Adapting to Pricey Oil
Energy costs pushed Air Products to transform its business
ALLENTOWN, PA.—Air Products is a company that literally found a way to make money out of thin air, by selling oxygen, hydrogen, and other gases to industry. It was a good business for 60 years. But by 2000, the $5.5 billion company—now a diversified conglomerate—was adrift. Much of its chemicals business was in slow-growth mode, and federal antitrust regulators had blocked its plan to expand revenues and reach by merging with foreign rivals. The outlook was weak, as most of the company's new investment was going to prop up its worst-performing segments. A full plate of trouble for incoming CEO John Jones, who might have thought twice about the job if he had known what loomed: a relentless surge in energy prices that would threaten the economic model of the entire industry.
But in retrospect, Jones—and Air Products shareholders—are glad he took the gig. Under his direction, businesses were bought and sold as Jones focused the company on maximizing growth. Chemicals were mostly out, and energy and electronics were in. Profits are up 82 percent since 2003, while sales have grown 40 percent, on track toward $10 billion this year. The workforce has grown 20 percent to 20,000, and operations reach from its eastern Pennsylvania headquarters to 40 countries. What's more, Air Products stock has jumped 30 percent in the past year. It's a turnaround that also serves as an example of how companies can survive and thrive, even when up against the uncontrollable, like a new era of pricey energy.
"We said we're going to focus on portfolio management," says Jones, "and we've reshaped the company to get to the point where we have this trajectory that's going in our favor."
Steel years. It's not the first time Air Products has had to retool. The company was founded just before World War II by entrepreneur Leonard Pool, who saw the steel industry's soaring demand for oxygen used in welding. The raw material—air—was everywhere, but separation and transport were costly. Pool's innovation: Build oxygen plants right at steel mills, instead of delivering gas by cylinder, and lock in long-term contracts. Decades passed, and the U.S. steel industry had its rise and precipitous fall, but Air Products continued to grow, mainly because it took care to diversify into a variety of chemical businesses.
But Air Products' broad portfolio proved unwieldy at the turn of the millennium. It churned out an array of compounds—for agriculture, glues, security glass, printer's ink. Yet scores of global competitors kept prices and profit growth low. So Jones began a process of divesting $1.5 billion worth of these businesses. At the same time, he embarked upon $1.3 billion worth of higher-growth acquisitions, such as Ashland Electronic Chemicals, maker of ultrapure substances for the semiconductor industry, and several Asian specialty products firms.
Jones's strategy became even more urgent when energy prices took off. Traditional chemical manufacturers suffered a double blow, both as big fuel consumers and as users of natural gas—traditionally cheap but now more volatile than oil—as a major feedstock. By 2003, Air Products' profits had dropped 24 percent, largely because of raw material costs. "Our chemical business—over a long, long period of time it did very well, had consistent growth, and contributed to the overall well-being of the company," Jones says. "I think the difficult part for companies is dealing with reality. And our reality changed." Yet the company had some businesses that flourished in the harsh energy climate—especially its service to the energy business itself.
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