The 2020 Mid-Year Economic Update_long

Go With the Flow: How Airgas Benefits by Riding the Current

Adaptable strategies can help steady the ship during unstable market conditions.
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Market conditions are constantly shifting, and a company’s ability to ride along with waves of growth can be especially useful when it comes to maintaining a stable balance sheet.

In its investor call to discuss its fiscal first-quarter earnings, executives at Radnor, PA-based Airgas Inc. (NYSE: ARG) noted three recent things that could have thrown a wrench in the Airgas works. The company’s approach to each of these unrelated speed bumps shows how the ability to flow around a problem is more constructive than allowing it to impede profitability, according to the distributor’s executives.

Phase-out of CFCs

In the 1980s, scientists noticed how the protective atmospheric layer over Antarctica was thinning due to use of chlorofluorocarbons. In order to avoid negatively affecting businesses that relied on selling and servicing air conditioners, the Montreal Protocol called for a timetable to phase CFCs out. But the full elimination remains unstable.

The EPA is expected to make a final ruling on production of R-22 from 2015 to 2019. Beginning in 2010, no production of virgin R-22 will be allowed, increasing uncertainty on how to plan for future market demands. Airgas President and CEO Michael Molinini said that the industry will eventually move toward the use of reclaimed and recycled R-22.

“Although we can't predict the timing and speed of this transition, we remain very well positioned as the leading reclaimer and recycler of R-22 in the United States,” Molinini said.

Helium shortage

Airgas increased helium prices last year, in response to rising crude helium prices being charged by the Bureau of Land Management to helium refiners, which drove up the cost of pure helium from suppliers. The helium supply inconsistencies further confused the market, which affected Airgas’ helium customer base.

Products like helium have significant potential to affect profit margins, since some customers, such as medical facilities, are operating with strict timeframe demands for it. Changing prices and delivery schedules aren’t variables that some customers are able or willing to deal with.

While some customers may have sought new sources for helium over the last few years, Airgas is making it a priority to regain its market position, the company’s CEO said. “We are just now getting into a position where we have the volumes to aggressively attempt to win back some of the customers we lost during the peak of the helium shortage,” Molinini said.

M&A

Airgas has been a leader in M&A activities for a long time, acquiring around 400 companies in less than 30 years.

But 2013 market trends showed sellers were reluctant to enter into M&A agreements. Airgas completed only one acquisition in the fiscal first quarter of 2013, and executive chairman Peter McCausland said it was due to expectations of the economy strengthening.

One year later, Airgas has completed only four acquisitions in the first half of 2014 (Abbot Gas Products, Hember Limited, Technical Alloy & Industrial Gas, and Welding & Therapy Service). But McCausland remained persistently optimistic that more are on the horizon.

“The landscape for M&A is encouraging, and I still feel that once the U.S. economy shows signs of more sustained improvement, we'll see more interest from potential sellers,” McCausland said.

Future speed bumps are inevitable, both foreseeable, such as ongoing supply shortages, and unforeseen, such as the inability to expand because other companies are simply not selling. Airgas’s circumspect outlook on the rest of the year reflects 2014’s to-date slow-but-steady growth.

“Overall I'd say the general tone of the economy on balance is one of slight improvement,” McCausland said. “I am encouraged by the fact that July sales are currently running relatively strong year-over-year. However, we remain cautious because we've seen strong months in quarters over the last couple of years, followed by weak ones.”

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