Praxair Analyst Day Notes

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This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“the most important question, what has the most meaningful impact are who sits in those top 20 to 25 positions in the company. And to the extent that we can get that right, we’ll be in great shape.”

“at the end of the day, all I’m trying to do is get the right people in the right place at the right time for what’s in their best interest from a development standpoint and for what’s in the best interest of the company. ”

“We simply cannot achieve the type of productivity that we achieve year in and year out without a strong commitment to continuous improvement”

“4 major dimensions you can use to organize an industrial gas business.

The first one is product:6 major products make more than 80% of the sales of this industry. So the 3 main, atmospheric Gases: Oxygen, nitrogen and argon, plus hydrogen, CO2 and helium…the differences that you have from region to region and especially, the differences that you have in supply mode…are so big that it’s not a good alternative in a global level and a regional level.”

“The second option you have to organize your business is by supply mode…we may have customers that take — anywhere for like 5 pounds a day of product, like a patient that needs oxygen for respiratory care or a welding shop, all the way to 5 million pounds a day of product for a steel mill or a petrochemical company…if we have a customer that requires more than 50 tons a day of product, for example, we’re probably going to install a plant close to the customer with prolonged side supply mode, and we’re going to connect the customer with the pipeline and supply gaseous product to this customer. And the name of the game here is really how well you design, build and operate the plants. So it’s an engineering and operations business,…If the customer needs less than 50 tons a day, all the way down to probably 50 pounds a day, we’ll probably supply the customer using liquid product. So liquid product comes from the same plant that we used to supply the pipeline customers, and we — where we liquefy the product, we store at very large tanks, and we bring the product to the customer using the trailers that you can see on the pictures on the back of this room…It’s a business that — it’s all about logistics, and all about how well you can manage at a very tight supply chain…If the customer needs less than 50 pounds a day, then the only solution you have is a high pressure cylinder. Now high pressure cylinder is not a very convenient way to transport a gas, a cylinder can weigh more than 250 pounds of steel, and you cannot carry more than 30 pounds of product inside this cylinder. And on top of that, the cylinder’s worth more than the product that you have inside of the cylinder, most of the time.

So the name of the game here is how well you manage these assets, a company like Praxair has more than 10 million cylinders. So how well you can move these cylinders to the customer, bring them back, dance with you and so forth. And it’s a very labor-intensive business.”

“The third dimension that we have is by end user. We have some industries that really have very specific periods, requirements or quality control requirements or they need special equipment in order to dispense the gas. And you can think about organizing a business around that, and you see a lot of that in the industry with electronics, with health care.”

“fourth option is the geographical option, is selling the simplest one…requires very strong general management skills to run a business with all the products that I described, all the supply modes I talked about, and all the end-users and have one person managing everything, it’s not an easy task.”

“We prioritize P&L accountability. We try to keep it simple and we try to run as a regional business model…Now underneath that level, in the country level, we try to organize that it makes sense as the conditions for the local market dictates.”

“One presentation you’re not going to be see in your books today is about some big ERP implementation at Praxair, most likely a lot of people here do not know what the ERP system or systems we use at Praxair. And the reason is simple. We — although we have a global platform, and most countries follow that, we are comfortable running separate P&Ls in separate countries in different systems, and also to bring acquisitions using different systems, which allow us to basically be much more focused on the business and not focus on IT transformation.”

“the Packaged Gas business in the U.S. is unique. We have more than 700 distributors, independent distributors that we need to compete with….we need to run across a structure that is competitive with these 700 distributors that we need to face in the marketplace. So in order to do that, we create a separate subsidiary that we call Praxair Distribution Inc. or PDI…80% of the business we run in a geographical mode. So we believe that this is a local business, so we break this apart in 4 regions and 12 divisions.”

“our productivity model is based around 3 functions. You have the front lines, the sales professionals, the plant technicians, the accounting department, they really make the business run on a day-to-day business.”

“we have as really the third function, is the dedicated productivity teams. So these teams really take the ideas, and those ideas can come from anywhere, they may come from the frontline, they may come from the support groups, they may come from a different country. They take that idea, develop it into a project, get that project executed in a timely manner, and then most important, make sure that we get the benefits realized and those benefits are sustainable. In a lot of ways they’re like a sales group because they have a backlog of opportunities, they have specific targets that they need to achieve and we measure them on the amount of value that they create. So again, it’s the robust analysis and execution that really drives our continuous productivity.”

“the key to the distribution costs is really driving down your cost per mile and driving up your volume per trip. And so in terms of our distribution costs, fuel and labor are the largest components. And we spent a lot of time making sure we’re improving those areas. And a lot of the new technology that’s coming out is really helping us do that. For example, we’ve just finished installing our next-generation onboard computers. These computers are mounted in every truck. They give us detailed information about driver behavior, things like breaking, acceleration, idle time.”

“while there are commercially available equipment suppliers, and we use them quite regularly in our plants, we’ve developed the internal capability to basically retrofit those — that equipment and, in some cases, build entire pieces of equipment ourselves, which really maximizes the efficiency.”

“to use the baseball analogy, it really is a game of singles…We have thousands of people doing thousands of projects, delivering the productivity. And it’s really that granular approach that we believe is the differentiator. We don’t have a special name for our productivity program. We don’t even call it a program, it’s just what we do. It’s part of the DNA of the company.”

“how can Praxair sustain this level of productivity benefits? And really, the answer is we can for really 3 reasons: first, we have a proven methodology. We know how to get it done. We don’t talk about what we like to do. When we have an idea, we define it and we get it done.”

John M. Panikar – President of Praxair Distribution Inc.

“The demand for hydrogen, globally, is still robust. We estimate that over the next 5 to 10 years, we’ll need an additional 8 billion cubic feet of hydrogen globally. That’s being driven by new refineries, expansions, upgrades and the use of heavy crudes. ..f a refinery wants more diesel, they need to heavy up the crude coming in to the distillation column, and they also need to install hydrocracking technologies, which require large volumes of hydrogen.”

“e’ve completed 3 world-scale hydrogen plants. The first one is in Port Arthur, Texas. It’s up and running and producing hydrogen to supply the Valero refining company, new hydrocracker there. That plant is also coupled with our hydrogen pipeline system that travels from Louisiana into Texas, along with our storage cavern there.”

“In late ’90s, beginning of 2000s, Mexico could not match China’s extremely low wage rates, as illustrated by the bar chart down on the left. Manufacturers located the factories in China rather than Mexico. It was a crisis that Mexico did not like to go to waste. They did the homework. And along with the strengthening democratic institutions, the government began to focus on improving infrastructure and alleviating unnecessary regulatory burdens.

Meanwhile, Chinese wages have skyrocketed, and transportation cost is affected by higher fuel prices, began to rise extremely fast. So in this direction, total land and manufacturing costs for goods made in Mexico are currently lower than in China. In this sense, manufacturers are very optimistic about the future of Mexico.”

“it takes a long time for these projects to close. And I think people around the world are doing what they typically do. When it’s kind of uncertain times, they’re just reluctant to pull the trigger”

“we think of in terms of industrial production growth”

“when capacity utilization gets into the mid-80s, pricing dynamics certainly improve. So I don’t know how long it’s going to take to get back there. I mean, we’re certainly not going to be adding any merchant liquid capacity. So as volumes progress in the U.S., it will tighten up.”

“We’re basically assuming no growth in Continental Europe going forward, so that kind of weighs down on our forecast. And based on that, we may be looking at 60% capacity utilization 2 or 3 years from now.”

“we get 3 questions pretty steadily from the investment community. Can you maintain pricing power? Will your disciplined capital allocation continue, or is the risk return profile changing? And how on earth do you drive productivity and a profit improvement from that at a rate twice that of any industry peer? And we would contend that all 3 of those questions are about culture.”

“what you see on the left is a show horse, and what you see on the right is a picture of a workhorse. And what I’m here to tell you is I have never seen a company culture more aligned with a workhorse than every enterprise I’ve seen in Praxair.”

“A show horse worries about the optics toward headquarters. What’s headquarters going to think? Maybe headquarters needs to make that decision. A workhorse just cares about what works with the field P&L. A show horse leans on commercial savvy. A workhorse is all about operations. A show horse is a risky investor. A workhorse is a conservative investor. A show horse spends time on big, bold, futuristic conceptual things. A workhorse, well, they’re grounded in the details of today. A show horse always chases new revenue opportunities, new fields of growth. Because you know what, the grass is always greener over there on the other side of the fence. A workhorse, well, a workhorse is just happy with the field they have, and they want to squeeze the existing assets. A show horse is all about words, about what may happen in the future. And a workhorse is numbers, about what did happen today.”

“And what we would contend is in the industrial gas industry because its different in other industries, you want to have a workhorse culture because that’s what drives the best results.’

“e favor profit over size. This industry generates a lot of cash. There’s a lot of investment opportunity. You can chase growth all day long. You can throw capital and growth all day long. But if your goal is highest operating profit and highest return on capital and not to be the biggest in the world, that’s actually a much harder path to go down.”

“Third is we have a very stable consistent strategy…Most companies that I’ve seen, and they’re somehow not happy with where they are….So there’s a more frequent change if they, let’s say, in the commodity space, well, they envy the world of specialties. If they’re not in a certain geography or pipeline, well, they better get into it…And with every strategy change, of course, comes the organization change. We’re not that way at Praxair. We are just fine with stay on course, no distractions, more next year.”

“Fourth thought is we clearly favor best practical execution over the big bold innovative.”

“We have very strict monthly operating rhythms…I’m still waiting for that quarter-end push. Now I’m not saying we don’t hustle to hit numbers. We take our results commitments as seriously as anybody. But partly the nature of our business, minimal physical inventory, minimum take-or-pay agreements, the business runs steady. Any process industry runs best when you run it steady. So a Friday, the end of a quarter at Praxair is like any other Friday.”

“you don’t get pricing discipline by big sweeping statements from the headquarters. You get pricing discipline by thousands of salespeople drilling into the details customer-by-customer because you make money in this business 1 nickel at a time.”

“I’m stunned that we even booked this place for this event today, and it’s a clear misfire on discipline that we even had sea bass on the menu. That’s an expensive entrée. It’s just not who we are.”

“Another distinctive part about our culture is our approach CapEx versus expense…most of what I’ve seen in my career is that expense dollars get this much scrutiny because that affects the results of today, like thank God that we can capitalize this chunk of spending over here. That’s tomorrow’s problem, big sign of relief. We’re not that way at Praxair because CapEx is precious cash just like expense dollars are precious cash.”

“And remember, at a capital-intensive business, on-time and on-budget is everything. And all you have to do is look at the mining industry for the last few years as recent examples of this massive transgressions.”

“the single dominant thought on people is that the field P&L trumps headquarters, okay? this is a local business. This is a regional business at best. This is not a global business. And the best way to run it is to push as much empowerment and accountability for the frontline as possible because the product doesn’t move.”

Ray Roberge – Chief Technology Officer and Coprorate Vice President

” I’ll be talking about technology. And then Ben Glazer will talk about capital projects and how we approve capital projects, how we allocate capital. And Murray will talk about project execution. When we win a new plant contract, how do we execute that project? And all 3 of these functions are run as global functions within Praxair to really take advantage of a common technology platform, a common decision process around what projects to go after, what our return criteria are and a common process for executing those.

“Boeing, for example, develops the 737 platform. And they do all of the engineering work associated with that platform once. And they build some flexibility into that fleet, and then they get to use that platform over and over again, making, in their case, hundreds or thousands of planes with the same platform. So we have the same concept in Praxair, and again, our goal here is to be able to reuse the engineering, get very good at that platform and achieve our 3% lower cost every year.”

“about 8 years ago, 8 to 10 years ago, and we recognize that we were spending too much time custom-designing plants as specific opportunities came up, and that it was very risky because when you do a design, a unique design, a new design for a project, it’s time-consuming for the engineering, and then you’re trying new things and some of those may work, some of them may not. So we adopted a product line strategy in which we work with our businesses, work with the market segments to understand what are some common needs, what are the most likely to be used plant size is, what kind of product mix do those plants have to produce”

“from an availability, reliability viewpoint, we’re able to afford to have spare parts. So all the major components that go into a product line plant, we have global spares for that, in some case, regional spares. So if a compressor fails, if a turbine files, if a valve fails, we have the ability to spare those parts and to be able to get that plant up and running very, very quickly at very low cost for the organization.”

Ben Glazer

“we exist and thrive in an industry that’s very capital-intensive. To maintain our operations, to grow our business, it requires a significant amount of investment, and as you heard Steve talk about earlier, we spend a considerable amount of time around these decisions. For our part, we spend approximately $2 billion a year in capital investments and we spend that time to make sure that we get it right.”

“really, what differentiates ourselves or differentiates us, what makes us special is our rigorous and consistent application of these programs and processes and ideas. It’s our discipline.”

” a basic outline of our capital selection process. It’s a very simple gated-review process where each one of these state’s gates has an entry, an exit criteria associated with it.”

Murray G. Covello – Vice President of Global Supply Systems

“we get to travel to very interesting places around the world on a regular occasion, and the other thing that makes it exciting is when it goes poorly.”

“Contractor performance is difficult for us. It’s difficult for lots of companies out there as trades, the load on trades gets very much higher as more and more projects get approved. And so worldwide, there is this challenge with finding good contractors, good tradesmen to get out there and do the work that’s required.”