The Beginning
Airgas Chairman and CEO Peter McCausland founded the company, then known as US Airgas, by acquiring Connecticut Oxygen Corporation (Connox) in February 1982. The company (Airgas) is today the largest distributor of packaged industrial, medical and specialty gases as well as welding & cutting equipment and one of the largest distributors of safety supplies in the United States. So how did it all begin?
“I was a young lawyer working for the US subsidiary of Messer and I got a lot of experience with financing and acquisitions, and I learned the gas business,” says McCausland. A few months before leaving Messer, he had recommended that they buy a distribution company called Connecticut Oxygen. “It was a little different from the average distributor as it had a very large bulk resale business. It was almost 70% gas and it was very profitable.”

Messer did not want any more acquisitions then, so after McCausland left the company to start his own law practice, he set about raising $1m of equity and $4.5m of debt to buy the company. “The original idea was it would just be an investment or a nest egg,” he explains.
In time, McCausland realised that the distribution side of the industrial gas business in the US was ripe for consolidation.

The company started to make smaller acquisitions. “I realised that we had a good formula for running businesses and so I set about to raise enough cash to fund an aggressive roll-up strategy,” he explains. More than a dozen acquisitions later, US Airgas had $37m in annual sales, and completed a reverse merger with Werco, Inc., a $68m supplier to the industrial gas industry. The result was Airgas, with sales of over $100m. “The idea was to go public and use the proceeds from the public offering, plus the eventual sale of Werco manufacturing units to fund an aggressive roll-up of industrial gas distributors in the US,” McCausland says. “And that’s essentially what happened.”

Airgas sold Werco manufacturing units during the late 1980’s leverage buy out boom. “Going into the 90’s we had plenty of cash flow and borrowing capacity to continue with an aggressive roll-up, we were over the hump – that’s how we got started.”

Company strategy
Airgas developed a vision of an integrated platform. Facilities and capabilities in every market would mean large multi-site customers could rely on Airgas. “That wasn’t going to happen overnight,” McCausland says. “In those early years we focused more on winning at a local level – getting density. We felt that you don’t need to have a huge market share at local level to be successful in our business, but you need a large enough presence to be able to defend your business.” The company’s acquisition strategy involved buying an anchor acquisition, a large regional distributor, and then following on with add-on acquisitions to build market density. McCausland stresses that market density is the single most important determinant of profitability in the industrial gas distribution business.
“We view ourselves as a distribution company with gas as our principle product, so the early years were all about getting density in all the important markets, strict financial controls, good cash management, and good liability management.” During the 1990’s, the company began to pay more attention to details such as standardisation and performance measurement. It also built infrastructure in both gas and hardgoods. “If you’re not the low-cost supplier, you’re vulnerable.”

Diversification was another issue, because with the exception of Connecticut Oxygen, the rest of the acquisitions had focused on traditional welding distributor. So in 1998, the company launched its ‘Repositioning for Growth’ to build its infrastructure and diversify its business.
“Before repositioning, the name of the game was employing great local managers and giving them autonomy and responsibility, so that they could react to customers at a local level. If you don’t take care of the customers at the local level you’re in big trouble,” says McCausland.

The company built a robust data warehouse, and diversified into a number of new, non-cyclical or counter-cyclical growth platforms. These included medical gases, bulk gases, specialty gases, liquid carbon dioxide and dry ice, and safety. These make up 40% of Airgas sales today – indeed Airgas is the second-largest CO2 producer in the US, one of the largest safety products distributors, and the leading distributor of medical and specialty gases in the US. The company also has a centralized Strategic Accounts program, coupled with local strategic account managers. “It’s been very successful: When we do a match with the customers the chances are that 99% of the customer’s locations are within 20 miles of one of ours.” The company now boasts 1,100 locations nationwide. Airgas also invested to build large distribution centres for hardgoods and safety products, as well as 4 buying centres to streamline its hardgoods supply chain.

Airgas entered a number of international markets in the 1990’s, including Poland, India, and Thailand. Then McCausland says that “dot com lunacy took over the United States capital markets,” resulting in a drop in Airgas stock price to below $5. The company regrouped and refocused on its core US market. Today, the company does operate in Sakhalin in eastern Russia, Mexico and Dubai, and is considering going into China. Airgas has been successful in the rather unusual $11bn plus US market – which features over 900 distributors. This leaves Airgas plenty of room for continued acquisitions. McCausland suggests that it could acquire up to a further 10% of distributors.

McCausland says Airgas is becoming market focused and adding services and engineered solutions for its customers’ problems. In addition to core and strategic growth markets, the company has added further specialties for construction and utilities, and has added ammonia, refrigerants and bulk process chemicals to its product portfolio. Airgas continues to build up supply chain services.
A big factor for customers of speciality products is that as a large company, Airgas has $200m of liability insurance and national emergency response capability. This offers real benefits over small, local distributors.

So is Airgas a distribution business or a gas company? “Clearly there’s no question that we’re a gas company, we have a huge gas business in the United States. When I say that we’re a distribution company with gas as our principal product, I’m talking more about a business philosophy,” McCausland explains. Distribution is a nickel-and-dime business compared to the opposite end of the spectrum in the industrial gas business, with large hydrogen plants, large ASUs for coal gasification or large engineering products.
“They have their focus and we have our focus.”

Manufacturing generates higher returns than the distribution business, as in any industry. Airgas has steadily improved returns, with return on capital up 150 basis points to 13.3% in fiscal 2007. Airgas has just announced new strategic goals for fiscal 2011 of more than $5bn in sales, operating margins of 13% to 13.5%, and return on capital of 15% to 15.5%.

McCausland considers Airgas’ manufacturing businesses to be at least as profitable as those of BOC and Air Products. “We will never turn our back on our distribution business, it’s our heart and soul,” he says. “Returns are one thing. But cash flow and long-term customer relationships and local presence and national platforms, where you can bring national capabilities right down to a local level, they’re very important to us and that’s how we’re going to grow our business.”
McCausland estimates Airgas has around 10% of US production of atmospheric gases. “If there were a national distribution market, I think we would have 25% of it. But as I said, there is no national market for package gases.” There’s an $11bn plus market for packaged gases and welding in the United States, made up of a lot of local markets, of which Airgas holds around $2.5bn.

Airgas has significant trading relationships with Air Products and Linde, involving large volumes of bulk gases all over the US, where Airgas is their number one customer for many product lines. Airgas also competes with these majors in the bulk business, in areas where it has production. “In the rest of the country, we are concentrating on small bulk and less-than-truckload quantities, so we can be competitive,” McCausland explains. “We have a good relationship with Air Products and Linde as they’ve realised that less-than-truckload quantities is our forte and not theirs. They are supportive and we have good relationships, but we compete hard against each other.” Airgas has also recently developed a relationship with Praxair, and inherited a swap arrangement with Praxair when Airgas bought Linde’s divested bulk business. The company has a lesser relationship with Air Liquide at this stage.

The US market has consolidated considerably over the last 15 years – with a certain amount of help from Airgas! Companies like Air Products, Linde, and Air Liquide are all courting independent distributors to get volume on their plants. “Whether or not that’s going to lead to new distributors being established on the basis of these new distributor programmes by the industrial gas producers, I don’t know yet,” McCausland says, adding that this would slow the pace of consolidation. On the other hand customers are growing more and more demanding, customer segments continue to consolidate across the country and they’re looking for companies with broader capabilities, such as great safety programmes, and programmes that help manage their supply chain. “I think there are different cross-currents here and we’ll just have to wait and see how it plays out,” says McCausland.

Putting up the pressure
Drivers towards operational efficiency include standardising cylinder gas testing using new ultrasonic testing technology in-house, and cylinder truck routing software that Airgas will soon roll out nationally. Airgas Merchant Gases, the company’s new national bulk infrastructure, is helping with economies of scale in bulk distribution compared with the earlier regional model. AcuGrav™ automated specialty gas mixing capabilities cut labour by a third or more and improve quality and performance immeasurably: “You can’t make a mistake with this technology, which we’ve developed in-house,” McCausland explains.

The company is also willing to up the pressure, along European lines. “We pump six thousand pound (400 bar) cylinders in several places in the US right now, and we have a national contract with NASCAR for six thousand pound nitrogen cylinders.” The company has implemented higher pressure filling stations for a number of customers: “When that trend does take-off and when customers start demanding them, we’re capable of rolling it out further,” he adds.

The future
“We still have a long way to grow in terms of the US package gas market,” says McCausland, who aims to increase this by internal growth as well as acquisition. “Then I think we’ll selectively grow in the bulk market, but very selectively.” The company’s CO2 and dry ice business is set for expansion. McCausland says that Airgas Speciality Products, which distributes bulk process chemicals, refrigerants and ammonia, is another “great platform to grow”. As well as looking at China for potential expansion, McCausland is also monitoring large independent companies in Europe and South America that he’d be “interested in talking to”.

McCausland says that the US market is currently strong and capacity is very tight. “There are shortages of argon and helium nationally – I expect some new capacity to be added.” With market growth running at twice GDP, new capacity is rapidly absorbed. The result may be better pricing, but gas is thinner on the ground. “I think we have great sourcing capabilities and we’ll get our fair share.” A leap forward in large ASU technology and the hydrogen technology businesses presents a great opportunity for the very large companies, with benefits to Airgas, which can pick up a lot of products from these installations.

McCausland also sees a recession as a possibility in a few years. “Hopefully the fact that over 40% of our sales are these strategic products to non-cyclical and counter-cyclical customers and that we have these other growth platforms will allow us to move through any recession and emerge stronger.”

Secrets of success
Airgas’ strategy of sticking to the density model and decentralised management organisation structure has paid off. “You can’t micromanage this kind of business,” McCausland says, adding that giving people autonomy and responsibility and letting them make decisions to respond to the customers and grow the company at the local level has been key. This unique market is unlike others around the world where the likes of Air Liquide, Linde, or Air Products operate.
“It’s hard to have enough business to support the local presence that we get as we focus on so many different products and we want to sell them to all of our customers,” he adds. “I think that has been another difference in Airgas’ approach to the market and another reason why we’ve been successful and others haven’t. I think this is a great time to be in the industrial gas business”.