2015 Annual Report Shareholders Letter
2015 was a challenging year, but Praxair employees once again delivered high-quality results. We demonstrated strong financial leverage with sales comparable to the prior year while earnings per share grew 3%, excluding negative foreign currency translation and cost pass-through. We continue to lead the industry in operating and EBITDA margins, return on capital and return on equity.
Nothing in our company is more important than our employees returning home safely at the end of each and every workday. In 2015, we experienced best-in-class safety performance in many categories. Our recordable injury rate was 7 times better and our lost workday case rate was 25 times better than the OSHA average. In distribution safety, our investment in new state-of-the-art technologies helped us reduce vehicle accidents by 22% year over year. We also continued to reduce key events in the important area of process safety, delivering our best year ever. In short, we are passionately committed to providing our employees a safe work environment.
2015 brought significant headwinds to our earnings growth which contributed to underperformance in the stock price. The strength of the U.S. dollar reduced earnings from the translation of foreign subsidiary income by an unprecedented 10%. This also negatively impacted demand from our U.S. metals and manufacturing customers who struggled to compete with cheaper imports. Additionally, growth in many of our emerging markets slowed significantly.
Prompt Actions Taken
What did we do to mitigate these headwinds? We quickly adjusted our cost structure in line with changing economic conditions and redoubled our efforts across the globe in productivity and price attainment. As a result, we grew our industry-leading EBITDA and operating margins of 34% and 23%, respectively, to record levels.
We completed 15 small acquisitions that were highly synergistic with our existing footprint. We started-up onsite projects under long-term supply contracts in Asia, Europe and North America and grew base volumes in more resilient growth markets such as food and beverage, healthcare and aerospace.
Accordingly, operating cash flow was strong at 25% of sales. Tightly managed capital spend maintained our industry leading after-tax return on capital of 13% and contributed to free cash flow of $1.1 billion. And, we were pleased to increase our dividend for the 23rd consecutive year.
Strategy for the Road Ahead
Optimize the Base Business
This is not new to Praxair - it is a hallmark of our culture. We have delivered more than two decades of continuous improvement across our business, yet every day we discover new ways to improve how we operate. We are confident in our ability to continue to generate productivity improvements well into the future. Optimizing our base business drives strong cash flow which affords us the opportunity to invest in high-quality projects and acquisitions that align with our strategic objectives and meet our investment criteria.
Grow Resilient End-Markets
We quickly recognized the cyclical shift in some of our end-markets and intensified our efforts to grow more resilient end-markets. We are focused on delivering growth through customer innovation and solutions in healthcare, food and beverage, aerospace, specialty gases and environmental applications. South America is an excellent example of these efforts with more than 30% of their sales now in these markets. As a result, its growth has consistently outpaced that of the general economy.
Synergistic mergers and acquisitions are another path to increasing our exposure to more resilient growth markets. We recently announced the acquisition of a European carbon dioxide business that will grow our exposure to food and beverage customers. Aerospace sales will be enhanced through a joint venture with GE Aviation for expanded jet engine coatings by our Surface Technologies business.
Build Density with Acquisitions
In addition to accretive acquisitions that increase exposure to resilient end-markets, we will capitalize on acquisition opportunities in core industrial gases which will build network supply density and generate cost synergies. We expect the majority of these to be small packaged gas distributors in North America, but we will also make acquisitions in Europe and South America.
Execute Backlog and Capitalize on New Opportunities
We have a $1.5 billion dollar backlog with fully-executed customer contracts that will deliver growth this year and through 2018. Six long-term projects were added to the backlog during 2015, including expansion of pipeline product supply networks to petrochemical customers in the U.S. Gulf Coast, the Port of Antwerp and China.
And we expect to add new projects to the backlog. The opportunity set includes customers taking advantage of low-cost energy and existing infrastructure in the U.S. Gulf Coast, downstream refining opportunities globally and smaller onsite opportunities in North America, Europe and Asia related to a variety of end-markets and innovative applications.
Strength of Employees and Core Values
Our vision continues to be the best performing industrial gas company in the world and that means more than financial performance. It is an ongoing commitment to our core values: safety, integrity, diversity and inclusion, environmental stewardship, community engagement, customer satisfaction in addition to being a results-driven high-performance company. These values shared by our more than 26,000 employees knit us together as a company, and create the foundation for a prosperous and sustainable company over the long term.
Praxair has been selected as a component of the prestigious Dow Jones Sustainability World Index for 13 consecutive years recognizing the company’s long-standing commitment to environmental and social responsibility – the only U.S. chemical company with this distinction. Praxair was also named to the 2015 CDP S&P 500 Climate Disclosure Leadership Index for the eighth consecutive year, recognizing the company’s long-standing commitment to growth through resource productivity and environmental innovation – with a perfect score of 100.
Praxair’s business model of local production and distribution means we are embedded in our local communities for the long term. We encourage employee community engagement and we are proud that our 2015 employee volunteerism brought direct benefits to more than 345,000 people around the world – that’s more than 12 beneficiaries for each Praxair employee.
The strategy we outlined – optimize the base business; grow resilient end-markets; capitalize on acquisition opportunities; execute the project backlog and win new opportunities – will enable us to grow profitably without assistance from the macroeconomic environment. Having said that, we know the macro headwinds we are now facing are cyclical in nature and will turn to our advantage at some point. And when they do, we are well-positioned with our existing infrastructure to leverage any volume recovery to the bottom line.
This is why we are so confident in our future. Thank you for your continued support.
Chairman, President & Chief Executive Officer