Reporting on the business and technologies
driving today's global industrial gas industry

The Art of Selling
How to Negotiate
By Art Waskey
2007.10
We recently received a call from a customer that was doing very little business with us. Their current supplier was out of product, so we were called to the rescue. The pricing structure was marginal, and this account required exceptional service, maintenance, and repair of equipment on a priority basis.

How do you move strategically on such an account? Do your prospects realize you service their business better than their current supplier, while still requiring you to match competitive pricing?

In his TeleSeminar, Negotiating Strategies, Joe Ellers of Consulting Associates, provides tools for getting the most from a competitive opportunity. Negotiating is the interaction between a salesperson and a customer while mutually seeking a solution, when both parties are willing to give up something to get what they want.

The basic elements of successful negotiation are:


• Real Need - It is critical to understand the customer. What are his conditions; his goals? What type of person are you dealing with? What is his motivation? Do you know other people in similar organizations/positions? What is the behavioral style? etc. Practice the 80/20 rule: listen 80% and talk only 20%.
• Options - What are critical desires, or acceptable trade-offs? What are the mutual "throw-aways?" Discover 1 or 2 mutual items each party is willing to concede; (i.e.) terms and conditions, etc. Define your "walk-away" position; what is critical and what is not.
• Empowered Parties - Are you really in front of the final decision-maker? Negotiations with secondary decision-makers may still leave you facing additional concessions when you confront the final decision-maker.
• Deadline - establish/identify a time constraint, a sense of urgency.



When we asked this customer what aspects were critical, he immediately pointed to a piece of equipment, "That machine must NEVER be down, or we will lose money and miss delivery dates." He also advised us of specific equipment parts throughout the shop that must have JIT (Just-In-Time) delivery. On the basis of his requests, we negotiated a contract with premium pricing in exchange for guaranteed inventory and a 24-hour response.

Ellers concluded his presentation with a summary of preparations for a successful negotiation meeting. These include- know what you want to accomplish, have an alternative solution, know your last resort, negotiate only the critical aspects, don't give everything away early, and insist on conditional concessions, focus on reality, and seek win-win scenarios

The customer received a commitment to service; we updated a marginal account to one giving us more business at premium margins. Truly, a negotiated win-win scenario!

Art Waskey is Vice President of Sales and Marketing for General Air Services and Supply Company in Denver, Colorado, and author of The Art of Sales in One Month. He can be reached via e-mail at awaskey@generalair.com.

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Air Products to Lead DLA Hydrogen Powered Forklift Demonstration Program
By Maura Garvey, Director of Market Research
2007.10
Air Products has signed an agreement with the Defense Logistics Agency's (DLA) Research and Development Program. As lead contractor for a two-year demonstration program, Air Products and its partners will develop the technology infrastructure for an indoor hydrogen fueling station, which will support 20 hydrogen fuel-cellpowered forklifts for daily warehouse operations at the Defense Distribution Depot Susquehanna Pennsylvania (DDSP).

Air Products will collaborate with General Hydrogen, a wholly-owned subsidiary of Plug Power Inc. of Latham, NY, to retrofit 20 lead-acid battery-powered Class 1 forklifts with fuel cell power packs. Air Products will provide the hydrogen fueling station technology infrastructure for the pilot program.

General Hydrogen, which was founded in 1999, was acquired by Plug Power Inc. in the spring of 2007. Plug Power is an established leader in the development and deployment of clean, reliable on-site energy products that integrate fuel cell technology into backup and primary power products. Plug Power also acquired Cellex Power Products, Inc. Both General Hydrogen and Cellex Power were leading developers of hydrogen fuel cell solutions for the material handling industry but focused on different classes within the lift truck market. The acquisitions capitalize on the well established commercial relationships forged by both companies with some of the world's largest material handling operations. With the integration of Cellex and General Hydrogen complete, Plug Power offers an entire product line of motive power solutions for lift truck fleets - under the brand name GenDrive - used in high-throughput warehousing, distribu-tion and manufacturing operations.

DDSP personnel will operate the fuel cell-powered forklifts alongside lead-acid battery forklifts in daily operations. Data to compare costs and operational characteristics will be collected and analyzed to support the development and commercialization of hydrogen fuel cell technologies for Department of Defense (DoD) operations.

"The DLA is to be commended for commencing this demonstration program. Hydrogen-powered forklifts provide an excellent opportunity to continue to grow the potential applications for the use of hydrogen as an energy carrier," said Tom Joseph, Business Development Manager for Hydrogen Energy Systems at Air Products. "We believe the program will demonstrate that hydrogen-powered forklifts will show productivity improvements during active warehouse operations, and also show economic and environmental benefits at the same time."

The refueling of hydrogen fuel cell power packs typically requires less than five minutes, only once or twice daily, depending on use. In contrast, traditional lead-acid battery-powered forklifts must be placed temporarily out of operation for battery replacement every four to six hours. In high throughput operations, it is necessary to house three batteries per truck-one in operation, one charging, and one cooling. This requires valuable floor space dedicated to a battery room, whereas refueling stations for hydrogen fuel cells take up very little floor space. Hydrogen fuel-cell-powered forklifts provide consistent power during use. The power output of batteries declines (battery droop) as the required changeout and recharge time nears, causing a decline in performance as well as added wear on the lift truck motor. Further, hydrogen-powered fuel cell forklifts are more environmentally friendly, without the storage and disposal issues of the toxins associated with lead-acid batteries.

This demonstration program is a continuation of Air Products, work in the hydrogen-powered forklift market. Air Products has been participating in similar work at a manufacturing and assembly plant in Tennessee since January 2006 and a grocery chain warehouse in Texas since March 2007. The projects include providing indoor hydrogen fueling station infrastructure for fueling hydrogen-powered forklifts and automated guided vehicles powered by hydrogen.

Air Products has more than 50 years of hydrogen experience and is on the forefront of hydrogen energy technology development. As the world's largest supplier of merchant hydrogen, Air Products is a leader in the development of the hydrogen infrastructure necessary to fuel hydrogen fuel cell and hydrogen internal combustion engine automobiles, HCNG (hydrogen/compressed natural gas) vehicles, and indoor dispensing stations for forklift applications in manufacturing facilities and warehouses.

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Wall Street Views
By Fred H. Siemer, CFA
2007.10
Economic Overview — Over shadowing the US economy, in general, is the liquidity squeeze caused by the collapse of the housing bubble and the sub-prime mortgage crisis. The difficulty in unraveling the complex derivative mortgage financing obligations is making it difficult to judge the depth of the liquidity crisis or the extent to which problems in the housing sector will spill over to the economy overall and stall economic growth. This brings into question any forecast for GDP in 2H 2007. The consensus estimate from a Wall Street Journal pool of 60 economists is a preliminary GDP estimate of 2.3%. Labor productivity has slowed and some think a 2.5% GDP rate is all the economy can sustain without inflation.

The key to achieving even this level of growth, or in fact, avoiding recession is the Federal Reserve or Administration response to alleviating the psychologically induced liquidity crisis. The Fed has already moved to lower the bank discount rate to 5.75% from 6.25% and Wall St. fully expects a reduction of at least 0.25% in the federal funds rate to 5% at their September 18 Meeting. I have long held that the primary concern of Chairman Bernanke was to contain inflation. This view was confirmed by an analyst at the NY Federal Reserve Bank in a conversation on August 9. I also hold the view, that the Fed must be concerned with the value of the US dollar, lest the Chinese and other creditors supporting the US Trade Deficit move out of dollar based assets. I note some diversion of funds to Euro based assets and Mr. Putin’s attempt to sell Russian oil and gas for rubles, rather than dollars. A cut in the US Federal Funds Rate while Finance Ministers in the EU and UK are poised to raise rates, would in my opinion, trash the dollar. This could promote a real, rather than psychological, financial crisis.

Mr. Bernanke is under tremendous pressure to cut the Federal Funds Rate, and I think his speech at the Kansas City Fed’s annual symposium in Jackson Hole, WY, may set the stage for a replay of the “Greenspan Put”, and allow him to cut rates without the moral hazard stigma of capitulation to the Investment Industry. Macro events seem to be falling in place to allow such action. Recently the US Current Account Deficit is shrinking as a share of the economy. After averaging 6.5% of GDP in 2006, the average was 5.7% in the first three months of this year. The financial crisis has spread overseas and planned fund rate increases in the EU and possibly the UK may be placed on “hold”. The US dollar has also lately been relatively stable against the Euro, and in fact has appreciated about 4% against the Yen. Also, recent inflation data in the US has been favorable. The Personal- Consumption Expenditure Index, excluding food and energy, remained tame in July, rising 0.1% from a month earlier. This would put the annual inflation rate below the 2% level the Fed feels puts a cap on the ability to cut rates. The surprise disappearance of 4,000 non-farm jobs in August is probably “the straw that breaks the camels back” in terms of a rate cut. President Bush has also entered the fray and proposed easing limits on mortgage financing by the FHA. I still think a cut in the Fed Funds rate is a negative and this view seems supported by the price of gold, where September futures rose 1.2%, hitting a three week high. By the time these comments are published we will have a better feel for the outcome of the liquidity situation, but my conclusion remains that the US economy will experience non-recessionary growth for at least another year.

INDUSTRIAL GAS PERFORMANCE
I continue to hold a positive view for the industrial gas industry. The industry is a lagging sector in the economy and recent financial problems have not yet affected quarterly earnings. The average sales growth for the three major US based gas companies was 15.3% in Q2 2007. Operating Profit margins for the major players increased from 40 to 200 basis point yty, as selling prices generally increased faster than electric power costs, and new plants enjoyed operating leverage. Average eps gains for the three major US based firms were running at over 25% yty. Earnings in the latest quarter were up nicely yty, as shown in Figure 2.

THE EXCESS MERCHANT GAS CAPACITY ISSUE
My data for supply/demand in the US market shows rates as follows for 2008: Demand 4-5% — Planned Capacity 6.5%. A decline in operating rates is in the cards. In the June issue of Cryogas International, I listed five reasons for concern regarding the new operating environment (New management at US gas companies, Airgas as new entrant to US merchant bulk market, replacement of BOC management by Linde, recent price increases, and change in executive compensation metrics.) Resolution of these concerns is in progress. The issues of new management at Airgas and the extent to which price increases have been cost justified have been resolved. I have met with the new management of Airgas and Praxair, and while it is hazardous to make judgments from conversations that can last for as little as 15 minutes, Praxair seems more concerned with cost control than market share and Airgas claims its’ operating rate in merchant gases has moved from 82% immediately after the Linde asset acquisition to 88% today, which is a rate above the effective operating rate of their current system.

I lately reflected on the comments within the industry that power costs, that is variable costs, for some plants comprise as high as 90% of the Cost of Goods (COS), as opposed to 70% at the turn of the century. The dramatic increase in Distribution Costs has also changed the economics of merchant gas supply. A model of these costs is shown in Figure 3. If one were to characterize the merchant gas business of today, I would classify it as an ENERGY DISTRIBUTION BUSINESS. One can readily see from Figure 3, that operating rates are less important to profitability today than they were in 2000. A 10% drop in operating rates results in 130bp decline in margins in 2007 versus a 250bp decline in 2000. Incremental increases in volume seem subservient to optimization of distribution costs, which are now of paramount importance. I would guess the maximum shipping distance for LIN/LOX is now more like 150 miles rather than 250 miles. The decline in Distribution Costs as a percentage of revenues despite higher power rates confirms the shrinkage in shipping distances. This means that SIZE & SCALE are keys to low cost operations. Thus, multi-plant national footprints with large volume customers are advantaged. I would venture that there is no room in this industry for the small player. The declining trend in gross margins at Praxair, from 2002 -2006, if more than natural gas pass thrus, also suggests that the recent rash of plant expansions have more to do with optimization of distribution costs than any dramatic increase in re-investment level selling prices. If operating rates are less important to profitability than optimization of distribution costs, there should be less reason to cut prices to gain market share.

COMPANY COMMENTS
Airgas (ARG)
While weakness in housing, and especially autos, has reduced industrial gas demand somewhat in these sectors, strength in non-residential construction and infrastructure repair continues. As noted earlier, the gas sector is a lagging economic indicator, and results for the June Quarter generally were stronger than those in March. For ARG, this propelled yty same store sales gains of some 7% in FQ1. Overall sales were up 18% yty, with acquisitions providing 11% of this increase. Hard good sales were up 6% and gas & rent 8%. Operating earnings advanced 41% yty, and margins at 12.2%, showed a 200 basis point yty improvement. Sales for Distribution were $763MM, up 17% yty. Same store sales were 7% of this gain. Operating earnings advanced by 47%. Gas & Rent sales mix was 53.9%, up slightly yty. Sales for all Other operations at $187MM were up 34% yty, with gains in operating earnings of 20%. Earnings per share were 63¢, a gain of 31% on adjusted prior year earnings. The company’s guidance for FQ2 is a range of $0.60 - $0.63/sh, excluding a 3¢ charge for the exchange of stock by National Welders.

The growth investment story at Airgas has always been about acquisitions. One might be concerned that, as the company’s sales base increased, that acquisitions of sufficient size would not be available to contribute meaningfully to growth. In 2007, ARG has closed on the largest dollar sales acquisitions in the company’s history. The purchase of the ASU and packaged gas business from Linde will add some $840MM, or about 30%, to Airgas sales base. While the Linde ASU acquisition caused some dilution in operating margins of about 140bp in this quarter, after integration, these assets will be accretive to earnings in 2H of FY ’08. A 1¢/sh penalty to earnings from the Linde Packaged Gas acquisition, which closed June 30, should be eliminated in the second half of calendar 2008.

Demand remains strong in almost all geographic regions and the company expects eps gains of some 26% or better to $2.52-$2.60/sh in FY2008. Current results are somewhat constrained by supply shortages of helium and argon. Resolution of these supply problems will be a source of future earnings growth. For FY’08, the company expects sales of about $4Bil and an operating margin between 11.5 – 12%. This would translate to eps of some $2.70/sh, by my calculation, but I have not yet changed our estimate of about $2.60/sh.

Air Products (APD)
For the fiscal Q3, APD reported sales of $2.6Bil up 16% yty. Operating income advanced some 25% yty and reported eps, excluding gains from a favorable tax adjustment, was $1.16/sh, a 29% yty gain. Tonnage Gas sales, at $695MM increased by some 27% yty. Volume added 17% to sales, gas pass-throughs, primarily impacting the Hydrogen business, added 7%. Foreign exchange and acquisitions added 2% and 1%, respectively. Operating income for the Group increased 30% yty and Margins expanded by 30bp, without the benefit of gas pass-throughs, to 15.9%. Volume gains and subsequent operating leverage in new plants were important contributors to these excellent results. Merchant Gas sales at $817MM were up 17% yty. Volume contributed 5% to increased sales, with selling prices, acquisitions, and foreign exchange each contributing 4% to sales growth. Liquid/Bulk volumes were: — NA up 2%; EU down 1%, with gains of 9% in A/P. Shortages of helium and argon were largely responsible for any volume shortfalls. Merchant LIN/LOX pricing was up in all areas. We are encouraged by the pricing action in NA, where a 5% yty gain offers hope that industry pricing momentum still remains positive. Merchant operating rates were probably less than 85%, but note my earlier comments on the reduced importance of operating rates on merchant gas profitability.

Electronics demand was good, sales were up 14% yty. Pricing, while improving in the bulk gases, is still very competitive in specialty products. Performance Materials volumes were up 6% yty. Operating income for the E&P Group was up 28% yty, with the 140bp improvement in margins due to restructuring actions taken in Electronics. No information was offered regarding margins in the Performance Chemicals Sector, apparently results were not yet strong enough for management to deliver on its promise to hold an analyst conference on performance in its chemical operations. Energy & Equipment Group sales of $134MM were down 3% yty, largely due to lower LNG completions in the quarter. The backlog has slipped to $268MM, which was down 47% yty. Operating income was up 7% yty, but profits are expected to be down yty in 2008. Problems in the US Healthcare Group continue. Volume increases seem difficult to achieve and cost increases for new personnel are dragging down operating profit for the Group, which at $9MM was down 2% yty. Business in the EU remains strong and contributed all or more to the 6% gain in Group sales. Negotiations continue with Wacker and others for the divestiture of the product lines currently included in the Chemicals Group. APD terminated a DNT supply agreement, which helped operating profit. Profit increased 40% yty, but margins of only 8.8% still argue for divestiture of Chemicals.

Lincoln Electric (LECCO)
Although there has been some weakening in US markets as a result of the collapse in residential housing, strength in worldwide non-residential construction markets continues to drive exceptional results for Lincoln Electric. For the last quarter, sales increased by 17% to $587MM, volume added 8% to this gain and selling price and foreign exchange added 4% and 3%, respectively. Acquisitions added 2% to sales gains. Adjusted net income increased by 30%, to $55MM or $1.27 per share. Results again exceeded “Street” estimates. Global demand again is the primary driver of improved results. Sales of Lincoln subsidiaries outside of North America increased to $223MM, a gain, in local currencies, of 20% yty. Sales for the Company’s North American operations were $364MM, an yty increase of 8%. Export sales increased 27% to $50MM. Sales gains in North America, while still strong, represented some slowdown in the yty rate of increase. A collapse in US residential construction had some minor impact of sales. For LECO, sales in the US are about 50% of total sales, and the extraordinary demand surge for Lincoln products in the rest of the world should continue to allow double digit sales gains for the company overall for the remainder of 2007. In the quarter, sales gains in Latin America, Asia/Pacific, and South Africa were up from 20%- 43% yty. The company is straining to meet demand, and is somewhat capacity constrained in Europe. Capital expenditures and acquisition outlays were $30M in the quarter, as new capacity is added. The operating leverage provided by greater volume allowed profit margins to expand by 60bp yty. We expect eps growth of about 22% yty in Q3 and 26%for year 2007.

Harsco (HSC)
Harsco reported strong earnings in the second quarter, demonstrating that strength in commodities and capital goods markets benefits players at all levels of the supply chain. EPS for the quarter, for continuing operations, was $0.91, up some 44% yty. Corporate sales were up 24% yty. Operating margins improved by 180 bp to 14.4%. Access Services had a sales gain of 34%. Organic growth contributed 20%, with currency and acquisitions adding 5% and 9%, respectively. Operating income increased some 35% and margin gains of 10 basis points, to 13.7% were realized. Minerals & Rail Technologies, Services and Other Products report sales of $204MM some 34% higher than the prior year. Organic sales growth contributed 7% and the February 1 acquisition of Excell Minerals added 26% to the gain. Excluding a gain on sale of property this year, operating income increased by some 115%, and margins of 23.1% were 860 bp higher than last year. The outlook for this business sector remains positive with strong second half performance led by Excell and Harsco Track Technologies.

The Mill Services Business reported sales gains of 11% yty. Contributions from organic growth, acquisitions and foreign currency were 2%, 3%, and 5%, respectively. Operating income decreased by about 5%, and operating margins decreased by 160 basis points to about 10%. Poor second quarter performance was impacted by lower steel production in NA and severe flooding in the UK, which caused damage to a number of large mills served by Harsco. Also, the company incurred higher Administration charges for personnel and facilities to provide for future growth. Results for this Group are expected to improve in the second half. As previously reported, negotiations continue to divest the Gas Technologies segment. This has now been classified as a discontinued operation. For the Corporation overall, the company sees continued strength in the majority of its end-markets and positive global economic conditions into the second half. Performance should again be led by Access Services, with Minerals & RR technologies expected to outperform last year’s second half. Thus, the company expects a 22-25% yty increase in Q3 earnings and raised eps guidance to a range of $2.90-$2.95 for the year 2007.

There is a transition in top management, as Derek Hathaway, in preparation for retirement in 2008, has turned over leadership to CFO Salvatore Fazzolari. While it is not usual for financial managers to assume the role of CEO, I note that Mr. Fazzolari has been intimately involved in the many transactions over the last several years to restructure the company and has a thorough understanding of Harsco’s current strategic plan. I would not expect any significant change in the progress underway at Harsco as a result of this management transition.

Praxair (PX)
Demand for industrial gases continues strong and Praxair continues to post positive yty quarterly comparisons. Operating Profit was up 15% yty and net income was 89cents/sh, a yty gain of 19%. Sales were up 12% yty in Q2, with significant new business from the energy sector and continued gains in Asia and South America. Contributions were 3% each from selling price and currency. Volume contributed some 5% to sales growth, aided by the start-up of new hydrogen plants. In North America sales advanced 11% yty, ex gas pass-throughs, with price and volume contributing 4%. Merchant sales advanced 12%yty. Overall volumes for on-site gases were up 8% yty, ex. natural gas pass-throughs. On-site volumes to the steel industry were down due to lower operating rates at several customers and some softness was noted in Canadian auto and oil well services. Packaged gas sales were up 13%.The acquisition of Linde’s Mexican gas operations will add to earnings in subsequent quarters. The Aerospace Industry is experiencing a boom and Surface Technologies is benefiting. Sales were up 12% in the quarter yty ex. divestitures and currency. Operating profit increased 10% yty and margins at 17.6% improved from 16.8% in the prior year.

South America saw a 16% yty gain (Volume 9%, FX 8% & Price 5%). The sale of some equipment reduced sales by 6%. Economies in this region have improved, with Brazil becoming a real export power. Sales in Asia/Pacific were up 15% yty (Volume 11%, FX added 5%, selling prices reduced sales by 1%). Merchant pricing in China is still very competitive.

Consistent with the region’s broad economic recovery, demand in Europe is picking up, sales were up 14% yty in the quarter, selling price increases added 2% to sales growth. Volume was up 4%, and currency translation added 8% to sales growth. Price gains were not as great as those in Q1 primarily due to lower natural gas passthroughs. Pricing is advancing to offset cost pressures and operating margins improved due to gains in productivity. The outlook for the remainder of 2007 is quite positive, as there is strong momentum in energy, non-residential construction and capital markets. The company expects eps of 89 – 91 cents/sh. in Q3, and has increased its eps guidance to $3.50-$3.55/sh for the year. These represent yty gains of 17-18%.

Chart Industries
Since the Industrial Gas Industry is in an expansion mode, not only in the US, but worldwide, I introduce here a brief look at Chart Industries, a producer of production and storage equipment for gases, LNG, and hydrocarbon based industries. To gain a sense of scale for the company, I base my initial comments on results for the six months ending June 30.

Sales of $320MM increased 27.9% yty. Operating income was $37MM up 21% yty, and net income of $15.6MM increased some 38%. EPS was $0.60 on shares of 26.2MM, recently diluted by a secondary stock offering. Management’s eps guidance for the year is in a range of $1.26-$1.38 on 27.3MM average shares. For the second quarter, sales increased 30% and reported net income was 32cents/sh. However, excluding option and other expenses resulting from the stock offering, net income would have been $13.5MM up 155% yty. Eps would have been 51 cents/sh, which combined with Q1 eps of 28 cents/sh and the forecast of an average of 72 cents/sh in 2H, results in non-GAAP eps of $1.51 for 2007. Backlogs in June were $415MM up 50% yty fueled by significant orders in the Energy & Chemicals Sector. The company was awarded orders of more than $100MM from Energy World Corporation and has formed an alliance with this LNG construction firm. Despite some expected 2H slowdown in its Distribution & Storage Sector, as a result of the BOC/Linde merger, worldwide expansion of industrial gas capacity should continue into 2008, as will growth in the BioMedical Sector. Shares outstanding should increase to 29MM in 2008, but based on current backlogs and anticipated growth, we think eps should easily exceed 2007’s non-GAAP eps of $1.51/sh in 2008.

Fred H. Siemer, CFA, is President of Siemer Management Co. and has over 25 years of experience in the Chemical and Investment Industries. He established “Chemical Research for Wall St.” in 1985. He can be reached via e-mail at FHSChem1@aol.com.

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