What Consolidation, Sailing, Farming And Leadership All Have In Common

A conversation with Airgas Chairman and CEO Peter McCausland

Peter McCausland, 61, is the founder, chairman and CEO of Airgas. Having survived a takeover attempt in 2011, Airgas reported record earnings in First Quarter 2012, which began on April 1, 2011. With more than 14,000 employees and approximately 1,100 locations, he is a busy man. McCausland spoke with WGT Editor Carole Jesiolowski about the company and how he holds it all together.

Peter McCausland

Distributors seem to have a love/hate relationship with Airgas. They love you when looking for a buyer for their business; hate you if you are competing against them. What’s that all about?
To some extent, when they are ready to sell, I think they do love us. We have a history of fair dealing. We haven’t been afraid to pay a good price for a business. We’ve provided incredible opportunities for not just owners, but more importantly, at least from the owners’ perspective, for their loyal employees. Owners acknowledge they are successful because of key employees. Many of those key employees are now very important executives at Airgas. I like to tell the story of Bob Hilliard, who was the sales manager of a $2.8 million annual sales business in Bowling Green, Kentucky. Now he is the president of Airgas Mid America with annual sales of over $300 million. There are a lot of Bob Hilliards in Airgas, people who were loyal to the independent distributorships that were purchased by Airgas. I think that independents have gotten a great deal of satisfaction in watching their loyal associates flourish under the Airgas banner. That’s certainly part of the love.

Part of the friction that exists between Airgas and the independents is really related to changes taking place in the economy and in the way people do business. Some of these are driven by industry consolidation, others by advances in information technology. Airgas is trying to do the best we can to take advantage of these changes, and the independents are trying to do the best they can to be successful in their local markets. Sometimes the two conflict.

How so? Please give an example.
Consolidation is a fact of life in our industry, but it is also a fact of life in many other industries. When companies consolidate, they look for synergies, among them vendor consolidation. If purchasing power can be combined, they can eliminate a number of vendors. Not only can they get a good deal through increased purchasing power, but they can achieve supply chain savings through vendor reduction as well as transaction cost reduction. In the power industry, for example, public utilities are merging, and instead of having 15 plants, they may end up having 37 plants. A power plant is a big customer for an independent distributor, but if the holding company that owns and operates that plant merges with a company with whom Airgas has a national account, oftentimes an independent will lose that power plant. That’s a real point of friction.

Peter McCausland
Convention Speaker
Monday, October 10
“Lessons In Leadership

What do you bring to the table?
Airgas has economies of scale that benefit the customer. For example, our construction segment has invested in gas handling equipment and hardgoods that can be rapidly deployed to construction sites across the country. We have a business unit that offers supply chain services and another that offers safety services at the customer site. We’ve invested a tremendous amount of money in these construction capabilities, and I think it would be hard for a local or a regional company to match what we’ve done in a few of these areas. I’m not saying that the local and regional companies aren’t strong. They are. They’re very strong, and they know how to take care of customers. And they’re very tough competitors. But in certain areas, we have economies of scale, and we’ve made appropriate investment. This is another point of friction.

What drives Airgas?
We’re really driven by what our customers want. High quality and outstanding service are their top concerns, and we’ve been addressing these with specific training for our people. Our customers want to take costs out of their supply chain, and we are responding to that with a wide variety of supply chain services and e-commerce.

Acquiring smaller companies and consolidating them into the Airgas brand is a major activity for you.
Consolidation is a fact of life. It’s been happening for 15 to 20 years, gaining momentum in the past few. Some independent distributors would rather not have to deal with the issues of consolidation. Some of them have tried to get big and consolidate their local or regional markets in response to these forces. In some cases, it’s worked. Consolidation will take place without Airgas. We’re not driving it. Customers are the ones driving it. There are other important factors, such as rising liability insurance costs, employee benefit costs, litigation and the regulatory environment. We’re doing our best to take advantage of it.

What do you look for when evaluating a company for acquisition? Location? Sales? What makes a good acquisition for Airgas?
We’re not looking to pay the lowest possible dollar or to steal the company. We’ve always paid fair prices. In fact, it’s the bargains that have come back to bite us. The things that really attract us are an owner who treats his people very well. It’s talented people. Density is not as important today as it once was, but we want a company that has a decent share in its local market, especially if we’re filling in a gap and we don’t have much of a share in that particular market. The company should have a good asset base in cylinders and tanks, gas equipment and people. I keep coming back to people because at the end of the day, the quality of the people does have a major influence on our desire to buy a company and how much we are willing to pay for it.

Your acquisition goal for FY 2012, which began on April 1, is $150 million in sales. How far along are you at this five-month point in August?
Activity has picked up, and we’re halfway there. Success in meeting that number is dependent on how many of the larger distributors decide to sell. Of course, we have to be able to win them. And there is always competition.

Your projections for the year include 2% growth via acquisitions and 7% via store sales. Are you on track?
First Quarter same store sales growth increased by 9%, and so far, we’re slightly above on acquisitions.

Do you consider international acquisitions?
We have three priorities. The first priority is acquisitions in our core business, that is, independent welding equipment and industrial gas distributors. There are many parts of the country where we have gaps and where we could benefit by having increased density. In our core business, $6.5 billion dollars of the $13 billion dollar industrial packaged gas and welding market is still held by independents, about 50%. That’s a big opportunity for Airgas. Our number two priority is what we call “adjacencies.” We have a process chemicals business, an ammonia business, a refrigerants business, a safety services business. We bought these businesses because many of our customers use these products and services, and it’s great cross-sell opportunity. Our third priority is overseas, and we would go to markets where we could get a critical mass or where there was a great consolidation opportunity. We’ve looked in South America, India and China. We continue to look, but I would say it’s our third priority.

The 1st Quarter earnings reported in July were impressive, especially in a challenging economy. To what do you attribute this growth?
The resurgence in U.S. manufacturing has been a contributor to our success in the 1st Quarter, as well as resurgence in the energy business driven by horizontal fracking. We had a price increase in March so the 1st Quarter was the first one with the full impact of that price increase. The pricing environment has improved a little bit, but it’s still pretty competitive.

How is Airgas strengthening its markets?
We started specializing in market segments with medical. Then we added construction because it was so different from our regular customers in terms of how demanding the construction business is for just-in-time product and 24/7. The success of those segmentation attempts—medical and construction—led us to form ten customer segments about a year ago. That’s definitely been a contributor to our success. And if we are outperforming, that’s certainly been a factor, because now we have people in each of our ten customer segments who really know the customers’ business, who spend their time calling on people in research or biotech, for example. They attend industry meetings. Because they’re familiar with customers, they know what potential customers might need in those industries. It’s a much more efficient way to go after customers than just giving people geographic territories, which we have at the local level.

What impact are you seeing as a result?
Customer segmentation is driving efficiencies. The continued consolidation of the different customer segments is driving demand for our strategic accounts program, vendor consolidation, supply chain services. In some markets, where petrochemicals are a very strong customer segment, we’re adding additional specialists in petrochemicals at our regional company level. We have that in medical and construction now, and in markets where metal fab is the dominant customer segment, we’re adding additional welding specialists. Hopefully we’re doing a much better job for our customers by putting specialists in there who know their industry very well.

What was the impetus for restructuring the Airgas divisions?
We restructured because we’ve never been on one computer system. The cost of maintaining our computer systems has been very high, as we have about 26 different computer systems for all of our business units. By the end of 2012, almost all of Airgas will be on SAP. Every one of our customers will have a unique file number. We can look across the entire country, but we can also look on Main Street USA. Our information-mining capabilities will be tremendously advanced. We will be able to get a much better look at our business on the local level because the quality of the information will be much better. Our local people will not have to worry about the administrative details of the business. They will be supported by state-of-the-art business support people dedicated to specific geographies. So our local people can focus on operations and sales and taking care of the customer.

In addition to recently becoming a farmer, what do you do for fun?
I run Airgas. It’s the best job anybody in the world could have. It’s an amazing group of people, and I love working with them every day.

Let’s talk about that farm. Two years ago, you purchased a 426-acre farm outside of Philadelphia and moved there. Because?
The property has been in continuous agriculture since it was part of William Penn’s Springfield Farm in the early 17th century. My wife and I purchased the farm to save a good part of it from development. It’s a beautiful place to live, and we feel very lucky to live in such a special place. We have a property manager, but we do participate in activities at the farm. We’ve been involved with cows, sheep, the orchard, bees, planting meadows and making trails. We’ve learned how much work it is to take care of a large property, but we have also learned to appreciate just how beautiful and important open land really is.

You’re also an experienced sailboat racer. I’ve read that you love sailing and you spend weekends racing, mostly in Nantucket. What do you love about the sport?
I love sailboat racing. I love developing the strategy. I like the tactics on the water during the race. And I like both the mental and physical challenges that sailing throws up there. The weather forecasting, all of it! It’s a very complex sport and it’s really fun to try to figure out. I’ve been sailing for a very long time, and I’m still learning.

What type of boat do you race?
On Saturdays, I race a Nantucket Indian, which is a 21-foot flat-bottom sloop designed by John Alden in 1929. It’s a hard boat to sail, really kind of tricky, but it’s a wonderful, wonderful boat. I sail that in the shallow waters of the harbor. On Sundays, I sail an International One Design, a 33-foot keel boat designed in 1936. It’s beautiful. And really fun to sail.

What was your first job?
I started a lawn mowing business when I was 13. I really worked hard, but I kept buying new equipment because it kept wearing out. So when I got to the industrial gas business and found that cylinders never wear out, I found my home.

Is there anything you want to say about the takeover attempt?
Our position all along was that the bid was opportunistic and did not fairly value Airgas. We demonstrated over the course of the takeover fight that Airgas was worth a lot more than the bid. I think the whole thing was unfortunate, but in the final analysis, the reason that Airgas survived this attempt was because of the 14,000 Airgas people on the frontlines. They did such an incredible job. They turned in four outstanding quarters in an economy that was still very weak and just beginning to recover. They did all the really heavy lifting and hard work on the front lines, taking care of our customers, attracting new customers. That’s why Airgas is around today. I think their performance was remarkable.

How often are you approached about a buyout of Airgas?
I couldn’t answer that question even if I wanted to.

What’s on the horizon for Airgas?
We have a lot on our plate. The customer segmentation of our strategic accounts group and filtering down to segmentation of the sales force at the regional level are just at the very early stages of getting really significant traction. We’re very, very excited about that. Airgas University, which provides quality training for associates and customers, is gaining tremendous momentum. We see acquisitions coming back. And we see a pretty good environment in the U.S. If our political leaders have the courage to do the right thing, we think manufacturing in the United States will have a renaissance and the U.S. economy will continue its recovery.

Despite the economic developments of August?
U.S. manufacturing exhibits more favorable long-term trends than many sectors of the U.S. economy, including the consumer. Recent market developments don’t change the relative positioning, even if macro-growth is slowing. Airgas remains a great place to be, whether we find ourselves in an economy requiring defensive strategies or in an economy that is expanding.

What are you doing to prepare for a double-dip recession, should one occur?
We are able to react quickly to changes in demand levels, so we are ready to respond if necessary. We can quickly curtail capital spending, working capital and expenses, including incentive compensation, temporary help and overtime spending.

Any final thoughts?
I always like to say that the best time at Airgas is now. We’ve had a lot of good times. But the best time is right now. The opportunities are in front of us.

Gases and Welding Distributors Association