Products Employee Meeting Transcript
morning, good afternoon and good evening to all of my colleagues on the webcast
around the globe.
I want to
thank you all for turning out on such short notice this morning. I'm
sure most of you have had an opportunity at least to see the (inaudible) news
article on the press release of our intent to make an offer to acquire Air Gas
at $60 a share. I'd encourage you, to the extent that you didn't
listen in to the investor call that Paul and I just finished to have a sense of
what our investors are asking about this transaction there's a lot more detail
and I don't have the time, frankly, to go through with you this morning, and
there's some very good questions by our investors.
that our broadcast will be up and running around two o'clock this
afternoon. It's a pretty easy link from our home
page. What I did want to do, though, is spend some time this morning
to really talk about the exciting and compelling opportunity that we have in
front of us and take a little bit of time to address some questions or any
questions that you may have on your mind. I need to start this session, unlike
many of the times that I get to address the employees based on a worldwide
basis, with two slides that really talk to the fact that there are a lot of
the discussions that are on the webcast, and of course we start every call with
investors with that, and also remind you as well that there are going to be some
forward-looking comments that I made and you really need to be careful as to how
you use that information and I'd encourage you to look on the web where the
slides from the investment call are placed and take a little time to read
through that and what it means.
thing it means from the standpoint of my remarks this morning is that, unlike
most of the coffee talks or chairman talks we do, I try to address all sorts of
questions that come in.
going to be a lot of questions, frankly, that could be off bounds from a legal
and SEC and regulatory basis given where we are in this process. And
so if you hear me decline to answer a question, it's not because I don't want to
share information with you. You know, my commitment will be to share
information with you as soon as I am -- as soon as it's possible for me to
do. But depending on the nature of some questions, I may have to
defer until some point in the future when we're at liberty to discuss
of course, is (inaudible) and I'll probably be talking to some of them for
specific questions depending on the nature of the question. Let me
give you just first a really high-level summary of the transaction. As the press
release mentioned, it's an all-cash option, $60 a share for Air Gas shares, and
that's about a $7 billion total transaction. It breaks down between a
little over $5 million for the equity of Air Gas, and then course we assume the
outstanding debt on Air Gas' balance sheet, which is about 1.9
million. That's how you get to 7 billion.
probably see numbers in press writings and the like that talk about 5 and talk
about 7. It's just how that particular paper and reporter chooses to
identify the cost of the transaction. It represents a 38 percent
premium to yesterday's closing price. As Paul and I discussed in the
call, it's treated on an earnings per share basis in the first full year of
integration of the property.
a substantial amount of synergies -- and I'll get to those in a little bit --
and that allows us to (inaudible) the premium and create value for Air Products
have the financing fully committed through JPMorgan and we'll be subject to
regulatory review by the FTC. We think we understand what we need to
do to comply with that review. We don't think it's going to be
material to the transaction but that will be one of the issues that will drag
out the time between today's offer, should we be successful with Air Gas'
shareholders, the acceptance and the closing of this transaction.
step back, though, first a minute. And I want to assure you that this
decision was not taken lightly. It wasn't because of a current point
in time or a thought on, boy, their stock is down, we're going to go and make a
-- let's be honest -- a knee jerk reaction to this. This is part of a
long thought-out strategy around the industrial gases part of our
business. And what you have up here is a high-level
summary. And we talked about this in a lot more detail than I will
this morning in the investor call about what the benefits are of being a full
line player, meaning a player both in our tonnage businesses, our liquid bulk
businesses and our packaged gas businesses, and the benefits both from a market
presence, an industry sector that we can cover only with a packaged gas
business, cross-selling opportunities where a large packaged gas customer may be
an aerospace or pharmaceutical or sectors like that by someone with our ability
as to marry up both through packaged gas requirements, with liquid requirements
which we can't presently do in the marketplace. It's a compelling
argument for why this makes sense.
parts of the world, whether it be Europe, whether it be a lot of our joint
ventures, Italy, in India, in Mexico and South Africa we have a full line
business and we can see firsthand -- in Europe as well -- the benefits of having
that full line and that's the essence of this slide.
point that I want to bring forward is in most of my communications with you I've
talked about four points that we need to stay focused on as a
company. That's rising growth, improving our returns, that is being
externally focused, and people. You are the people of Air
Products. In my mind, this fits exactly with those other
of the things that make it exciting about this is the opportunity to grow based
on some of those points I made around cross-selling, density in North America
but also to take these skills and capabilities from the Air Gas team and the
outstanding capabilities they bring to this table to really extend that business
model globally. And that, in my mind, thrives on the growth
believe that we can take our operating skills, our operating capabilities, our
supply capabilities, our investment in SAP, et cetera, and we will bring to the
operational side of the business considerable operating
synergies. And it's really those two combinations that allow us to
meet the growth and return part.
external point of view, you'll see in a later slide Air Gas has 1500 salespeople
in the United States alone. And if that doesn't give you a good solid
touch on what's going on in the marketplace across what is still one of the
largest economies in the world and will continue to grow and represent a
significant part of the manufacturing and PDP growth in the world, that's a
really good endorsement and a really good opportunity to have those hands-on
minds on the ground looking for opportunities to marry the strengths of both of
finally are people. And one of the things -- you know, we've been on
a long journey for the last year. It's been a tough
journey. I think we've done -- as I stood up here before, have taken
appropriate action to improve our overall cost structure to make us more
competitive in the marketplace. I don't know if you've been watching
some of the announcements or the last quarter or so of new orders that we're
winning that's a direct result of our ability to get our cost structure
down. And the ideal was -- effort was never about cutting costs but
really about cutting those costs to make us more competitive and to make us more
successful. And a competitive, successful company creates those
opportunities which ultimately creates opportunities for the people within that
company. And I believe that that's starting to play out for us and
what we're doing here today just furthers that journey from my
just take you back to why are we doing this. I'll give you a moment
to look at the slides, but in essence, if you think about the four points that
we've been driving, the strategy points that were made on the four slides,
that's why we're doing this. This is an incredibly attractive and
compelling opportunity for us as a company.
look at some of those things, we'll become the largest industrial gas company in
North America, one of the largest in the world. We'll have the mix
and capability in all three major modes of supply that are really
important. The skills and the strengths are what enable us to be
better able to serve our customers.
you'll see in here that we bring things to the table, Air Gas brings things to
the table. I believe the timing's right. The timing's
right from the context of we're beginning to slowly come out of the recession in
the manufacturing economy in the United States and getting in now gives us an
opportunity to capture more than our fair share of growth.
believe from some of the activities that Air Gas is involved in -- they're
presently embarking on a SAP deployment, they're looking at globalizing their
business model. And we could bring our capability in SAP, we could
bring our global infrastructure and really create value both from an ability to
be efficient as well as from an ability to generate revenue growth
This is a
high-level overview of Air Gas. You can see 4.3 billion in sales
fiscal year ending March of '09. Growth, nice growth, 19 percent,
seven percent same store sales. What that is 19 percent is their
total top line growth which includes the same store they use in that vernacular
but a given depot and how does that grow here. If you look at retail
stats, you'll always get same store sales and then you get total headline
sales. And the reason for that is this company has done a lot of
small acquisitions and continued to grow. And one of the things and
one of the capabilities and skills that we find to be really attractive is their
ability to integrate and add on small businesses to allow them to grow both
their organic growth with the market as well as increase that growth by
acquiring distributors. And in the United States today 50 or so
percent of the market is still unconsolidated. There's a lot of
opportunity to continue that process.
also see in the map what's represented is where their locations
are. There's some 1100 around the United States. And
Canada was about 14,000 employees throughout that geography. We
talked a lot in the call about where the value creation comes from. I
mentioned that earlier. You know, getting our cost structure down as
we've been doing, we've been doing a good job of that and we have been very
clear with the investors that we're going to continue on that process; that the
goals that we had for the underlying Air Products business does not
change. And we're going to need your help and your support to
continue the great work and the great momentum that we've had over the last
you probably saw our Q1 results. I talked about it at the recent
annual meeting. We got to a 15.9 percent margin. And as
you know, one of the key stated goals we had is a 17 percent margin in
2011. Continue that momentum that we've been able to build from Q1 --
I'm sorry -- Q3, Q4, Q9 and 10, we're well on track to hit those targets, and as
you know, we've put a variable compensation plan in place that recognizes that
hard work and we need to keep focused. And I'll ask you that again as
I close to stay focused on delivering it.
left-hand side of this slide I just hit a high level -- I'm not going to read
each one of those -- I articulated some of those earlier -- around what are some
of the things that we believe Air Products brings to the table and what are some
of the things that Air Gas brings to the table. And as you can see,
our global infrastructure is a real enabler, our gas application skills, the
ability and a very strong operations engineering set of skills and of course our
experience in deploying an enterprise resource planning system such as
SAP. On a global basis today, 95 plus percent of our business is on
an SAP system. So we have visibility up and down our supply chain on
a global basis and we've been able to use that to drive productivity in the
strengths, I mentioned it earlier, a really broad US footprint. 1500
sales resources on the ground. A very respectable business, good
packaged gas skills and the acquisition and their ability to acquire and
integrate small acquisitions very, very quickly to grow that top line number
above the organic
an eye chart, I'm not going to spend a lot of time, but what you have here is if
you took the 4 billion in '09 and our 8 1/2 billion '09, you have a fairly
substantial company when you're done.
look all the way to the right, you'll see the pro forma mix of the combined
entity which shows things like packaged gases at 39 percent liquid bulk and 17,
our on site feed 25 percent, et cetera. This puts us at a mix very
consistent with what our competitors are on a global basis and very consistent
with what the market mix is from an industrial gas point of view, and again it
articulates some of the compelling reasons at the bottom of the slide for doing
forward, bottom line of this is -- I started with this -- it's going to be a
long process. It's going to be a long process for a lot of different
reasons, including the regulatory reasons that I mentioned
earlier. It's also going to be a long process because we were robust
in abilities to try to act on a friendly combination with Air Gas over the last
number of months. A lot of that information is now in the public
domain. You can see some of it in the press release. And
so there's going to be steps that we're going to have to go
If you go
back to sort of my opening comments, at different parts of these steps there's
going to be many questions you have on your mind that I may not be able to
answer at a particular point in time and so I'll just reinforce that when I'm
able to answer them, I will. And I think that I've always operated
with that level of commitment with the employee base and I'll continue to do
transactions, delivers on our promises, from my perspective it's
strategy. We maintain the fact that we're still a company that's
respected by our investors for this ability of our cash flow which comes from
our business model, also comes from the diversity of the markets and the
products and the geographies that we operate in. I believe it
accelerates growth and we're not walking away from our commitment to our
that, I'm going to say thank you and take some questions. No
have any questions coming in, Katie?
do. They're coming in here in streams, John, so I'll try to package
these together. A couple of questions about the acquisition being
very North America-centric. Is this a concern to our management or
our investors and would it limit our ability to invest or grow in other
economies in the world.
a great question. The simple answer is that it will not limit our
ability. In the conference call we were asked a very similar question
by one of our investors and the point is when we modelled this investment into
the overall capital structure of Air Products, our financing plan, our ability
from an employee point of view and a management point of view to be executed, we
considered those factors and we modelled in there the level of investment for
this coming year -- the year we're in -- excuse me -- which we've been now
talking to the street about, which is 145 million dollars, which is the same
level that we invested last year and we anticipated, as we've said, that that
number on the base business will grow.
ability to continue that growth is only related to keeping our eyes on the ball
on the underlying businesses. But the simple answer is we can do
this. We have the financing to do this, we have the capital structure
and the ability to execute against the growth opportunities we
want. That was a really clear issue with me as we were evaluating
this because not only are we recovering from the recession in the United States
but a lot of the markets globally, and I don't want to miss out on that
VOICE: I forget the exact time frame but I'm going to say roughly 10
years ago we got out of the packaged gas business. I think we didn't
like the growth prospects and maybe even profitability at that
time. What has changed either with us or the market that makes this
now a compelling buy?
JOHN: Yes. It
was exactly 2002. I forget the exact month, but let's -- but you were
close. And, you know, the driving reason and the importance in the
packaged gas business in general is first we'll get out of the packaged gas
business in the United States. We didn't get out of the packaged gas
business globally. We stayed in it in Europe. We stayed in
it in most of our joint ventures.
-- if you go back to the slide here, the map slide -- we didn't have anywhere
near that level of density.
some blue dots in the middle, we had some blue dots on the West Coast, a few in
the Northeast, a few here and there, exactly, but we didn't have the density to
be able to make this a successful business. And at the time we felt
that we had other options to pursue that we did pursue, things like driving our
high degree general business which today is a two billion dollar business,
continuing to drive our international expansion in the new parts across the
globe, and we felt at that time we needed to begin to devote some of our
resources to really deploying the SAP system, globalized network processes, and
we just didn't have the ability to do that all.
made sense because of the lack of density and the lack of cohesiveness in the
business at that time driven by the lack of density to exit it.
it's a very different story. We have a lot more
capability. I've talked about our ERP and SAP, our market
practices. I talked about our ability with a stronger balance sheet
to be able to fund both our base growth, if you will, as well this
way, Air Gas did a really, really nice job of continuing to roll up this
business. If you go back to my comments on to be successful on the
industrial gases side of our business, your ability to have all 33 models of
supply integrated in a given geography is a nice add to drive productivity and
profitability as well. Other questions? Yes,
couple of questions, John, about Wall Street's reaction today in the
JOHN: Sure. I
mean, I'll start this and then I'll ask Paul to join if he wants
obviously, the stock's down. I'm sure that's on everybody's
mind. And then similarly Air Gas's stock is way up, and that's still
on everybody's mind too.
the bottom line is this isn't unexpected. In early days, you know,
the street sells on news and buys on news and then they take time to sort of
sort through things and let things settle out based on how they view the
strategic and financial views of the transaction.
you want to add to that?
let me just add to that. You know, the market hates
uncertainty. (Inaudible) we reintroduced a great deal of uncertainty,
whether this deal was going to be done, what will be the impact of
it. (Inaudible) sitting on their shelf looking at
that. And so with that -- with that immediate action people are going
to -- are going to go out and sell.
also a number of people who don't like acquisitions. You know,
there's a number of our shareholders who are -- just are going to say if they do
an acquisition I don't care whether I loved them yesterday, I'm going to hate
them tomorrow. And those people are going to be there.
put a blanket supply of shares into the market, a lot of supply and the demand
is not there, very few people are going to look here to buy. We
expected to trade down today. You know, the stock the last time I
checked is kind of in that range of where we expected it to break
We may go
up by keeping our eye on the ball, doing all of the things -- communicating
clearly that we have a good set of goals and then doing the basics which we do
every day. So that's what we've got to do, is just keep delivering as we have
and the stock will come back.
you, Paul. Other questions? Sure.
VOICE: Hi. Can you comment on the degree of divestiture we
expect to be required as far as the SEC regulatory in terms of granting new
generation assets or employees of Air Gas?
JOHN: Yeah. No,
I can't. But I will say that we've done a pretty thorough view of
that and really feel that we have a good understanding on that. We
don't think that they're material on the transaction. And so the
other point to remember is we're not in the packaged gas business in the United
States, which is a big, big plus, and so we don't have a lot of overlapping
footprint between the two businesses.
John, about our operating margin and UPS goals for 2011. With the
potential acquisition, will you back off those goals in any way?
absolutely not. And I think that's one of the key
things. This is a highly strategic opportunity for us, ultimately
drives a lot of (interruption) from shareholder value. We'll get
through where we are today. The best way we get through and, as Paul
mentioned a moment ago, driving our stock price up to a fair valuation for where
we should be today and a recognition of the value we're going to create with
this transaction, to not drop the ball on the existing goals and objectives that
we have out there.
management team, we've talked a lot about that. We believe we have
the capability to do that and the team and the people to make that happen but I
am going to need your help on that.
VOICE: Other than yourself, is there anyone else that could legally
or would be interested in Air Gas? Obviously Plak (phonetic) is
packaged gases, BOC. Have you heard anyone?
mean certainly, you know, there are others who might have interests in
this. You know, we'll have to see how that plays out. I
don't know what their appetite is at this particular point in
time. You know, I'm not a lawyer but I think your assessment on Plak
is probably spot on. But certainly some of our other global
competitors and there might be other companies that aren't in the industrial gas
space that might have an interest in this. I don't
know. We'll deal with that as that happens and, you know, if it
happens, we'll deal with it at that time.
questions? Kate, any more?
John, about how much financial risk are we taking on if we proceed down this
let Paul address that. I think we can manage it, which is the bottom
we are going to take on more financial risk since we're going to borrow more
money to do that. However, we've been taking a very close look at
this and we've been looking at plans for the future also so all the capital
which would go in to expanding the on-site area and expand in Asia across the
world is still funded and we still remain investment grade if we borrow all the
money. And so that is a sign of still a very strong
company. There are a lot of companies which are around which aren't
investment grade. So that -- so I don't think that that is an
significant worry for us.
the things here is that, as we look at this, if we do this deal this will
generate a lot of cash for us if operated properly and in making this
happen. This is a strong generator of cash as we look at this which
will enable us to grow even faster. So it brings opportunity, plus it
brings the opportunity to generate the cash if we execute well to fund those
opportunities. So this is really a great opportunity for
us. We're going to pay a lot of attention to cash
the people out there collecting receivables, collect those receivables, please.
Don't build inventories. Keep our inventories slim. And,
most importantly, let's operate as a low-cost company.
Paul. Any other questions? Katie again.
what way will the transaction affect our current distributor
do you want to take that.
think this is probably one of the complicated answers, actually. We
have had -- because we have not had a packaged gas business in the United
States, our distributor set looked at us with real clarity because they didn't
have a competing situation where we would be selling packaged gases in their
territory, plus selling with them, if you will, in that same territory selling
liquid to them in that territory. We've got a plan now to get out to
our distributors to tell them we really do plan on continuing to value their
business as a part of our important liquid bulk business.
managed that way in the past. When we had our packaged gas business
in the past, we had packaged gases and distributors. (Inaudible) had
packaged gases and distributors. It's a normal course activity in the
marketplace. There will be some concern by some of our distributors for sure,
which is why we've got the program that Tom Gordon and his team are going to be
working on over the next day in order to get out and really contact our
distributors. But we think we can manage that over time without too
much of an issue.
Bob. Yeah, Donna?
we be selling anything else in order to fund buying Air Gas?
have this fully financed. We don't need to sell other assets other
than what we have to sell from a regulatory point of view to do
question, John, about your perception of any cultural differences between the
two companies and whether you see it as an opportunity.
been mentioned in, certainly, Air Gas's response to our offer. I just
flat-out don't believe that to be the case. I think they have a
highly charged sales model which we highly value. They have a very
good M&A capability to roll up these acquisitions which we also deeply
highly value. And I think that we have a very good supply chain, back
office capability and efficiency that they're trying to emulate along with our
international footprint, which is another area that they're trying to
So if you
work on the ends and say those are drastically different types of cultures but
when we look for the opportunity in the middle, it really creates the value in
it's very clear to me in any acquisition people are the number one asset that
you're really acquiring. And so we'll have to work together in that
middle space to really drive the value that we see in this
transaction. You know, one of the things that Air Gas has commented
on -- we obviously have a long-term relationship with them.
an important customer of ours today -- is that they were a group of companies,
lots and lots of acquisitions being built up without really sort of an
independent culture -- and one of the things Peter Ricolso (phonetic) has
actually told us is one of the most important things that happened with -- I
think it was something like 1,000 Air Products employees went into Air Gas in
2002. By the way, I know many of those 1,000 employees that went into
Air Gas and they were top-notch Air Products employees. So don't
think too much how disparate the culture is that went into Air
Gas. They also got some folks in a similar way from BOC.
what happened was -- in Peter's mind, actually, and he will tell you this -- is
that that was a big part of the cultural change that Air Gas needed to go
through as they started to move from just a group of independent companies that
had been bought up to an operating company that could really drive customer
service, drive performance, drive against metrics, those that kind of things;
safety, culture, those kinds of things.
ways it was back to the future was that it was the Air Products team that helped
get them there. So I believe, as John said, that we can really get
that cultural issue put to bed and be very successful.
Bob. Unless there's no more questions from the floor or on-line
one more. Okay.
Air Gas' board has already rebuffed two other offers, why do we think going
directly to shareholders will be more effective?
we felt that making our value proposition directly to the owners of the company
was the best way to get an attractive deal out there and
understood. It did require us to engage in an
unfriendly or hostile process.
probably worth a minute to just ask John Stanley to frame what that
means. Because part of framing, what that means is the process that
I've commented on earlier about when I can and can't talk about certain things
and also the length of time. This is going to be a
while. And as you'll see when I close, this is why we need to stay
focused on our existing business operations and that we'll ask for help when we
me ask John to sort of define things a little bit more broadly from a legal
point of view here.
right. Thanks, John.
A lot of
you already -- I'm not going to tell you anything new that you don't already
know about a tender offer process. But as John said, in a tender
offer process you go directly to the shareholders, which means you bypass
management and the board of directors.
happens typically, as in our case, where you haven't been able to
contrast that, if you will, with a merger where you actually engage with the
board of directors, agree on what the price is and the transaction and you then
go out and ask the shareholders to vote on the merger itself as opposed to
tendering their shares.
clear, we have not started the process yet. The tender offer process
is formal filings are made with the SEC, which we intend to do in the not too
distant future, and in that you will lay
your price is -- obviously, it has to be at premium or they're not going to be
interested -- what the conditions are to your offer which will include a minimum
number of shares which you have to get in order to actually close on this, have
tendered to you, will include the regulatory approval process. You've
got to get through that until you close.
it will be open for a period of time. It's not open for four
years. It's open for a period of time. You can get through
what you need to get through and then ultimately then have the shareholders
tender an actual vote, if you will. I'm sorry, actually tender to you
an actual time we then have enough shares to control the company.
change. It can be friendly over time and it may drop the tender offer
and move into a merger process.
you've probably seen -- a lot of you have seen a lot of bad out there if you
read the Wall Street Journal for other companies as they go
think the important point that John said is that this is not a short-term
process. This is going to take a long time, months, as we work
through it. There's not going to be of lot of sort of media out there
specifically on what's happening as we go through. But trust
me. Things are going to be going on behind as we move
through. Okay? Katie?
more, John. I think we've spoken to this already, but a question
about our competence to do this successfully.
as a management team with our board spent a lot of time, obviously, discussing
this. I'm not taking this step very lightly, given the size of the
transaction. And one of the things that
really, really important to me in doing this is can we -- as I said a moment ago
-- can we execute our base plan, whether it be on our return objectives or our
that mean we have the capital capability and the investment capability to do
that and then do we have the people. We have a tremendous amount of
confidence in the global Air Products leadership team as well as the global
(inaudible) employees that we can do two things. We can stay focused
on our existing business. We will reach into the organization but I'd
ask you wait to be touched, if you will, for help on executing the transaction
and integrating the transaction. We're going to lean on a lot of
[inaudible] employees as well because they're part of the value that we're
bringing to table. And I got myself and the board there and I think
management team there that this is something we can do and I believe that very,
very strongly as I stand up here today and as I look at this transaction over
the many prior months as we've made the decision to move forward on
know, perhaps as we leave, since we had a lot of discussion and a lot of other
things coming at all of us, a number of us need to get back and talk to our
shareholders which we'll be doing today, tomorrow and Sunday in earnest and then
we'll continue on with that next week, to make sure that they fully appreciate
the compelling opportunity.
to leave you with these few thoughts, you know, and hopefully you
excitement on what this means and then what the future of this transaction can
mean to the global Air Products and our Air Gas team.
John just made us very sensitive to the fact that this will take time to
resolve. Months, not weeks. We'll communicate with you in
each and when time we can, when we're allowed to. I mentioned this --
I don't know -- numerous times throughout this discussion, Paul mentioned
it. I really need your help on staying focused on your job, staying
focused on your goals and objectives. The best way we can make this
the successful transaction that I believe it can be is that we continue the
progress we made coming out of our a tough '09 because of the global recession
and continuing that momentum into 2011. And most importantly we can't
drop the ball on safety.
lot to ask. I understand that. I think I've asked a lot of
this organization over the last couple of years. I'm really proud of
what you've been able to do in delivering. And so I say thanks for
your time this morning and thanks for your help in the future to continue the
great progress that we've been making.
noted: 10:40 AM)