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WIKI ANALYSIS
Airgas and its competitors are supplied by the major gas producers such as Air Products and Chemicals (APD), L'aire Liquide or Linde. The company repacks industrial gases in high-pressure cylinders as required by end-customer specifications. Airgas' main revenue source comes from the sale of gases to fill these cylinders 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 cylinders for gas storage as well as related safety materials. About 80% of the company's revenues come from the gas delivery business.[1]
Airgas is the only national company in an industry dominated by regional players, largely because its expensive to package and transport gas over long distances. Airgas has aggressively consolidated regional players throughout its history, acquiring 350 companies since its inception in 1986.
Business Overview
The company reports under two main business units
- Distribution - This unit earns most of Airgas' revenue. Airgas has over 1 million clients[2] ranging from metal fabricators to packagers of carbonated soda. Airgas' national scale, in contrast with its regional competitors, gives it an advantage in negotiating better contracts than competitors.
- 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.[3]
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 grown even more, at 33% and 27%.[4] 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 a centralized administrative business model[5]
| 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% |
Approximately 82% of revenues were 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[7], which will change the contribution in the mix for the future.
In FY2007, Airgas completed 13 acquisitions with annual sales of approximately $336 million.[9] ARG's acquisition-driven model does lead to significant amounts of debt, $1.9bn at the end of Q3 FY2008[10], but the businesses it acquires typically allow it to deleverage, as they create cost savings through scaled operations.
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 as of 2008.[11] However, it does free Airgas from supply issues as it can partially supply itself at lower cost.
Geographic Analysis
Airgas operates in specific geographic regions in the US due to the transportation limitations imposed upon this industry as mentioned above, and the limitations of its existing infrastructure. 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."[12]
Trends/Forces
Scale lends power to ARG's procurement and distribution networks
ARG continues to trump its smaller competitors' margins due to its ability to leverage scale in negotiation and distribution operations. The effects are seen in both gross profit as well as operating profit, and ARG can win share by converting customers through through lower prices, and buying-out their opponents when the opportunities present themselves. This is the advantage of being the only national player in a highly fragmented industry.
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.[13] Although the company has been historically successful at meeting targets for acquisitions and not overpaying, integration risk exists for any one of Airgas' acquisitions.
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. While its products can be sold internally to ARG's distribution segment, the business will have to earn share from ARG's competitor-suppliers, such as Praxair (PX) and Air Products and Chemicals (APD).
Rising costs for indisturial 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 been passed on to Industrial gas prices, as electricty costs are the main component of industrial gas cost of goods sold.
Presently, with the weakening 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 and demand for industrial gases slackened, Airgas' pricing faced significant downward pressure.[14] In 2008, high oil prices are creating the opposite effect - higher input costs - and competitive pricing pressure in this fractured market means ARG might not be able to pass-through cost increases. The dynamic between energy cost and industrial gas pricing will determine Airgas' revenue growth as well as margin expansion.
Domestic market cyclicality and the potential of recession are challenges for Airgas' growth
In light of the recessionary fears caused by the U.S. Housing Market, consumption of manufactured goods may drop, feeding into the economy at large. While slack demand for manufacturing will damage Airgas, as its gas sales come from manufacturer demand, there are alternative customer segments that Airgas participates in which shielded from some of the recessionary woes. For example, with rising energy inflation, alternative renewable energy becomes more attractive, which also demands gases as inputs. Healthcare, food, life sciences have also been identified as shielded from some of these cyclicality concerns.
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, delivering gases in non-bulk quantities to individual customers at a time. They instead prefer 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 it does not have majority share in the national market.
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] ARG's recent acquisition streak mentioned above highlights the truth behind this statement, and will continue to be a source of competitive advantage for the company, though not without risk.
References
- ↑ Airgas FY2007 10-K "DISTRIBUTION" pg.3
- ↑ 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 FY2007 10-K "Acquisitions" pg.22
- ↑ Air Gas December 31, 2007 Q3FY2008 Earnings Call Transcript
- ↑ Airgas FY2007 10-K "Airgas Merchant Gases" pg.6
- ↑ Airgas Q3FY2008 Earnings Call Transcript
- ↑ Airgas Q3FY2008 Earnings Call Transcript
- ↑ Airgas 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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