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Airgas Q4 2014

 

Headlines

  • Total sales at $1.33bn in CYQ4 showed highest YoY growth in over two years at +7%. Sequentially down -2% on prior quarter partly due to two fewer sales days.
  • Organic growth of +6% combined with +1% contribution from acquisitions. Gases sales up +5% with volumes +1% and prices around +4%.
  • Mixed performance by business/market with some continuing to show softness but others strong (e.g. transportation) or recovering (e.g. downstream energy, non-residential construction).
  • Fiscal YTD (months) acquired 13 businesses with combined sales of $48m.
  • Operating Income +5% YoY but Operating Margin down YoY and below peak of last two years partly due to seasonality – partly due to shift to lower margin Other Operations products.
  • Operating Margin in Distribution segment (90% of business) at 12.7% in Q4, slightly above the corporate performance, while Other Operations (10% of business) continue below overall returns at 7.8%.
  • Selling, Distribution & Administration costs up +5% YoY including 1% for acquisitions – remainder reflects inflation plus costs of new inititaives such as e-business platform and expansion of telesales (now approaching 10% of total sales).
  • Cash Flow down on previous year due to increased working capital and capex.
  • EPS guidance for next quarter lowered to YoY growth of +9-13% based on organic sales growth of +6-7% (down about 150bp) - reflects expected impact of strong dollar and slowdown on some customer projects.

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  • Total Sales were up +7% YoY in CYQ4 with acquisitions contributing around 1%, similar to or slightly down on previous quarters. No impact from Energy Pass-through or Currency due to the business type and geographic concentration on US.
  • Organic sales growth accelerated sharply to +6% YoY, its highest rate since early 2012.
  • Volume and Price made similar contributions with the Volume impact being the highest since the first half of 2012 and Pricing continuing to make a positive contribution as it has throughout recent years.

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  • Airgas’ Distribution segment accounts for around 90% of total sales with the remainder in Other Operations. Within the Distribution segment nearly 60% is represented by Gases/Rent with the remaining 40% in Hardgoods, while Other Operations is mostly Gases.
  • Distribution Gases continued to show solid positive growth at +4%.
  • Hardgoods continued to recover from the negative performance of 2012/3 with YoY growth in Q4 of +6% with volumes up +5% and pricing +1%.
  • Other Operations Gases showed a significant recovery in Q4 after declining for the last two years with Q4 showing YoY growth of +12%.

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  • Distribution Gases includes three Strategic Product groups (Bulk, Medical and Specialty Gas) as well as traditional Industrial Gases. These account for 9%, 8%, 5% and 29%, respectively, of total company sales.
  • Bulk Gases and Specialty Gases have consistently shown the highest organic growth amongst Distribution Gases over the last 18 months but Specialty Gas slowed to +3% in Q4.
  • Medical gases have been running at +1-2% over the last year which is below the previous trend. Improvements in hospital sales offset by weakness in wholesales to Homecare distributors.
  • Industrial Gases growth appears to have accelerated to around +4% in Q4 – its highest rate since Q2 2013.
  • Argon and helium supply situation eased in Q4.

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  • Other Operations includes one Strategic Product (CO2/Dry Ice) as well as Ammonia and Refrigerants, including CFCs. These account for 5% and 7% respectively of total company sales.
  • CO2 sales growth slowed slightly in Q4 to +2% YoY.
  • Ammonia/Refrigerants appear to have recovered sharply after nearly two years of decline with Q4 appearing to show growth of around +20% - however, Q4 is cyclically low quarter and trend not clear until next quarter.
  • Environmental Protection Agency (EPA) ruling in October increased clarity on future allocation and phase-out for certain HCFCs but market impact remains unclear.

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  • Corporate margins driven lower in recent quarters mainly by performance in Other Operations, although profitability in Distribution has also been flat.
  • Sales shift towards lower margin Hardgoods and within Hardgoods also shift to lower margin equipment has depressed Distribution margin.
  • Within Other Operations, cost pressures in Ammonia and CO2 combined with sales shift towards lower margin products. Ammonia pressures appear to be stabilising/easing.

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  • Capex spend approaching $120m in Q4, over +30% higher YoY.
  • Capex relative to Sales now running at over 8%, highest rate since late 2008, although below most industry peers.
  • Major projects now running at over 3.5% of sales. Includes previously announced new ASU at Calvert City, Texas and the recently announced Liquid Hydrogen plant at same location.

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