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WIKI ANALYSIS
Air Products and Chemicals sells gases such as hydrogen, helium, nitrogen, and oxygen to industrial manufacturers and commercial end-users of industrial and lab-purity gas.
Gases are vital inputs to many manufacturing processes, and APD is one of the largest global bulk gas sellers. For large customers, APD will put one of its own plants next to the customers' factory and supply gas directly via pipeline. Earnings have grown at double digit rates from 2003 to 2007.[1]
Over 50% of APD's revenues are earned overseas.[2] APD's exposure to the energy and high-tech industries, in both R&D, as well as consumer devices, have helped it grow from $7.673B in revenues in FY2005 to $10.038BN in FY 2007.[3]
Business Overview
After the Q1 2008 divestiture of the Chemicals business, APD reports revenues in 5 segments:
- Merchant Gases - industrial and lab purity species of gases such as oxygen, nitro, and hydrogen. This segment chiefly supplies the metals, glass, chemical processing, manufacturing, and energy industries. The distinction between this segment and the Tonnage Gases segment is chiefly one of how the product is delivered. Volume in Merchant gases is lower, and often delivered by tanker or tube trailer, or smaller containers.[4]
- Tonnage Gases - In this segment, gases are supplied in very large quantities, and Air Products often places its plants adjacent to its customers, delivering gas via pipeline, and thus saving on transportation costs. This arrangement leads to reliable supply of gas as well as significant discounting of costs for the client, and often plants are designed with contractual arrangements in mind ensuring a steady relationship between APD and its client.[5]
In the above two segments, the chief component of cost of goods sold comes from electricity prices, as the separation of air and other gases is energy intensive.
- Electronics and Performance Materials - This segment specializes in delivery of products relevant to the electronics industry, for the manufacture of silicon, semiconductors, displays, and photovoltaic devices. APD also has a chemical materials business that also sells related products to clients in this segment. [6]
- Equipment and Energy - Designs and sells equipment for energy production, and also partially owns and operates several small energy plants around the world.
- Healthcare - Sells home-based medical treatment, including chemical therapy, beds, and wheelchairs. Labor is the most significant cost in this segment. [7]
Financial Overview
Note: Financials are sometimes presented pro-forma for the divestiture of the chemicals business. As a result, information is presented in a FY manner rather than CY manner. (APD's fiscal year ends on September 31)
Revenues, Growth, and Margin
Air Products and Chemicals (APD) has increased its revenues in FY2007 and FY2006 by 15.73% and 16.61%, excluding the divested Chemical business.[8] Fastest growing segments, as can be seen in the table, were the Merchant and Tonnage Gases business, which were also the largest contributors to overall revenue. This reflects APD's restructuring from 2006 to the present to focus on higher-growth and margin business.[9]
APD reported a sales volume increase of 12% in FY2007 (including the chemical business), with no corrosponding price increase (which would be inflationary However, acquisitions and currency exchange contributed a total of 4% to the revenue figure. In addition, pass-through of raw material cost to the consumer of -1% also occurred, lowering the sales figure.[10]
| Revenues By Segment (000 s) | 2005 | 2006 | 2007 |
| Merchant Gases | $2,468.00 | $2,712.80 | $3,196.40 |
| Tonnage Gases | $1,740.10 | $2,224.10 | $2,596.30 |
| Electronics and Performance Materials | $1,605.70 | $1,801.00 | $2,068.70 |
| Equipment and Energy | $369.40 | $536.50 | $585.90 |
| Healthcare | $544.70 | $570.80 | $631.60 |
| Total (ex. Chemicals) | $6,727.90 | $7,845.20 | $9,078.90 |
| Revenue Growth | - | - | - |
| Merchant Gases | - | 9.92% | 17.83% |
| Tonnage Gases | - | 27.81% | 16.73% |
| Electronics and Performance Materials | - | 12.16% | 14.86% |
| Equipment and Energy | - | 45.24% | 9.21% |
| Healthcare | - | 4.79% | 10.65% |
Businesses with the best operating margin as a percentage of revenue are the Merchant and Tonnage gases segments, as would be expected since these are the "focus" businesses that APD has favored over the lower-margin chemical businesses. Growth in the Equipment and Energy segment slowed, due to mean reversion from higher energy activity in 2005. [11] The sharp drop in Healthcare operating margin from 2005 to 2006 is the result of increased bad debt expense and infrastructure costs to support growth.[12]
Geographic Analysis
| Geographic Revenues (000 s) | 2005 | 2006 | 2007 |
| United States | $4,310.60 | $4,908.10 | $5,135.50 |
| Canada | $72.30 | $108.00 | $185.10 |
| North America | $4,382.90 | $5,016.10 | $5,320.60 |
| Europe | $2,221.40 | $2,492.20 | $3,073.00 |
| Asia | $955.00 | $1,123.60 | $1,478.20 |
| Latin America | $113.70 | $120.90 | $166.00 |
| Total | $7,673.00 | $8,752.80 | $10,037.80 |
Geographic distribution of APD's revenues are well-diversified, with operations across the Americas, Asia, and Europe. Revenue growth in each segment has been in-pace with the company's growth at large, although Asia and Europe has increased its share from 12% and 28%, to about 15% and 30% approximately, between 2005 and 2007, due to higher growth in those areas. [14]
Trends/Forces
Significant Manufacturing Exposure to Electronics and Energy
- Increased demand for energy & industrial gases will fuel growth
- Increased consumption of high-tech devices such as LCDs will drive growth
APD's gases are inputs to many chemical and energy processes necessary for the production of energy and the manufacture of electronic devices. In addition, APD is the largest mover of hydrogen gas worldwide[16], which offers tremendous upside in any potential future hydrogen-based energy economy - such as one in which cars are powered by hydrogen fuel cells instead of gasoline.[17]
Air Product also supplies gases vital to LCD manufacturers, especially interesting as consumers in the United States are mandated to switch over to newer sets to take advantage of digital signals on February 19, 2009. [18] Other electronic devices also require input gases delivered by APD.
On the other hand, this exposure can be a double-edged sword. Significant economic contraction would impact consumer consumption, which will reduce consumer demand for goods and energy. Consumer demand is the lifeblood of manufacturing, and even more so for high-risk industries like electronics, where goods are typically consumer wants, rather than consumer needs.
APD's business is subject to legislation and regulation
Although the majority of APD's gases are environmentally innocuous, many of its customers use industrial gases in ways that are facing scrutiny. In addition, regulation adds to administrative costs to APD. For example, the European Union now requires volume producers of chemicals to register their chemicals and all their uses with the European Chemicals Agency.[19] This has both positive and negative effects for APD, as industrial gases can be used to improve energy efficiency as well as environmental performance, but demand for gases will decrease if regulation makes client businesses less profitable.[20]
Further development of the Nanotechnology industry can grow APD's revenues
Total global demand for materials fabricated on the nano/micro-meter scale, nano-devices and nano-tools is expected to reach $28 billion by 2008. The domestic nanotechnology market is predicted to reach $3.3 billion by 2008 and cross $19.8 billion by 2013. Air Products has increased its focus on the high potential nanotech market. [21] APD acquired Nanogate Advanced Materials GmbH in April 2006 in order to create manufacturing tools on the nano-scale. This consolidated its commercialization of nanoscale materials and gave it first mover advantage in the growing market of nanoscale manufacturing.[22]
Increasing energy costs pose a risk to APD's business, as energy is a significant input to its operations
Cost of electricity is the most significant component in cost of goods sold in the gases segments, and significant amounts of energy are required in any of APD's plants.[23] If prices were to substantially rise, APD will either be forced to pass-through costs to clients, or if it is not able to do so, take a hit to its margins.
Historically, this complicated relationship with energy was evidenced during the 1970's energy crisis. Increasing petrochemical fuel costs lowered revenues in that segment, but increased popularity of oxygen as a fuel. In addition, the higher input costs were offset by higher demand for other gases to create cheaper energy sources, such as liquified natural gas.[24]
Competitors
Global competitors
- Praxair (PX)
- L'Air Liquide
- Linde
These 3 global suppliers operate on similar platforms to Air Products and Chemicals. Combined, these companies earned over 56% of market revenues in 2006. This concentration makes sense in light of that fact that the industry requires capital-intensive investment, large production units and complex distribution networks. Firms compete on a variety of factors, including price, performance or specifications, continuity of supply, and customer service.
Market sizing can be measured in terms of $USD revenue or volume of gas delivered. The table below presents both metrics for the time period 2002-2006.
| Year | Metric: USD ($Bn) | Growth | Metric: Cubic Meters (bn) | Growth |
| 2002 | $39.50 | - | 1.951E+11 | - |
| 2003 | $41.60 | 5.10% | 2.038E+11 | 4.50% |
| 2004 | $43.80 | 5.40% | 2.134E+11 | 4.70% |
| 2005 | $45.90 | 4.80% | 2.219E+11 | 4% |
| 2006 | $48.10 | 4.80% | 2.318E+11 | 4.50% |
| CAGR | 2002-2006 | 5.10% | 2002-2006 | 4.40% |
Regional (domestic)
Since another large component of cost of goods sold is transportation, regional players can compete effectively against APD when they have on-site or cheaper delivery options.
Market Share
Market share information for this segment is given below in table, for the year 2006.[25]
| Global Industrial Gases | Percentage |
| L'air Liquide | 22.30% |
| Air Products & Chemicals | 12.50% |
| BOC | 12.40% |
| Linde | 9.50% |
| Other | 43.30% |
Note that BOC group has been acquired by Linde since 2006.
References
- ↑ ChemWeek. "Air Products Returns on the Rise". pg. 1, February 4, 2008
- ↑ ChemWeek. "Air Products Returns on the Rise". pg. 2, February 4, 2008
- ↑ Air Products and Chemicals. " FINANCIAL REVIEW SECTION OF THE ANNUAL REPORT TO SHAREHOLDERS". pg.16
- ↑ Air Products and Chemicals. "2007 Financial Review". pg.14
- ↑ Morningstar: "APD, Air Products and Chemicals" July 31, 2007
- ↑ Air Products and Chemicals. "2007 Financial Review". pg.14
- ↑ Air Products and Chemicals. "2007 Financial Review". pg.15
- ↑ Air Products & Chemicals, 2007 Financial Review. "Business segments" pg. 74
- ↑ Air Products and Chemicals FY 2007 10-K "Company Undertakings" pg.11
- ↑ Air Products & Chemicals, 2007 Financial Review. "Discussion of Consolidated Results" pg. 16
- ↑ Air Products & Chemicals, 2007 Financial Review. "Equipment and Energy" pg. 24
- ↑ Air Products & Chemicals, 2007 Financial Review. "Healthcare Operating Margin" pg. 25
- ↑ Air Products & Chemicals, 2007 Financial Review. "Business segments" pg. 74
- ↑ Air Products & Chemicals, 2007 Financial Review. "Geographic Information" pg. 75
- ↑ Air Products & Chemicals, 2007 Financial Review. "Geographic Information" pg. 75
- ↑ Air Products and Chemicals, 2007 Financial Review "Tonnage Gases."
- ↑ Seeking Alpha. "Air Products, Fuel Cell Energy building High Efficiency Hydrogen Power Plant". March 23, 2007
- ↑ Federal Communications Commission.""DTV" IS COMING(AND SOONER THAN YOU THINK!" January 3, 2008
- ↑ Air Products and Chemicals "REACH"
- ↑ APD FY 2008 Q1 Call transcript, Seeking Alpha.
- ↑ Datamonitor Company Report "Air Products and Chemicals" August 27, 2007
- ↑ Air Products and Chemicals, Press Release, April 04, 2006
- ↑ Chemical Market Reporter "Energy costs drive Air Products" October 3-9, 2005
- ↑ Answers.com "Air Products & Chemicals"
- ↑ Datamonitor Industry Reports. "Global - Industrial Gases" March 15, 2007
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