Air Products and Chemicals, Inc. (APD)

APD 
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Industry: Basic Industries
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Air Products and Chemicals, Inc. (APD)

February 21, 2013 10:30 am ET

Executives

M. Scott Crocco - Principal Accounting Officer, Vice President and Corporate Controller

Analysts

Duffy Fischer - Barclays Capital, Research Division

Presentation

Duffy Fischer - Barclays Capital, Research Division

We'll go ahead and we'll get started with the Air Products presentation and Q&A. And again, we're very pleased to have the incoming CFO, Scott Crocco, here with us today, who's been with Air Products for quite some time. Came up under the old CFO -- old CFO -- the former CFO, Paul Huck, who, as many of you know, have just been a wonderful guy and a great asset for Air Products over the years, who will be stepping down here in the next couple of weeks. And so we also have Simon Moore, the head of IR for Air Products, with us today. But I think what we'll do first, like we did yesterday, we'll roll through some of the questions. Kind of the fixed standard questions we've been going through just so we can kind of level set what people are thinking about for Air Products, maybe relative to some of their peers relative to other industrial names.

So if we could just get the first question up there. The question, do you own Air Products stock currently? And you have 6 seconds to answer. Are we going or no? Here we go.

[Voting]

Duffy Fischer - Barclays Capital, Research Division

Okay. And then second question is, your general bias towards the stock now? Positive, negative or neutral?

[Voting]

Duffy Fischer - Barclays Capital, Research Division

Third question. In your opinion, through the cycle, does EPS growth for Air Products grow faster than peers, in line with peers or below peers?

[Voting]

Duffy Fischer - Barclays Capital, Research Division

Okay. In your opinion, what should Air Products do with excess cash?

[Voting]

Duffy Fischer - Barclays Capital, Research Division

Okay. In your opinion, what multiple should Air Products trade?

[Voting]

Duffy Fischer - Barclays Capital, Research Division

Nobody under 10x. That's a good start. I like that. And was that the last one or is there one more? One more. Okay. Last one. What do you see is the most significant investment issue for Air Products?

[Voting]

Duffy Fischer - Barclays Capital, Research Division

Okay. All right. And now why do we do something. Scott, maybe just a good way to start off -- we did this yesterday with the competitor. Just kind of walk us through maybe the 3 modes of distribution that you guys utilize as an industry and kind of talk about where does Air Products have competitive differentiation within those modes of transportation or those business models and how do you see that changing over the 3 to 5 year-time frame?

M. Scott Crocco

Sure. Thanks, Duffy. And I just like to say it's good to be here with you today. So if I start with the on-site business or tonnage. This is where we build, own and operate a large facility that serves either a single customer or a pipeline franchise. These investments can be fairly large. It can range from tens of millions of dollars to hundreds of millions of dollars. They are under long-term contracts, typically 15 to 20 years, which provides a nice, stable cash flow. The other thing about these on-sites is it -- we do not take the volume or the energy risk. We're able to pass that on to the customer. Typically, the products that are made from the on-site, it's oxygen, nitrogen and hydrogen. Oxygen for combustion and various applications such as coal gasification or steel or glass. Nitrogen used for inerting and a variety of different applications in the industries, electronics, chemicals and so forth. And then hydrogen, principally used in refining to remove sulfur, as well as breakdown or crack crude oil. And in this part of business, Air Products actually has a -- 40% of our portfolio is an on-site. And that is -- compares to an average in the industry of 25%. So that's an area where we do see nice, stable, steady revenue and earnings. And frankly, Duffy, your question around where do you see this going longer-term, I think that the on-site or the tonnage piece of the business is going to be a bigger part of our portfolio going forward as we pursue a variety of opportunities, including things like coal gasification.

The next mode of supply is liquid/bulk. Products are principally oxygen, nitrogen, argon and helium. And this is where over the road, a tanker will haul from our facility where we liquefy it or compress it, and then deliver to a customer site in a tank. So these are smaller quantities than the on-sites but still fairly significant. We have typically 3 to 5-year contracts and we have the ability to recover both the power and diesel in our contracts, as well as general price increases. These products go into a variety of different end markets; general manufacturing, aerospace, pulp and paper, foods, et cetera. A wide variety of uses. And this comprises about 20% of the Air Products portfolio.

And then the last distribution mode is Packaged Gases and Specialty Materials, which makes up about 28% of our portfolio and it's about evenly distributed between packaged gases, electronics materials and performance materials. Packaged gases goes into a variety of different applications; general manufacturing, cutting and welding. And then we also have a variety of differentiated materials that go into specialty applications in both the electronics and performance materials.

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