Air Products needs to keep its electronics business, but...

Dr. Robert N. Castellano

NEW TRIPOLI, USA: I only live a few miles from Air Product's corporate headquarters, and have been analyzing its semiconductor and electronics business since 1985, when I started The Information Network. At that time, a couple of phone calls or lunches was all I needed to collect marketing information and turn them into market share charts that APD put in its Annual Reports. (Of course, I collected data from competitors as well.)

Things changed in September 2004, when APD management decided to move the marketing arm of its electronics division to the West Coast, a move that had followed its acquisition of CA-based J.C. Schumacher Company, a supplier of high-purity chemicals for semiconductors, in 1986.

No longer did APD have transparency in the electronics materials business (gases or CMP slurry). Analysts are suspicious when companies aren't transparent with revenue breakouts, because it can be inferred that the company is moving in the wrong direction. What typically happens is that we need to "go in the back door" and ask competitors what they think a competitor did. Talk to enough competitors and you can get a relatively good consensus, but it isn't the same. Customers of these materials read these reports.

I wrote about this in some recent articles on Seeking Alpha on Applied Materials, because it stopped sharing revenue data breakout with everyone except Gartner, which it has a "business relationship" with, whatever that means. Nevertheless, AMAT has been losing market share to competitors the past few years in all of its sectors, except last year to Japanese competitors because of the conversion of their revenues from yen to dollars.

So, the third bulleted item in this article, where Mr. Ghasemi needs to decentralize the company's decision-making away from Allentown, is a mistake. Marketing needs to be centralized, and revenue needs to be transparent to analysts, who then pass this information on to customers and investors.

There is a second issue I have with APD, and it happened in January of this year. I nominated APD for a prestigious Frost & Sullivan Best Practices Award in Semiconductor Gases. (The Information Network and Frost & Sullivan have a close relationship.) I received an e-mail from the director of corporate communication that stated: "Air Products has no interest in this. Here is the guidance I received from business management. Please, no more contact on this subject. Thank you. Ed McKendry."

I was at first shocked. I then recommended to Frost & Sullivan that they give the award to Air Liquide, a competitor of APD. But more importantly, it suggests to me, as an analyst, that there is something very serious going on. APD spends millions on advertising. I've been told that at some golf outings that supply a tent with all the accoutrements for visitors, particularly PA government officials. Yet, it refuses a prestigious award that would have cost it nothing. The award would have sent a clear message to customers, yet it sent a completely different message to me.

Ghasemi did an excellent job at Rockwood (we follow the liquid chemicals sector for semiconductors as well as gases). So I have two suggestions. Number one, let's have lunch (I'm in the neighborhood). Second, don't divest the electronics division, but bring marketing back to Allentown or educate Mr. M (I won't mention names) about being open with revenue breakout.

APD had some tough times recently because of the downturn of the semiconductor and other high-tech industries (LEDs, displays), but these are cyclical industries that are improving this year, and that we project will exhibit a few more years of growth before another cyclical downturn. In fact, in its latest 10Q earnings release, shown below, the ratio of operating income-to-sales for the Electronics and Performance Materials was greater than that of any sector in the past three months, and outperformed merchant and tonnage gases for the past nine months.

Air Products needs to be more transparent to analysts and market researchers, which will, in turn, provide its customers with positive attributes that go beyond what can be gleaned by reading press releases from the company. Independent third-party validation is a powerful PR tool. For example, APD has been the market leader in bulk gases to the semiconductor industry through pipelines that travel through the leading science parks in Arizona, Santa Clara, China, Korea and Taiwan, supplying next-generation fabs with the high volumes of nitrogen necessary for semiconductor integrated circuits (ICS).

APD is one of the market leaders in chemical mechanical planarization slurries that are used in all leading-edge ICs. It is also one of the leaders in supplying NF3 gases to clean processing equipment chambers. The IC industry is in the middle of a growth cycle that will last at least another 18 months. I have offered to help in promoting the company through our reports to our subscribers and through the Frost & Sullivan Best Practices Award, but have been flatly turned down.

The high-tech industry is at an inflection point in solar and LEDs, coming off a period of weakness, and we see sustained growth lasting for more than 24 months. APD is a large supplier of silane gas, which had been a key source in the ill-fated amorphous silicon solar cell technology.

However, silane is now being used as a feed source in newer technology (fluidized bed reactor) used to make polycrystalline silicon that is the starting point of most of the solar panels in production. Divesting the electronics industry would be a mistake at this time.

APD has infrastructure that is in a place in technology that is growing. The company needs to be both visionary and visible. I hope to discuss these issues with Mr. Ghasemi when we meet for lunch.

The author is president, The Information Network, USA.