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In this short workshop, we’ll map out how industrial gas works and what makes the business sustainable

A Value Investor wants to understand how the industrial gas business works. Here is a short overview at your convenience.

There are four customer groups who have the basic need of reliable industrial gas supply. It’s the sales manager’s job to get the best out of her salespeople in finding new opportunities by providing solutions being above customers’ expectations. The overall goal is to make the business profitable and generate sufficient free-cash-flow

Focus Groups with Purchase Managers and Operation Managers have revealed that the main driving force in choosing an industrial gas supplier is FEAR.

Gas Purchasing differs also in that it is not a one-time business. It is consumed continuously and gas suppliers provide automatic re-filling.

The focus on reliability means long-term contracts with suppliers, this, in turn, leads to the low frequency of changing suppliers in the industry.

Power makes up a large component of the cost of tonnage gas production followed by capital charges.
Other fixed costs are modest.
The longevity of both plant and contracts gives typical EBITDA margins between 25-35%.

Bulk Business: 
Production and distribution costs for LOX, LIN, LAR and LCO2 do not vary much and there is a significant wholesale business.
Most applications are not proprietary so margins are constrained.
High loading, as in the US leads to price and margin improvement so product swaps to avoid overcapacity are common.
Bulk Businesses generally generate EBITDA margins between 10% and 20%

The major costs of the cylinder business are in the cylinder filling and distribution operation of the business around 55% of total costs.
The cylinder business generally produces EBITDA margins of between 25-35% in a disciplined market.
In the US, with many minor players, margins are significantly lower than in Europe and Asia.

In this short workshop, we have mapped out how industrial gas works and what makes the business sustainable. If you want to get more insider information, contact us.