© Air Products 2005

Innovation in a mature market

Innovation, not stagnation -how we changed a mature market

Prof John Irven, Director of TechnologyPackaged Gases

2 © 2005

Air Products Industrial Gases – a ~$6bn pa business

ASU cryogenic distillation columnfor liquid air @ -196 oC

LIN @-196 oC

LOX @ -186 oC

Air Separation Plant

Cryogenic liquid transport

Cylinder packaged gases Cryogenic O2/H2

3 © 2005

Packaged Gases (PG) half of $30bn Global Industrial Gases market

Equipment5%

On-sites14%

Merchant Liquid

34%

Packaged Gases47%

$ 14 bn

Southern Europe18%

UK and Ireland15%

North Continent14%

Canada - 4%

Mexico24%

ROW18%

Air Products $900mm

In Europe we are 18% market share

4 © 2005

Old model‘PG is unprofitable part of gas businessbecause of high cost of distribution’Eliminate costly distribution logistics and focus back on base bulk gases“You can only cost reduce in such a commodity business to try to maintain cost parity with the competition – where you are not market share leader this leads to decline “There’s absolutely no margin in trying new products”“ Milk the cash cow of the mature business, and only invest in new growth platforms

New ModelPG is most profitable part of gas business“most value lies in the customer facing distribution steps ”Target retail customers who pay better prices, where gas is a small part of their cost stackSecure sufficient direct volume to achieve scale, but focus on indirect distribution via agents channelDrive customer loyalty and retention, and achieve profitable growth via differentiated , market leading offerings, and excellence in sales and marketing

BulkGases

CylinderFill

DirectDistribution

RetailDistribution

CustomerOn-siteProduction

x % 2x % >4x %x %Best

PerformerOROI

1.5x %

Old model New agent modelSupply chain

5 © 2005

BUT - Size of innovation challenge in mature, commodity, conservative industry

KEY FEATURES :

•Cylinder•Cylinder Valve & Cap•Compressed Gas

20002000

The only change had been the Colour ...

1900

6 © 2005

Integra value proposition

B50200 bar

Customer

‘Conventional wisdom’- value 2 + 2 = 4

Integration

Reduced size/weight

New opportunity- value 2 + 2 = 5 !

Incorporate other functions such as pressure, flow, + ease of use into our package - capture the value

IntegraTM

N30300 bar

Integra demurrage +100%; impact of ‘bundling’

7 © 2005

BIP®build the purifier into the cylinderOur first differentiated market leading offering

Prior to FY98 No branding & promotion strategyNIH preventing globalisation

Our first success proving innovation, but approach still unoptimised

DESPITEEarning gas premium of 50% over UHPsDoor opener

– Customers– OEMs– National Laboratories

Leverage sales x 3 other products

Output ppb O2 .H2O

© Air Products 2005

So what did we do about it?

Aim to try to build position for PGBUT improve on BIP experience

9 © 2005

Strategy DevelopmentDrive to an integrated offering development approach, linked to business strategyMarket-leading differentiated offerings to

– drive growth and profitability– improve customer loyalty and retention

Cross-functional and cross-regional participation in strategy, planning and prioritisation in a steering team

– Technology/ R&D– Marketing– Operations– Engineering– Geographical regions

All aimed at avoiding the ‘NIH’ issue

10 © 2005

Staged development pipelineUse a development pipeline approach to show how ideas proceed through to commercialisation

Gatekeepers from the key functionsDon’t re-engineer for each area, or re-invent the ‘wheel’ but do recognise that different geographies and cultures may need slightly different approachesCompetitor assessment and positioning

Ideas Commercialisation

0 1 2 3 4Gates

Con

cept

Feas

ibili

ty

Prot

otyp

e

Dev

elop

men

t

11 © 2005

Gate 4 Commitments drive commercialization

Link Gate 4 to established Business Plan

Ensure the ongoing commitments are baked into the planning and commitment process, supported by senior business leader in process3 year short term horizon for P&C and achieving fast returns are still balanced against the needs for a strategic program that looks at supporting also the longer term business-technology needsDon't overlook the role of communications and strongproduct and corporate brandingMarket driven, not sales drivenUnderstand customer and market need, but recognisethis can often be an as yet ‘undefined’ or ‘unmet’ need with a truly innovative offering

12 © 2005

Ideas Development Introduction

0 4

R&D Group Dev GroupCommercial

Group

Integrated OLM, P&C & Strat Plan processR&D Group + Dev Group + Commercial Group

Non-aligned, non-integrated processes

Ideas Development IntroductionFINISH

Key lesson learned - ideas into commercialization

Ensure ongoing integrated technology support to avoid problems with introduction process causing the new offering to crash into a ‘black hole

Don’t under-resource implementation effortDon’t blame gap fillers as problems surfaceBy building an open and supportive team dynamicWe’re all in this together

© Air Products 2005

Results

14 © 2005

IntegraTM cylinder on welding set+ MaxxTM range of shielding gases

300 bar lighter cylinderIntegral pressure regulatorQuickfit outletOptimised flow rate

‘Transforming commodity products

into global competitive advantage’

Silver awardUK Chartered

Institute of Marketing 2000

15 © 2005

Maxx Welding Gases

250 300 350 400

Ferromaxxplus

Speed -19% increase

86% Ar12% CO22%O2

-

Travel speed in mm per minute

© 2005 Air Products

16 © 2005

HeligasTM lightweight 300 bar cylinders

N3030 l

N2020 l

N1010 l

Cylinder CapacityM3

Lightkg

Oldkg

N10 2.6 12 18

N20 5.2 25 46

N30 7.8 49 62

Best gas supplier award

17 © 2005

Balloonium Party Perfect (retail helium balloons) local transfill

How to participate in higher profitability retail sector,Without giving all value to a distributorWithout incurring excess distribution costs

BulkGases

CylinderFill

DirectDistribution

RetailDistribution

x % 2x % >4x %

$8.3 B$4.7 B $6.7 B

x %

$2.3 B

BestPerformer

OROI

Value (2000)

Customer

18 © 2005

Party Perfect

19 © 2005

Lightweight oxygen therapy package New life style for our patients

20 © 2005

Lightweight oxygen therapy package the

new life style for our patients

21 © 2005

l

ProfitabilityFunctionality & priceGas volume & package size

22 © 2005

“Without portable O2 she wouldn't be able to attend school or travel to Disneyland Paris or lead the full and active life that she leads. Please feel free to use whatever photos in the promotion of portable oxygen - we are huge fans” - her mother

23 © 2005

Voice of the customer

She says…..excellent!

“Now that I have a cylinder which is light enough to let me go back to school, my mummy has asked Air Products to design one which will let me climb trees as well!!”

24 © 2005

MetricsSet up ways to measure success ($) as offerings are introduced, and as the product shows growth, based on an understanding of the product life-cycleDemonstrate 30-100% rental premiums over standard offerings, with much higher OROIMeasure and demonstrate the benefit in customer loyalty surveys from such offerings

38

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

GI Non Premium Maxx Heligas BIP

At RiskIndifferentFavourablesecure

25 © 2005

Key learnings

Embed Technology Program as an integral part of business, its strategy and implementation, driven by senior business leader. Set up structure and processes to drive and implement the strategyEnsure differentiated, value-added, branded offerings become key part of the recipe for growth and profitabilityDevelop trust and self-belief in open team environment, with technology support throughout development and into commercialisationBelieve in the product-if we don’t the market wont !Value of external validation by customers, OEMs and external awards Recognise and nurture innovation – it’s quite hard to do !Result - new offerings portfolio helping drive profit growth

26 © 2005

Brand & values

Best company toInvest in

– our shareholders through improved business returns

Buy from – Our customers

response to the products

To work for– Recognition and

rewards for innovation

Underpinned by key valuesPassion

– For innovation over all the hurdles

Integrity – Belief in the

approach– Don’t under or

overselling Understanding

– Of customer and Air Product needs

– Of wins for Customer, Air Products & Society

Maxx® BIP®

Heligas® Integra® Party Perfect®

© Air Products 2005

Thank you

28 © 20057

BIP

Heligas

“Maxx”Welding Gases

Medical

Integra

OxyWalker

Packaged Gases - new offerings

PartyPerfect Lynx

Gases

Best gas supplier awardExternally recognised© 2005

© Air Products 2005

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