Business Intelligence Financial – Airgas – Q4 2014

gasworld’s Business Intelligence provides you with the latest analysis of Airgas’ Q4 2014 earnings reports.

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.

• 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.

• 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%.

• 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.

• 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.

• 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.

• 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.