating margins expanded 100 and 40 basis points year over year and 90 basis points sequentially led by overall strong fundamentals in the base fit us. Operating cash flow was $790,000,000 and capital expenditures were 351,000,000 of which 65% was invested in North America, mainly in the U.
S. Free cash flow was $439,000,000 which was used to pay dividends and reduce net debt below $8,000,000,000 the lowest level since 2012 prior to the new CO2 acquisition. Project backlog for the quarter rose to $1,700,000,000, up $200,000,000 from prior period after starting up 2 large ASUs to serve Cenac in China and winning 3 on-site projects, 2 in Asia and 1 in North America. Of the total backlog close to half will supply chemicals, 40% will serve electronics, and the balance, the aerospace and manufacturing end markets. Additionally, we have over 30 small on-site project wins totaling $80,000,000 in investment as each investment is under $5,000,000.
But similar to the project backlog, these investments have fixed monthly payments and are underpinned by a long term contract. As a result of our disciplined capital management and cash focus, The after tax return on capital closed the quarter at expanded return on capital, and we expect it to continue improving throughout 2018. With that, let me now turn the call back to Matt, who will discuss 3rd quarter outlook.
Please turn to Slide 7 for an outlook on the 3rd quarter. At this point, we are anticipating similar business trends across all segments adjusted for normal seasonality. For Q3, we expect more stable operating conditions for both crude CO2 suppliers and US Gulf Coast refiners. Although helium will remain tight due to certain source outages. Tax rates should remain in the 23% to 25% range.
The most significant difference for You may recall that we had a 3% FX tailwind in the first quarter and no year over year FX effect for this second quarter. In fact, for the second quarter, we originally anticipated a 2% tailwind in the earnings guidance, which quickly evaporated to 0%. Based on recent forward rates, the second half of twenty eighteen could experience translational currency headwinds of 2% to 4% as the U S dollar continues to strengthen from higher interest rates and a stronger economy. Earnings guidance is not provided for Q3 due to the anticipated merger close date with Linda, which is consistent with the full year approach taken this January. Now since it is possible, this could be the last Praxair earnings call I'd like to personally For over 25 years, the Praxair name has been synonymous with operational excellence, prudent capital management, and industry leading performance.
So although the name Fractera may go away, the people will continue to thrive as we join with Linda, to create a new
Thank you. And our first question comes from the line of Vincent Andrews from Morgan Stanley. Your line is open.
Thank you and good morning everyone. Good morning. Just a question. If we look through North America, And
if you look at
the pricing in merchant versus packaged gas, could you just give us a sense of the trends there?
As you saw on our total North American slide, pricing for the entire segment is up a few% here. So of the 2%, you may recall that on-site, really, we don't show much in price. So that represents all of the merchant package price improvements over the entire revenue balance. So what I would say from that perspective is you're low single to mid single digit pricing we're seeing both in packaged as well as merchant. As you can imagine, we are seeing inflation across North America.
In some cases, power and other areas in distribution costs. So we need to continue to do this as you can imagine to recover that inflation. Some of it contractual in our merchant pack contracts, some are actually pricing actions that we have to go out and get.
Okay. And just as a follow-up, I might have missed but did you talk about what volume was in Asia if you stripped out the product, the project startups?
We had said, consolidated 5%, a little less than half is related to projects and the balance organic, for the total consolidate it. I'd say Asia is probably a little more projects closer to half for the entire segment.
Thank you. Our next question comes from the line of Duffy Fischer from Barclays. Your line is open.
Yes, good morning. The question on Latin America, the run rate, does it still feel like it's falling or have we kind stabilized at a lower level. And so if we kind of anniversary what we've seen over the last quarter, that gets us a decent look for the next year or so.
That's the question we're all trying to figure out. I would say, as you know, our South American business, a little more than three quarters would be Brazil. But I'll start with the non Brazil section. I think there we continue to do fairly well. It's more just of a currency issue.
Places like Argentina, Columbia. We do have more resilient markets in some of those countries that from a growth rate perspective continue to be pretty good. But it's getting drowned out with some of the currency effects. Within Brazil, clearly, the truckers strike, we lost about an entire week in the month of May and really did not get much of that back. So it's hard to take this particular quarter, given that, that sort of anomaly that happened.
But when I look underlying what we're seeing in Brazil, clearly, we continue to see improvements in the on-site metals, as you're seeing more metals being produced. Now Part of that is for export. With the real softening, it's making those products more competitive globally. But I'm hoping that some of that could be, for use for internal to start some thawing, but it really until the election, it's going to be hard to see. As you may recall, in North America, when we hit some industrial recessionary conditions going back 4 years ago, Metals was the first one to rebound and recover and then over time merchant and then package.
And Brazil right now, we just haven't seen merchant and package really turning the corner. Next quarter hopefully will be a better comp just given the lack of any anomalies. But frankly, until the October elections, it's going to be tough. I think, we've got to really have to see what happens in 2019. And I think Mexico is kind of a good example when AMLO was elected There were obviously some views and concerns.
But when he came out, announced kind of his cabinet, his views, I think at Calm, some of the markets and calm some of the views and we'll have to see if that happens in Brazil. So time will tell.
Okay. And then relatively small business for you, but your Russian business, the headlines have obviously been getting worse throughout the year. Do you see that in your business or does that feel like it's still the same structural strategic bet that you've always made be patient long term and it's still a decent place to be?
Well, we always need to be patient long term in this industry, as you know, Duffy, given the nature and the structure of it, clearly economic cycles will go up and down. I would say with Russia, to your point, it is quite small for us in the grand scheme. It's mostly on-site. And those on-site contracts, we feel very good about. So from that perspective, we absolutely expect that will be withheld or upheld, I should say, A lot of them are based on English law and things like that.
So from that perspective, we feel good. The merchant and package has been tough for a while. I would say more than just the last 6 months, we had a period of stagflation there for a bit of time. And so from that perspective, which is very small for us, by the way, the package and merchant. So Russia has not been easy for a while, but the on sites have been very good and anything related too.
I think exports of natural resources continues to be good. So we'll have to see. It is one of our geographies and this point, we haven't made a lot of incremental investments though. And we'll just have to see what opportunities present themselves in the future.
Great. Thanks fellows.
You're welcome.
Thank you. Our next question comes from the line of Mike Sison from KeyBanc. Your line is open.
Hey guys, nice quarter. It looks like the backlog continues to improve your 17. Can you maybe remind us where that backlog peaked historically. And given the industrial backdrop has been pretty positive here. Do you see backlog continue to improve over the next couple of years?
Hi, Mike. I think from us, our backlog peaked probably in the mid-2s. One thing you'd want to take into consideration on that. We had a large, steam methane reformer project that was in there for quite some time, probably 7, 8 years when you go back in time on that. We did resolve that.
That actually became a sale of equipment when all the dust settles. So if you pull that one out, I'd say low two's is probably the more normalized where we peaked on that. The nice thing I like about this current cycle to your point, it is a good cycle. And what we're seeing And I'd say the quality of our contracts and customers is a nice rhythm of startups and replacements, startups and replacements. From my perspective, the best thing about a backlog is a backlog that's constantly churning.
A growing backlog can be good, but we need to make sure we're starting them up. So right now, we're having large startups. As you know, we had a very large startup in the first quarter, but we're replacing it with new projects. And as long as we can keep replenishing and actually taking something that's a use of cash and turning it into a source of cash, I think that's quite successful. So we feel very good.
To your point, it's gotten up to 1.2. When I look out the rest of the year and we kind of probability adjust, it's possible we could have a 2 handle, on the backlog again. And so I think, the backdrop is pretty strong. And we feel good about our prospects and where we are on some of these pre backlog opportunities.
Great. And then in terms of pricing, I think you mentioned inflation, your pricing is in excess of inflation to some degree. How much of that is just driven by what you're able to do? And then to some degree, maybe industry pricing and everybody's working their way to get that pricing action?
Well, a portion of it is just how you contract, Mike, you there are several contracts out there that have inflationary aspects, either escalations or ability to surcharge through for power escalation. I mean, one thing that's very clear is you are seeing power escalate in many geographies in the world. For various reasons. So having the right contracting to be able to recover that, I think, is quite important. But aside from that, it's just a matter of just having at the very low levels to have to grind it out and work through it.
But it's a very local industry and inflation is a big, big driver behind the pricing in this industry.
Great. Thank you.
Thank you. Our next question comes from the line of Jeff Costco's from JP Morgan. Your line is open.
Thanks very much. I don't have a question on developments in your deal, but I have a question on the structure of the deal. Do you could you close the deal without Chinese approval that is if there were regulatory delays in China and you didn't hear from them?
Well, Jeff, I figured you'd be the one that would try and find a way around it. I would say this much, and I don't want to get into any depth on any of these discussions. But in our BCA, we list 9 regulatory agencies that are required to close the deal, and that is a public document. So you can go pull that information and see the 9 required to actually close. Obviously, we have to follow with others that are very important.
But of those others, they are not required to close the deal, per the VCA.
Okay. And if you received regulatory approval from China on I don't know October 23rd, could the deal still be closed on 24th?
Yes, I don't want to get into any specifics, Jeff, on either hypothetical situations or views of regulatory decisions. So at this stage, unfortunately, it's something we're working very constructively, and we're having good dialogues across all global regulators. And we will continue to update you guys on events as as they are warranted and relevant. But at this point, I don't want to get into any specifics, especially with any specific regulators.
Thank you. Our next question comes from Lawrence Alexander from Jefferies. Your line is open.
Hi, a couple of a few, hopefully short ones. You know, about a decade ago, you you guys used to talk about having about a 1% tailwind for organic growth just from energy efficiency investments. Are you seeing the industrial appetite for those come back? And then related to that, a couple of years ago, you were talking about how over say a 3 or 4 year period, you might have line of sight to about a 3% annual tailwind from on sites starting up. On average, not each year.
Is the current backlog and the trends you're seeing in line with that or better than you would have expected when you were making comments?
I'll start Lawrence with your second question and then go to your first. So you're absolutely right. We had laid out back strategy probably 4 years ago that based on our backlog, we anticipated 3% EPS. And we stuck with EPS because as you know, each contract can be a little bit different on how the revenue is reported. But we said a 3% EPS growth rate that we see extending out 3 plus years.
And as you may recall earlier, this year, we extended that another year based on the wins. So we still believe that we can see a 3% EPS plus or minus neighborhood of improvement over the next 3 to 4 years based on this current backlog. Now if our backlog starts to increase, we can reassess that, but this was based on a roughly $1,500,000,000 continually replenishing backlog, which is where we still are right now, give or take. So I'd say, yes, those dynamics, we still see valid over the next 3 to 4 years. And if we continue to maintain this level of backlog, that should continue out more years.
From your first question, as you may recall, a lot of the energy efficiency, I'd say, we were seeing many years ago, were for natural reducing natural gas consumption. So for instance, if someone had a natural gas fired burner, any type of combustion operation you do, you want to eliminate inert gas. Meaning nitrogen primarily. So by displacing and burning in an oxygen environment, you would accomplish that. Given that natural gas, at least in the U.
S, is much cheaper. Those applications are less than what they were probably a decade ago. But I would still say in emerging markets, anyone using higher cost hydrocarbons, especially oil, that application is still very, very valid. But more what I would say we're seeing displaced that is environmental reasons for NOx and SOx reduction by burning in a better environment, you can reduce that. And you see that a lot also in the glass industry where it gets into even more so with throughput improvements in addition to environmental.
So I would say the original main drivers have shifted. But they're still relevant in certain markets and in certain end markets, and we're still seeing some improvement with that energy efficiency.
And have you received any clarification from the, managers of the different equity indexes as to whether or not you'll be belonging to which ones you'll be logging in? Or is will there be a technical period post the deal closing where it will be ambiguous?
Yeah, they can't tell us until post close, as you probably know. So they're not able to make the decision you could probably look at other deals, as you know, like DowDuPont and some other relevant situations. And they're not able to make any announced and so the deal is consummated and they review that and then they make their decision for index inclusion.
Perfect.
But obviously, we're pursuing both the New York Stock Exchange S and P 500 as you can imagine and the Dax in the Frankfurt exchange.
Right. Thanks.
Thank you. The next question is from David Begleiter from Deutsche Bank. Your line is
Hey, good morning. Matt, just on the U. S. Packaged gas strength, can you give a little bit detail as to where and what's driving that and how long do you think this is think you said low double digits right now is sustainable?
Hi, David. Hi, single digit actually all in. What we're probably seeing is mid single digit plus on gas. And then we're still double digit on hard goods right now. And it's funny.
I asked the same question internally here. And the answer is it still is pretty broad based. Clearly, manufacturing, you look at industrial production, and you look at some of the subcategories of industrial production like metal fabrication, construction equipment, they're doing quite well. So they drive a lot of welding shielding gases. So think Argonne is a big driver in that area.
That continues to do well. Construction does well, but we're also seeing a variety across many other end markets, some resilient markets healthcare, some of the packaged gases we deliver into hospitals, but also aerospace, as Juan had mentioned, even refining, things for gas analytics. So it still is pretty broad based and packaged gas, as we've always said, tends to be a very good proxy with industrial production, especially the subcategories and the manufacturing categories. So At this point, there's no one market I could point to that I would say is more stronger, weaker than the other, but it's fairly broad based.
Very good. And may I just go through the merchant operating rates by region?
Sure. When you look at the U. S, And right now, we're still probably high 70s and base merchant in the Lynn and Locks, but Argonne continues to remain tight. As you know, it's more based on oxygen based loads. And as I mentioned, demand is high in met fab, so argon is still tight across most of North America.
Brazil is still probably mid-70s. And that's just as much a function of we still have some on-site customers undertake or pay. That we do over. So it's probably base molecules are constricting even as much if not more than the liquefaction capacity there. When I look at Europe, we continue to see some improvements.
We're getting up to say mid-70s now for Lin and Locks are gone a little bit less than that. So Europe is running well. Asia is one that, it's a little tighter in some areas. But, it's kind of overall probably in the 80s, as we're seeing good demand. That continues to be strong across several countries in Asia.
So I'd say trends are going well. But we're able to get a good utilization out of our asset base globally. But clearly, we have room to expand, if needed, in all of our markets.
Thank you. The next question is from TJ Gibiger from Citi. Your line is open.
Good morning, Matt.
Good morning, P. J. I
had a question on pricing related to your earlier question. Pricing was up in packaged gases in both North America and Europe. And do you think that, packaged gases pricing leads merchant pricing in that sense that you see it in 1st in Packaging assets, which are shorter than contrast compared to merchant?
Well, I could say this much, on Europe, just to add to that, part of that pricing is not only recovering inflation in the packaged gas side. But also we do have a refrigerant business there in Italy. And as you can imagine, part of that pass through is both power and flooring and refrigerants and also some of that price. So it's a combination of packaged gases in our refrigerant business in Southern Europe. But I would say that I don't know if I'd call it a leader, but I would say packaged gases tend to be much tighter correlated with inflation.
As you know, in package, the contracts are not very long. They could be 1, 2, 3 years or they might just be purchase orders. So they are the most sensitive and probably the most elastic, as far as pricing, but they also tend to be re priced more to inflation faster. And in some cases, especially hard goods, where you know we operate primarily as a distributor in hard goods, These hard goods can be sourced from various countries, from various locations. And so as you may get cost creep, whether it's through tariffs, or other various raw material items like metals, then that has to be recaptured in the pricing to recover that inflation.
So you're seeing some of that as well in packaged gases to recover those hard goods, higher costs. So it's a combination, I'd say, of all that, but I don't know if I'd say it's a leader, but I would definitely say it's probably most closely tied timing wise to inflation given the short duration of contracts and given their exposure to a variety of both hard goods and gases.
Great. Thank you for that. And then you won 2 on set projects in Asia and 1 in North America. Can you talk about those And as you look forward to second half of 'eighteen and then in 'nineteen, can you size the impact of new projects starting up?
So I'll start with this starting up. It's not a number we've disclosed, as you can imagine. Generally, we've been on average probably a third, a third, a third, a third, just on the average build cycle is 3 years. I don't see next year drastically different than that. Could be a little bit lower because as you know, this year, we had a couple large start ups, including our largest project ever.
So I think the startup next year, we still believe we'll overall reach that 3% number in that range. I talked about before for EPS growth. But the backlog reduction somewhere in that neighborhood of a third or maybe a little less. As far as the ones we won, chemicals and electronics primarily. As we had mentioned, when you look at the U.
S, still seeing strong chemicals activity across the spectrum. And so investments continue to be made. And this was an asset related to that investment and in Asia, 1 in chemicals and 1 in electronics. So as we had mentioned in prior calls, these continue to be kind of the strongest growth end markets primarily in Asia and North America, as you know, and we continue to see good opportunities. And if I look at our pre backlog, The major three markets related to that are still electronics, chemicals and energy to an extent.
Those are right now, I would say probably in the best build cycle. But, hopefully, we'll start seeing things in manufacturing and some of the other end markets soon.
Great. Thank you for that.
Thank you. And the next question is from Stephen Bernie from Bank of America Merrill Lynch. Your line is open.
Matt, just continuing on that commentary, how would you characterize that pre backlog geographically?
Well, right now, Steve, as you look at our current backlog, it's about half Asia, half North America in terms of where we stand. And when I look at the pre backlog, it's probably not too distant from that. We were more heavily North America for a period of time. Asia had built up. If anything now, we could be a little bit higher in North America, but Again, these are projects that have been actively worked on for the last anywhere from year to 2 years.
And we'll have to see which ones ultimately come to fruition. But, it changes based on where we are in the and I'll say the starting gate and contract negotiations. But again, U. S. Gulf Coast and Asia are the 2 primaries.
And just a question about the disruption in Brazil from the trucking impasse. Is this fair to say that some of your customers down in Brazil are still impacted by the lack of a settled trucking freight rate. And maybe the conversely to that. Do you compete with anyone in the merchant business down there that is struggling in that they have some outsourcing of that merchant trucking.
Well, I would just say high level, everybody was affected by the trucking. It was not discriminatory in any way. And the industrial production number for the month, as I mentioned, at minus 7% pretty much characterized and validated that effect. So from that perspective, we were all affected. If I look at now, things seem to have gotten back to normal I mean, clearly for a smaller company, it may be more difficult.
But when I look at the broad scheme of things, I think we're all pretty much back to normal there. We haven't heard of any additional issues, but normal is still a challenging situation, as we know, given the political uncertainty. So I don't think there's any residual issues, right now, large or small customers, but we'll have to see what happens over the next several months.
Thank you. The next question is from Mike Harrison from Seaport Global Securities. Your line is open.
Good morning. Speaking of trucking issues, we're hearing a lot about rising freight and logistics costs, particularly in the U. S. Can you just remind us as you think about your merchant and packaged gas fleet in the U. S.
I guess North America overall, how much of that is in house versus outsourced how much inflation have you seen from either rising labor or fuel costs and how confident do you feel you are your ability to pass that through to customers?
Okay, Mike. So I'll start with just the diesel kind of that's a structure of a pass through surcharge that is a contractual component. As I mentioned earlier, passing through inflation can be very contractual and diesel is a classic example of that. So these are aspects that you contract to recover. And so from that perspective, there is a lag It's usually 2, 3 months, but that's something that will go up and down with the diesel cost.
As far as truckers, you're absolutely right. The costs are going up. It is tight to get truckers, but this is not, I would say, anything new We go through this in cycles, as you know, with how the economy, especially in the United States, is going when the economy is going strong, there tends to be more shortages of truckers. And when the economy is softer, you're able to get some. And then things like Amazon and FedEx and UPS will continue to absorb more drivers, just in general.
So when I look at Praxair, this is something that we've had to manage since our inception. And we always keep a balance, as you mentioned, of in house contract in house drivers versus of outsourced of both contract and common carriers. We'll use both. And that percentage of in house can range anywhere from 50% to 75%. It flexes up and down just based on conditions.
And then we will use outside truckers for surge capacity and also ongoing variable. Clearly, they got to meet our safety standards, and that's a big part of getting them trained, getting them part of our culture. So it takes some time for us to get them to be the right drivers. But it's something we're used to. We've got a great team that does this day in, day out.
And we from my perspective, while it's challenging, while it's tough, there's nothing I've seen overly concerning about this current trend versus any prior trends.
All right, appreciate the detail there. And just in terms of the U. S. On-site business. It looks like U.
S. Refinery utilization is running very strong. Just wondering if you can comment in a little more detail on strength you're seeing in hydrogen? And did you see any planned outages that were pushed out as refiners look to run harder?
As you may recall, in first quarter, we had some significant turnarounds that we mentioned and that occurred. And those were ones that we believe were pushed out from 2017. You had a combination, as you know, of strong refining margins coupled with the hurricane toward the back end of the year. So that pushed a lot of turnarounds into Q1. The vast majority of our customers were back end running hard.
Like you said, although this quarter, we did have 2 large customers that were having some outages. They are back running now. So that from that perspective, I'd say right now, we're seeing pretty strong demand and strong volumes. And the refiners, from my perspective, want to run. And so hydrogen is doing well as so is oxygen and nitrogen, which both go to refineries as well.
So At this stage, things are running well. And then we'll just have to see how things go forward.
Thanks very much.
The next question is from Jim Sheehan from SunTrust. Your line is open.
Good morning. This is Pete on for Jim.
Good morning, Pete. Could you
quantify the margin impact in Europe from the CO2 disruption? And given that strong pricing growth 3%. Do you expect that the margin uplift there will accelerate in the back half of the year?
Well, we didn't disclose that, but I'd say consolidated It might have shaved close to anywhere between a half $0.01 off total results. So you could probably back into what that might have meant from a Europe perspective. And yes, when you look at that price of 3%, as you may recall, inflation has been challenging in Europe, but we're starting to see signs. There are some tightness of certain products. And I think that is driving a little bit of the inflation as well.
And so our team's done a good job to go out there and get back some of this pent up inflation and power has been a big area. You may recall when you look at pass through, We had 4% this quarter. I think last quarter, we were a similar number, low single digits. So we've started to see power, as I'd say, the initial area of inflation. And it's kind of creeping through in other areas.
So our team needed to get ahead of it and they did. So when I look at that, I think that's a good result. Now as you can imagine, this second quarter is the high season for CO2. So we had the outages during the difficult time. As I mentioned in the prepared remarks, most of our sources are back and running, to normal rates.
But we see a normal seasonal decline at this point, just given the seasonality. But we feel we should be able to manage this now given the balance. I think we have time for one more question.
Thank you. Our last question comes from the line of Kevin McCarthy from Vertical Research. Your line is open.
Morning. This is Matt on for Kevin. Thank you for squeezing me in. So merchant price in China has improved, and I think company utilization rates as you had mentioned in Asia were kind of the low 80 range, but seems like industry utilization rates in China in particular somewhere in the 50% range. So are we just catching up to a more normalized level of pricing here and then going to expect to balance out or should we expect continued price traction as utilization rates kind of continue to tighten?
From my perspective, Matt, I think it's, I guess, your former of trying to catch up. You go back the last several years, it's now secret that there was a large excess supply of merchant product in the China market. A lot of that was driven by both capacity in the, what I'll call, industrial gas, but also capacity in the non industrial gas, meaning steel mills that had byproduct coming off of their captive plants. So this drove both not just low utilization rates, but just more supply than demand. And pricing in China was one of the lower pricings around the world given this.
So while China throughout the years has had inflation. You could debate it, but anywhere from mid to high single digits. The pricing and you just look back at our history was not reflected, of that. So I would say at this point now you've had some structural supply impacts that have been favorable where capacity, especially related to the steel mills has come out as steel mills have been shuttered remains to see how much more that will happen. I think that seems to have slowed, but you also have demand improving And the combination of that has allowed us to capture some of this pent up inflation from several years closer to what we would expect.
I mean, because you got to remember in China, it has some of the highest mill rates in the world. So you've got to take that in consideration when you look at merchant pricing because power, as you know, is one of our biggest inputs. So from that perspective, we need to get price seen more in line with what the recent inflation has been and what the costs are to serve that business. And I think that's what's been happening as we've seen some both structural improvements
Thanks. And if I may, just slide 1 more in, can you remind us your stance as it relates to, like, in pursuing Chinese coal gasification projects, your competitors' comments make it sound like competition for those has picked up?
Well, I could say that as our stand has been the same for the last decade plus. We've been quite clear that, whether it's China coal gasification projects or other projects, we will pursue ones that meet our density strategy, that meet our return criteria, not just financial return, but also who we're partner with in our technology and matching that up. So That's something we've participated in in south part of China, Eastern part of China in integrated industrial parks. And we've had longstanding strong ships with customers over a decade on that front. We have not pursued moving upstream or we have not pursued going into regions where we were not able to achieve the density model.
So we've been quite consistent, as far back as I've been here, And we feel good about how we're doing that.
All right. Thank you.
Thank you again for participating in our 2nd quarter earnings call. If you have any further questions, please feel free to reach out to me directly.
Ladies and gentlemen, thank you for participating in today's conference. This Everyone have a nice day.