On the 18th of September 2014, newly appointed CEO Seifi Ghasemi introduced the Air Products Five-Point Plan. Prior to his appointment at Air Products, Ghasemi has had a history of successfully restructuring companies under his control.
Ghasemi implemented the plan to significantly improve efficiency, profitability and cash flow, to drive value for shareholders. This article details the sections of the plan and demonstrates how the company has been executing against it so far.
1. Focus on the core
The company wanted to focus on its core business and core competency, that is, industrial gases. Subsequently, in may 2016, the company announced an agreement to sell its Performance Materials business to Evonik for $3.8bn, and in October 2016 Versum Materials spun off. These actions will further enhance the company’s ability to take advantage of investment opportunities to grow its core industrial gases business.
2. Restructure the organisation
Air Products wanted to transition from a centralised to a decentralised organisation. This involved reducing and streamlining management layers, as well as a geographical focus and alignment.
Ghasemi stated at the presentation, “We fully believe that a decentralised organisation releases entrepreneurial energy and minimises costs”.
This, Air Products argues, creates a simpler and more efficient structure with true profit and loss accountability at many levels of the organisation.
Successively, Air Products embarked on the largest organisational restructuring, creating more than 40 teams with individual incentive plans and an empowered decentralised structure. The company also eliminated significant layers of management.
3. Change the culture
Air Products sought to build a culture based on safety, simplicity, speed and self-confidence.
“We will focus on safety, make work places enjoyable and encourage people to get involved, focus on simplicity, and have a simple and clear structure and decision-making process. We will focus on speed, to get it done with a sense of urgency with a fast response to customer needs, and finally we will focus on self-confidence,” Ghasemi specified.
The company continues to promote these key principles. Ghasemi believes that the fundamental culture of the enterprise, and the commitment and motivation of its people, will guarantee its success.
4. Control capital and costs
This section of the plan focuses on a long-term scheme to ensure value creation for shareholders.
Ghasemi stated, “We will not spend more than we can afford and we have raised the required project returns and lowered delegations of authority for capital spend”.
In response, Air Products now reviews every capital investment of more than $3m and has established a minimum hurdle rate of 10% internal rate of return for all new projects. Additionally, the company has significantly reduced its cost through the reorganisation, lowering overhead costs by $300m run rate.
The company also has a detailed plan to achieve an additional $300m of operational cost savings. In fiscal year 2016, Air Products delivered more than $75m of this cost saving initiative, and is on its way to deliver the balance in the next three years.
5. Align rewards for better results
Air products’ final point in the plan is to reward behaviours that drive shareholder value. Subsequently, Air Products has completely changed its incentive reward programme. Annual performance bonus is based on adjusted EBITDA results, and people are rewarded on what they achieve in their specific business unit. This has created differentiation. Some units in 2016 will get up to 200% of their targeted rewards. The company’s long-term incentive plan is now based on the relative total shareholder return.
EBITDA (Earnings before interest, taxes, depreciation, and amortisation) gauges the raw earnings power of a company before debt servicing, corporate taxes, and any allowances made for depreciation and amortisation costs the company faces.
This is the third in a series of articles that gets behind some of the business plans and accounting measures of the major industrial gas companies, and the industry itself.