2016 Annual Report Shareholders Letter
During 2016, Praxair employees again demonstrated operational excellence by delivering high-quality results despite facing challenging economic conditions. We made significant progress on our core strategy and generated operating cash flow margin of 26% of sales and free cash flow of $1.3 billion. The strong cash flow enables a balanced allocation of capital to more high-quality growth projects and greater distributions to our shareholders; both of which we accomplished this year through accretive acquisitions, project wins in the U.S. Gulf Coast and raising our dividend for the 24th consecutive year.
Our vision—to be the best performing industrial gas company in the world—includes more than financial performance. It is an ongoing commitment to our core values: safety, integrity, diversity, environmental stewardship, community engagement, customer satisfaction and operational excellence in all that we do.
Praxair is passionately committed to providing our employees with a safe operating environment—nothing is more important in our company than our employees returning home safely at the end of each and every workday. Praxair’s best-in-class safety performance consistently outperforms the OSHA industrial average. In 2016, our recordable injury rate was eight times better and our lost workday cases were 15 times better than the OSHA benchmarks.
Despite this world-class performance, our commitment to safety obligates us to strive for continuous improvement. As a result, our investments in state-of-the-art technologies in our distribution fleet and plant operations contributed to a further 10% reduction in significant safety events. Safety discipline is at the heart of everything we do at Praxair.
Growth and Strategic Achievements
Base Business Optimization
The first pillar of Praxair’s strategy is to optimize the base business, a hallmark of our culture and identity. We proactively took cost reduction measures in 2016 to improve our performance in a difficult environment. Furthermore, we achieved solid pricing globally in a world with low inflation.
From our perspective, the best way to measure our efforts is to look at the quality of our business results. Adjusted EBITDA margins were solid at 33%, operating cash flow was a record 26% of sales and our employees delivered operating cash flow growth of 3% year-over-year, despite significant headwinds on base volumes.
Resilient End-Market Growth
While we are well positioned for any recovery in industrial end-markets, we actively focused efforts toward faster growing resilient end-markets, which include food, beverage, healthcare, specialty gases, environmental and aerospace. Overall, these end-markets have expanded to 27% of our sales, with several countries, such as Brazil and Canada, already close to our 33% target.
A key product to serve the food and beverage industry is carbon dioxide; in the U.S., we increased our carbon dioxide capacity by 50%, and in Europe, we acquired Yara’s carbon dioxide business, significantly strengthening our growth platform on the continent.
Additionally, we closed a joint venture with GE for aircraft engine coatings. We expect that between increased scope and the production ramp of the LEAP engine, our coating sales with GE will triple in a few years.
Furthermore, we enhanced our regional density in many locations around the world through synergistic acquisitions in support of our strategy.
Securing Future Growth with New Project Wins
One of the most exciting and impactful growth opportunities of our strategy relates to executing and winning new on-site projects in the U.S. Gulf Coast, which are driven by the low-cost feedstock advantage in the region. We added several new project wins in 2016, bringing the total value of our backlog to $1.5 billion, 70% of which is located in the U.S. Gulf Coast. These wins enable us to further expand our dense supply network and leverage our existing infrastructure for highly reliable and accretive future growth. Within the next four years, we expect our U.S. Gulf Coast production system to be 50% greater than it is today.
And based on the strength of proposal activity today in the region, we expect to add new projects to the backlog, providing growth well into the future.
Strength of Employees and Core Values
Our core values establish the foundation for a prosperous and sustainable enterprise over the long term. With respect to diversity and inclusion, we are committed to providing a work environment where all perspectives are respected and heard. In 2016, Praxair was recognized as a “Top 25 Noteworthy Company” by DiversityInc and received a perfect score of 100 from the Human Rights Campaign for workplace equality and advocacy. We are proud of these accomplishments, but also recognize we have more work to do in order to reach our full potential.
Environmental stewardship and community engagement are also important core values. Praxair has been selected as a component of the Dow Jones Sustainability World Index for 14 consecutive years, recognizing the company’s long-standing commitment to environmental and social responsibility—the only U.S. chemical company with this distinction. Given Praxair’s business model of local production and distribution, we are embedded in our local communities for the long term. We encourage employee community engagement and we are proud that our 2016 employee volunteerism brought direct benefits to close to 350,000 people around the world—that’s more than 13 beneficiaries for each Praxair employee.
Proposed Linde Merger
The year culminated in a non-binding agreement in principle to merge with Linde. We view this as a compelling synergistic opportunity that would create substantial value for stakeholders. We believe the combined company would:
- Give us the opportunity to leverage the individual strengths of both companies across a much larger global footprint.
- Enjoy strong positions in all key geographies and end-markets and create a more diverse and balanced global portfolio.
- Enable development and delivery of more innovative products and services to our customers.
- Be a highly attractive employer of choice, providing enhanced career and development opportunities for our work associates.
This announcement is the first step in a process that will take some time to complete. While we pursue this opportunity, rest assured our employees will remain laser-focused on operational excellence and executing our core strategy.
We are confident that we have the right strategy to create value in this environment. Our employees have made significant progress executing our strategy and the benefits have not only supported our 2016 performance, but also lay the groundwork for future earnings growth and significant cash flow generation over the next several years. However, we cannot rest there—our obligation is to continuously explore new opportunities to create even more value for our shareholders. Regardless of which path we ultimately take, our commitment to operational excellence, capital discipline and best-in-class performance in every aspect of our business is unwavering. It has made us who we are today and will enable us to deliver world-class shareholder value well into the future.
Thank you for your continued support.
Chairman, President & Chief Executive Officer