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| <ref>[http://edgar.sec.gov/Archives/edgar/data/804212/000089322007002057/w35445e10vk.htm#110 Airgas FY 2007 10-K "SELECTED FINANCIAL DATA. " pg.16]</ref> | <ref>[http://edgar.sec.gov/Archives/edgar/data/804212/000089322007002057/w35445e10vk.htm#110 Airgas FY 2007 10-K "SELECTED FINANCIAL DATA. " pg.16]</ref> | ||
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| - | | align="center" style="background:#f0f0f0;"|'''Metrics''' | + | | align="center" style="background:#f0f0f0;"|'''Metrics ($ 000s)''' |
| | align="center" style="background:#f0f0f0;"|'''2005''' | | align="center" style="background:#f0f0f0;"|'''2005''' | ||
| | align="center" style="background:#f0f0f0;"|'''2006''' | | align="center" style="background:#f0f0f0;"|'''2006''' | ||
Revision as of 17:17, April 11, 2008
Airgas and its competitors are supplied by the major gas producers such as Air Products and Chemicals (APD), L'aire Liquide or Linde, repacking industrial gases in high-pressure cylinders as required by end-customer specifications. Airgas' main revenue source comes from the sale of gases such as nitrogen, oxygen, argon, helium, hydrogen and gases for welding, such as acetylene, propylene and propane, carbon dioxide, and nitrous oxide. Additional tie-in revenue comes from renting of cylinders for gas storage as well as related safety materials. By the company's own estimates, about 80% of revenues come from the primary gas delivery business.[1]
In March of 2007, Airgas announced the intent to acquire Linde AG's US gas production operations, giving it the ability to produce its own gases as necessary. This business is relatively small, constituting less than 15% of the company's revenues.[2]
This industry is extremely regional, as significant fixed costs are associated with packaging and delivering the gas. As a result, it is dominated by local distributors catering to a specific area. Airgas is the largest competitor with the segment, and has grown its revenues via acquisitions, totaling 350 companies since the company's inception in 1986. In FY2007, Airgas completed 13 acquisitions with annual sales of approximately $336 million.[3]
Business Overview
The company reports under two main business units
- Distribution - This unit earns most of Airgas' revenue, and is the primary provider of value to Airgas customers. Airgas has over 1 million clients[4] ranging from metal fabricators to packagers of carbonated soda. Airgas' larger size than most regional competitors gives it an advantage on the supply side as well as the sell side, negotiating better contracts than competitors due to scale, as well as concentrating administrative activities, enabling branch locations to focus on sales and services.
- All Other Operations - All other operations primarily consist of gas producing operations within the company. The Gas Operations Division produces and distributes carbon dioxide, dry ice, nitrous oxide, anhydrous ammonia, and specialty gases. Airgas Merchant Gases produces oxygen, nitrogen, and argon, most of which is sold internally within the company to the Distribution business unit. National Welders is a producer and distributor of industrial, medical and specialty gases, as well as the related packaging and safety products.[5]
Financial Overview
Revenues, Growth, and Margin
Revenues at Airgas have grown consistently year on year from 2005 to 2007, growing 20% and 17% in 2006 and 2007, respectively. Operating Income has growth even more, at 33% and 27%.[6] This is due to increased margins per dollar of revenue, caused by effective management of pricing and rental rates of gas and packing cylinders, as well as cost decreases from administrative overhead due to the centralized administrative business model[7]
| Metrics ($ 000s) | 2005 | 2006 | 2007 |
| Net Sales | 2,367,782 | 2,829,610 | 3,205,051 |
| Operating Income | 202,454 | 268,758 | 341,452 |
| Sales Growth | - | 20% | 13% |
| Operating Income Growth | - | 33% | 27% |
With respect to the main two business units at Airgas, approximately 82% of revenues was earned by the Distribution business unit, almost equally divided between Gas sales/packaging rentals, and the value-added services consisting of safety supplies and the like, collectively labeled "Hardgoods". While "All Other Operations" currently constitute a small (<20%) contribution to total revenues, Airgas is currently investing in expanding its gas production facilities in new regions in the Midwest (Indiana and Kentucky) scheduled for early 2009[9], which will change the contribution in the mix for the future.
Geographic Analysis
Airgas operates in selected domestic markets due to the transportation limitations imposed upon this industry as mentioned above. Airgas does not have immediate plans for international acquisitions, but the CEO has indiated that, "we are open to the possibility of extending our business beyond North America and are currently evaluating opportunities on a case-by-case basis."[11]
Trends/Forces
The success of integration and the associated management challenges are hurdles to Airgas' success
Airgas' primary revenue growth comes from acquisitions of existing smaller distributor networks, with operating income efficiencies coming from leveraging Airgas' national structure. In fact, in Q2 of FY2008, Airgas acquired 8 regional players in gas distribution alone, and intends on buying more through FY2008.[12]
The acquisition of Linde's bulk gas production group is a larger integration challenge than most, since it is in a business line different from the distribution side, and integration risk exists for any one of Airgas' acquisitions. While the company has been historically succesful at meeting targets for acquistions and not overpaying, this will not always be the case.
Cost of Industrial gases threaten ARG's growth and margins
Industrial gases are the main input to ARG's operations, and are typically purchased from a distributor such as Air Products and Chemicals (APD), L'aire Liquide or Praxair. Energy price increases have fed through due to cost pass-through into Industrial gas prices, as electricty costs are the main component of industrial gas cost of goods sold.
Presently, with the weaking of the US Dollar, Oil Prices have hit new highs in CY2008, further exacerbating the issue. During the late 1990's, as oil prices trended downwards, Airgas' pricing faced significant downward pressure, as this was coupled with slack demand.[13] Heading into the future, the dynamic between energy cost and industrial gas pricing will determine in Airgas' revenue growth as well as margin expansion.
Domestic Market cyclicality and the potential of recession are challenges for Airgas' growth
While slack demand for manufacturing will damage Airgas, the company has identified several sectors that appear to be blooming recessionary concerns. Airgas remains "optimistic that some of the peered weakness in the US industrial economy will be offset by the combination of rising exports and booming energy and infrastructure construction...key customer segments such as healthcare, food and beverage, life sciences, research, and environmental continue to grow at impressive rates."[14]
Concerns over soft demand due to manufacturing are also partially offset by the weakening Dollar . Though Airgas is a domestic-only player, many of its customers are international players in their respective markets, leading them to see more demand internationally as the Dollar weakens, which has happened largely over trade and inflationary concerns over CY 2007 and 2008.
Competitors
International Gas Producers
- Praxair (PX)
- Air Products and Chemicals (APD)
- L'aire Liquide
These major international producers and distributors also happen to be ARG's chief suppliers, with long-term take-or-pay (either take the gas at our rates or pay us a small fee instead) agreements in place to guarantee their own revenues as well as ARG's supply.[15]
These suppliers don't typically elect to compete in Airgas' "last-leg" business, deliverying gases in non-bulk quantities to individual customers at a time, preferring a business without the distribution challenges that ARG has embraced. However, they occasionally do choose to compete for select clients and markets.
Regional Gas Distributors
- Many small regional players (also acquisition targets)
- VALLEY NATIONAL GASES (VLG)
Due to the challenges to distributing packaged gas for more than 50-100 miles, the regional market is highly fragmented, leading to the acquisition strategy that has propelled Airgas to significant ownership of the market. However, even as such its share is not more than 50%.
Market Share
By the company's own estimates, it owns approximately 23-25% of their defined market, packaged gases, as of January 2008. [16]
The company expects to be able to grow to 40-45% by continuing on its acquisition strategy. "We're sort of acquisition junkies and we're good at it," the CEO said for an interview with Reuters at the beginning of 2008. [17]
References
- ↑ Airgas FY2007 10-K "DISTRIBUTION" pg.3
- ↑ Airgas FY2007 10-K "Airgas Merchant Gases" pg.6
- ↑ Airgas FY2007 10-K "Acquisitions" pg.22
- ↑ Air Gas December 31, 2007 Q3FY2008 Earnings Call Transcript
- ↑ Airgas FY2007 10-K "All Other Operations" pg.5
- ↑ Airgas FY 2007 10-K "SELECTED FINANCIAL DATA. " pg.16
- ↑ Airgas Q3FY2008 Earnings Call Transcript
- ↑ Airgas FY 2007 10-K "SELECTED FINANCIAL DATA. " pg.16
- ↑ Airgas Q3FY2008 Earnings Call Transcript
- ↑ Airgas FY 2007 10-K "Notes to Consolidated Financial Statements" F-49
- ↑ Airgas Q3FY2008 Earnings Call Transcript
- ↑ Airgas Q3FY2008 Earnings Call Transcript
- ↑ Airgas Q3FY2008 Earnings Call Transcript
- ↑ Air Gas December 31, 2007 Q3FY2008 Earnings Call Transcript
- ↑ Airgas FY2007 10-K "Distribution" p. 5
- ↑ Reuters.com "Airgas keen to grow core business market-share" January 28, 2008
- ↑ Reuters.com "Airgas keen to grow core business market-share" January 28, 2008
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