BUSINESS WINDS OF FORTUNE An airseparation plant in Mcintosh, Ala. Mark R. Gulley, a chemical industry analyst with Banc ofAmerica Securities, likes Praxair's direction. "The investment community has been pleased with what this management team has delivered—no question about it," he says.
PRAXAIR PLANS BIG Company sees itself in the right business at the right time and with the right technologies ALEXANDER H. TULLO, C&EN NORTHEAST NEWS BUREAU
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ENNIS H. REILLEY USES WORDS
not often heard in the chemical industry When describing the growth prospects for his company, the president, chairman, and chief executive officer of Praxair peppers his statements with terms like "gangbusters" and "leaps and bounds." And with environmental regulations and economic trends working in the company's favor, this head of the U.S.'s largest industrial gas maker may not be full of hot air. Reilley can afford to be confident. His company has several hundred million dollars ofgrowth prospects. Moreover, whereas most of the chemical industry saw lower sales and profits last year, Praxair's sales grew 2.3%, hitting nearly $5.2 billion, while its operating profits rose 9.3% to $1.3 billion. All this during the year when Union Carbide, Praxair's parent company until 1992, was acquired by Dow Chemical and ceased to exist. "Despite all the trauma of last year, we showed earnings growth when virtually no one else in the sector was able to do that," Reilley says. "We are confident that we are on track to show earnings growth again despite a gloomy economy" This is a good time to be in the industrial gas business, Reilley says. The sector— 12
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which also includes Air Liquide, BOC, Air Products & Chemicals, and Linde—plays into environmental trends because products like oxygen and hydrogen are needed to reduce pollution. Moreover, Praxair has been inventing other technologies that make production more efficient in the industries it serves, such as oil, chemicals, and steel. For this reason, Praxair has been able to expand its business at 1.2 to 1.5 times industrial production growth. Reilley says Praxair's business model works in its favor. Because the company has about 1 million customers spread over a dozen major sectors, it is insulated from dramatic changes in anyone market. Moreover, 30 to 4 0 % of its business is based on take-or-pay contracts with customers, guaranteeing a rriinimum return on investment, even when demand falls off, as it did for the chemical industry last year. "It's a whole different business model from what underpins the rest of the basic materials industry, including chemicals," Reilley says. Reilley's direction for the company is simple, and it is what Wall Street wants: high growth and high return on capital. "We're trying to reduce the capital intensity of our base businesses so we can put more money in new opportunities and generate growth," he says.
PRAXAIR IS targeting 5% annual productivity gains. Much of this is being done with procurement and operational improvements. The company is also implementing the Six Sigma efficiency and quality control program that chemical makers such as GE, Honeywell, Dow, and DuPont currently are using. In Six Sigma, employees called "blackbelts" and "greenbelts" are trained in special analytical techniques that help identity trouble spots within a company's operations and fix them. In fact, it was as chief operating officer of DuPont, a position he held until he joined Praxair in March 2000, that Reilley first instituted Six Sigma, with the help of a notable proponent of the method, the then-CEO of AlliedSignal, Lawrence A. Bossidy "I was lucky enough to get Larry Bossidy to take me under his wing," Reilley recalls. "I stole his template shamelessly and put it in at DuPont." At Praxair, there are 250 blackbelts and greenbelts working on 450 projects aimed at saving $60 million to $70 million a year. The company is also using innovative technology to boost productivity In packaged gases, for example, where the biggest cost is the distribution of cylinders, Praxair and Northrop Grumman are developing oxygen-generation technology based on ceramic membranes. Such on-site generators would eliminate cylinder delivery to many small industrial customers. Praxair plans to go commercial with the technology in 2004. "In the packaged gas business, about 40% of our cylinders are oxygen cylinders, and that is probably the lowest return portion of our business. We see significant upside there," says Steven L. Lerner, Praxair's senior vice president and chief technology officer. Praxair is also fine-tuning its geographic focus. It wants to expand in the U.S., Canada, Mexico, Brazil, Spain, Italy China, South Korea, and Thailand and get out of countries such as Israel, Turkey, and Poland. "We have some assets that our competitors can do better with because they fit well with their infrastructures," Reilley says. 'And some of our competitors have assets that we can run more efficiently beHTTP://PUBS.ACS.ORG/CEN
cause they fit better with our infrastructure." Late last month, the company signed a deal to sell its operations in Poland to BOC for about $50 million. One of Praxair's biggest opportunities is petroleum refining. Reilley sees two trends in the U.S. oil industry that will lead to higher hydrogen sales for Praxair. One is that oil companies are refining more and more heavy, sour crude—oil with lots of sulfur in it. Though these grades are more expensive to refine than are lighter, sweet crudes, they can be purchased cheaply The other trend is that clean air regulations from the Environmental Protection Agency call for most of the residual sulfur in motor gasoline to be removed by 2004, and from diesel fuel by 2006. AS A RESULT, refinery demand for hydrogen—needed to knock sulfur out of oil—will jump from 480 cu ft per barrel in 2001 to 645 cu ft in 2006, Praxair says. And the company has the infrastructure to take advantage of this opportunity, Reilley maintains. Praxair has 300 miles of hydrogen pipeline on the Gulf Coast that is connected with 85% of the refineries there, and it has contracts with 55% of them. "There's really no other competitor that can match the scope and the scale that we have in terms of refining services on the Texas Gulf Coast," he says. Reilley estimates that growth in refining can boost Praxair's hydrogen sales to 850 million cu ft per day from 350 million cu ft in 2001. "Short of a regulatory rollback, or refiners, for some reason, deciding in the U.S. that they won't continue to run heavy sour crude, this thing is certain," he says. To make sure there is enough hydrogen in its system, Praxair is building 300 million cu ft per day of hydrogen capacity on the Gulf Coast that will come onstream in the second half of 2 0 0 4 . The company has also signed an agreement to supply BP's Texas City refining complex. Over its life, the BP contract alone is worth hundreds of millions of dollars, Reilley says, and Praxair will probably sign additional contracts and announce more hydrogen plants. Praxair is also positioning itself in hydrogen for fuel cells. It has participated in the California Fuel Cells Partnership, which is testing cars in Sacramento. It has also signed a contract to supply hydrogen to fuel-cell vehicles in Los Angeles' airport. In these applications, Praxair delivers hydrogen in tank trucks, a strategy that will not work forever, Lerner admits. "Our vision in the longer term is that the needs HTTP://PUBS.ACS.ORG/CEN
in the transportation sector will be met by small, on-site units," he says, noting that Praxair is working on this as well as on safe hydrogen-storage technology Regulations are also enabling a Praxair technology that may make coal burn cleaner. The company is developing a nitrogen oxide reduction technology that's applicable to small, wall-fired coal furnaces. By replacing about 7% of a furnace's air intake with pure oxygen, NO x creation can be dramatically reduced. "It is an opportunity to sell more oxygen and collect more licens-
ing fees along the way," Reilley says. This one use could generate 30,000 to 40,000 tons a day of oxygen sales—more than Praxair, the largest oxygen supplier in the country, currently sells for all applications. HEALTH CARE IS another big part of Praxair's growth plans. Oxygen for health care is the biggest industrial gas segment, Reilley says, accounting for $7 billion out of the $40 billion-per-year global industrial gases market. Growth in the institutional part of the market—hospitals, clinics, and nursing
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BUSINESS homes—is about 3 to 4% per year. Praxair already has a strong position in the field, serving close to 1,700 hospitals in the U.S. But for new growth, Praxair is looking to home health care, a market posting gains of about 10% per year, driven by the aging population and a move by hospitals to discharge patients faster. "Our strategy is to grow our home health care business in regions where we have this very strong hospital position," Reilley says. "We not only want to be their supplier of choice in the hospital, but also to be their supplier of
Lerner
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choice after patients are discharged and get their oxygen therapy at home." To position itself for the market, Praxair has been purchasing regional home respiratory and medical services providers. It has spent $160 million on nine companies with $120 million in sales in the past couple ofyears. "We could not be more pleased with the way this business is performing. It is a good opportunity for us," Reilley says. Another opportunity for Praxair is its Cojet technology for the steel industry In Cojet, a nozzle injects a supersonic, laserlike jet of oxygen 3 to 5 feet into a bath of molten steel. The technology improves lancing, decarburization, and postcombustion in steel furnaces. For three years, Praxair has been licensing Cojet for electric arc furnaces, small units used to recycle scrap metal. Praxair says using Cojet can save these units $2.00 to $4.00 per ton of steel because it eliminates the costly process of injecting oxygen manually with pipe that is consumed in the process. Praxair has more than 50 licensees for Cojet, representing 10% of the worldwide electric arc market. But Praxair has even bigger fish to fry with Cojet. The company wants to adapt the technology for basic oxygen furnaces, which large, integrated steel companies use. Globally this market is about 500 million tons of steel per year, and Praxair says it can save producers up to $5.00 a ton. 14
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Praxair would reap about half the savings as a licensing fee. Two U.S.-based integrated steel producers, U.S. Steel and Ispat International, are demonstrating the technology in basic oxygen furnaces. A year ago, Praxair signed its first commercial license with an integrated steel firm: Brazil's Usiminas, which has a good technology reputation. "If you get somebody who is renowned for their technology approach, it will carry a lot of credibility in the marketplace," Reilley says. Electronics is also an area where the company has a plethora of growth opportunities. It also is one of the areas where Praxair has changed most dramatically in recent years. In 1995, more than 90% of the company's electronics industry sales were high-purity gases, which are used mainly to create inert environments. Last year, only 60% of its $420 million in sales were gases. During this time, through a series of acquisitions and some internal development, the company accumulated an array of nongases businesses in electronics materials and components. These include disk-drive polishing materials; chemical mechanical planarization slurries; gas delivery systems; ceramic coatings; anodized components; and electrostatic chucks, which hold silicon wafers in place. It also has developed service operations such as gas and chemical management, infrastructure maintenance services, and component logistics. REILLEY SAYS the wide range of electronics businesses has given the company more financial stability and better growth opportunities. ifWe created what we think is a very unique portfolio that is far less dependent on gases than it once was," he says. "It has taken us into components where we have either number one or number two positions around the world. The question becomes: Is your strategy working? I think the best testimonial of that comes when you look at our sales into the electronics industry last year. Sales were down 1%, while the electronics industry tumbled 20 to 30%." Nevertheless, last month Praxair announced a reorganization of its electronics business; it is putting its semiconductor materials unit and some parts of its surface technologies group under a single roof and calling it Praxair Electronics. Rather than being driven by financial targets, Reilley says, the move is
PRAXAIR AT A GLANCE Headquarters: Danbury, Conn. Sales: $5.2 billion Net income: $430 million R&D spending: $66 million Capital spending: $595 million Employees: 24,300 Products: Industrial gases, related services, and other products for manufacturing (25%); metals (13%); chemicals (12%); food and beverages (10%); health care (9%); electronics (8%); energy (8%); aerospace (4%); and other segments (11%) Note: All figures are for 2001.
meant to foster a single face for clients. Reilley sees plenty more growth in electronics. For example, the industry is moving away from the mechanical clamps used to hold silicon wafers in place during chip manufacturing, so last year Praxair bought Dorsey Gage, a maker of electrostatic chucks that do the same thing. However, standard aluminum electrostatic chucks can create a bow in the silicon wafer, a problem that is becoming more pronounced as wafer size increases from 200 mm to 300 mm. In response, Praxair came out with an advanced chuck that incorporates ceramics technology developed by its surface technology unit. "Business is growing by leaps and bounds," Reilley says. Closer to Praxair's industrial gases core is its development of supercritical carbon dioxide to clean residue that builds up during chip fabrication. As feature sizes on chips get smaller, it is harder for chemical solvents to reach all of it. Praxair is testing its first unit with Tokyo Electron, and Lerner says the C 0 2 cleaning market could eventually be worth $100 million to $200 million a year. Banc ofAmerica's Gulley says there are a number of things working in the industrial gas industry's favor these days, not the least ofwhich is a new crop of CEOs—including Reilley and Air Products'John P. Jones—who have a better eye for balancing growth and profitability For his part, Reilley keeps coming back to t h e industry's numerous growth prospects, which more often than not stem from the ability ofgases to help customers meet environmental regulations and lower manufacturing costs. As a growth business—and investment opportunity—he thinks the sector stands out among basic materials businesses, including chemicals, pulp and paper, and steel. "Industrial gases are probably the best value out of that group, year in and year out," he says. • HTTP: //PUBS. ACS.ORG/CEN
