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Airgas (NYSE:ARG)

Q4 2013 Earnings Call

May 02, 2013 10:00 am ET

Executives

Peter Mccausland - Founder, Chairman, Chairman of Management Committee and Member of Executive Committee

Michael L. Molinini - Chief Executive Officer, President, Director and Member of Management Committee

Robert M. McLaughlin - Chief Financial Officer and Senior Vice President

Analysts

Ryan Merkel - William Blair & Company L.L.C., Research Division

Jeffrey Schnell - Jefferies & Company, Inc., Research Division

Robert A. Koort - Goldman Sachs Group Inc., Research Division

Thomas L. Hayes - Thompson Research Group, LLC

Michael J. Harrison - First Analysis Securities Corporation, Research Division

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Holden Lewis - BB&T Capital Markets, Research Division

Operator

Good morning, and welcome to the Airgas Fourth Quarter 2013 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] For opening remarks and introductions, I will now turn the call over to the Manager of Investor Relations, Joe Marcelli [ph]. Please go ahead, sir.

Unknown Executive

Good morning. We thank you for attending our fourth quarter earnings teleconference. Joining me today are Executive Chairman, Peter Mccausland; President and CEO, Mike Molinini; and Senior Vice President and CFO, Bob McLaughlin.

Our earnings news release was made public this morning and is available on our website, as are the teleconference slides. To follow along, please go to airgas.com, click on Investors shortcut at the top of the screen and go to Earnings Calls and Events page.

During the course of our presentation, we will make certain non-GAAP financial measures and unless otherwise specified, metric referred to in today's discussion will be adjusted for unusual items identified in earnings material. Reconciliations to the most comparable GAAP measures can be found in our earnings release and slide presentation and our website. This teleconference will contain forward-looking statements based on current expectations regarding important risk factors, which are identified in our earnings release and slide presentation. Actual results may differ materially from the statements, so we ask that you please note our Safe Harbor language.

Please recall, as noted during the third quarter earnings teleconference, we changed reference in sales adjusted for the impact of acquisition and divestitures from same-store sales to organic sales. Growth rates presented in prior periods and underlying calculations have not been materially affected by this change. We'll take questions after concluding our prepared remarks as time permits, and we plan to end the teleconference by 11:00 a.m. Eastern Time.

Now I'll turn the call over to Peter to begin our review.

Peter Mccausland

Thank you, Joe. Good morning, and thank you, all, for joining us. Please turn to Slide 2. Fiscal '13 was, in one sense, a tough year. We found out what it was like to drive down the turnpike at 60 miles an hour while changing the tires, not only the tires, but the engine and all the mechanical systems and the wiring, which pretty much describes what it was like running our business and stretching for our goals while converting to SAP.

However, in my view, fiscal 2013 was a very good year for Airgas. We achieved record EPS of $4.35 a share, 6% higher than last year and remarkably only 7% below the low end of the initial guidance, we issued back in May 2012, despite the fact that economic conditions deteriorated as the year progressed with non-tech industrial production coming in below our original expectations.

In addition, our free cash flow of $298 million was a 14% increase over the last year. We also, as I mentioned, completed the implementation of SAP and the rest of our distribution group. We realized the first tranche of SAP-related benefits as planned for the year. We completed the $600 million share repurchase program that was announced in October and acquired 18 businesses with sales of more than $95 million. These achievements are significant milestones in the development of our company and help position us for sustainable long-term growth.

But we're not immune to broader economic weaknesses, even though we're relatively recession resistant. Fourth quarter EPS was $1.14, up 3% from the prior year. As we announced on March 21, organic sales growth in our distribution segment was flat through February. And absent a strong finish in March, we were likely to miss the low end of our fourth quarter guidance of $1.18 by 4%, and that is essentially what happened. The soft conditions we saw during the quarter were broad based, though we noted particular weakness in nonresidential construction with the completion in the prior quarters of some big jobs and the delay of new jobs.

We continue to win new business in the U.S. metal fabrication and energy sectors on the strength of our Strategic Accounts program, technical support, the breadth of our product and service offering and outstanding customer service. But activity levels in these sectors continued to slow over the course of the year.

On balance, our balance sheet is solid and strong cash flow continues to be a hallmark of our business model. This morning, we were pleased to announce a 20% increase in our quarterly cash dividend from $0.40 to $0.48 per share, reflecting our confidence in our long-term growth prospects and financial stability.

Turning now to the fiscal 2014 outlook. We're assuming the continuation of current -- of the current -- of current slow business conditions for the first half of the year, followed by slight improvement resulting in low- to mid-single digit organic growth for the full year with gas and rent outpacing hardgoods.

We have been investing and we'll continue to invest to position Airgas for long-term growth. But we're going to keep a sharp eye on expenses this year and we won't hesitate to take further action if the economy continues to weaken and our sales volumes don't recover.

We expect fiscal 2014 EPS to be in the range of $5 to $5.35, representing growth of 15% to 23%, with the low end reflecting organic sales growth in the low-single digits and the high end reflecting organic sales growth in the mid-single digits. Though we remain appropriately cautious about near-term business conditions, we're very optimistic about the long-term prospects for U.S. manufacturing and energy industries, as well as nonresidential construction, and our ability to leverage our unique value proposition and unrivaled platform to drive growth.

Now I'll hand it over to Mike to review some of our key initiatives.

Michael L. Molinini

Thank you, Peter. Please turn to Slide 3. As Peter said, current business conditions indeed present some near-term challenges, but we will continue to invest in our long-term growth strategies, including the further development of our sales and marketing strategies focused on key customer segments, our Strategic Accounts program, infrastructure enhancements, leveraging our SAP platform and eBusiness.

Our sales and marketing strategy focused on tailoring our value proposition to the unique needs of each major customer segment continues to gain momentum and is a driving force behind the Airgas organic growth story going forward.

Our Strategic Accounts program, which leverages this segment-driven approach, presents us with tremendous cross-sell opportunities in terms of product lines, services and location and represents about 25% of total sales.

In the fourth quarter, Strategic Accounts sales were up 1% over the prior year as continued new account signings and cross-selling to existing customers was tempered by broad-based slowing inactivity across most of our customer segments. Strategic Products continues to be an important element of our integrated offering of products and services. In the fourth quarter, sales of Strategic Products were up 2% over the prior year with the bulk in medical categories posting the highest growth rates in the group. Sales of safety products were flat year-over-year on broad-based moderation in core industrial customer activity.

Before moving on to SAP, I'd like to give you a brief overview of recent developments in the R-22 refrigerant market and their impact on Airgas. We're facing a challenging and unpredictable year ahead for our refrigerants business. The Environmental Protection Agency recently issued a ruling allowing for an increase in the production of R-22 in calendar year 2013 rather than reaffirming the further reductions that much of the industry have been expecting.

Fortunately, compliance with the Montréal protocol almost certainly requires the significant step down in R-22 production in calendar year 2015, reinforcing our position as an industry leader in the reclamation and distribution of recycled refrigerant products.

As a result of this one-year hurdle, though, our fiscal 2014 guidance includes an estimated $0.05 to $0.10 per share year-over-year negative impact from refrigerants as prices and sales volumes of R-22 have both come under pressure following the EPA's ruling.

Moving on to SAP, as Peter said, we completed the implementation of the new system at our last regional distribution business in March, marking a major milestone in the evolution of Airgas. All of our regional distribution businesses are now running on SAP. And although our associates improve every day they use it, it takes time for associates to become fully proficient in the use of the new system, and deriving benefits takes a lot of hard work.

The rollout of our expanded telesales channel, Airgas Total Access, continues to gain momentum. We now have about 120 full-time Total Access telesales representatives trained and deployed across most of our distribution regions, calling on customers in the target size and spend range, selling gas and welding-related hardgoods in addition to our traditional telesales offering of safety products.

About half of our regional companies are leveraging the data mining and functionality of SAP to take a more strategic approach to product pricing and discount management and efforts in that area continue to bear fruit. We expect to achieve a minimum of $75 million in run rate operating income benefits related to the SAP initiative by the end of the calendar year 2013 consistent with our long-standing target.

But in light of a difficult business conditions we're facing in the near term, combined with the extension of post SAP conversion support and training costs through the first half of fiscal 2014, which we highlighted on our last earnings call, our EPS guidance assumes the contribution from SAP benefits net of expenses at the low end of our previously announced range of $0.45 to $0.55 in fiscal 2014.

Our experience with SAP thus far, it reinforces our expectation that this initiative will create substantial shareholder value as highlighted at our December Analyst Meeting and enhance our earnings power over time as we leverage its capabilities in concert with the execution of our strategic growth initiatives.

As I noted a minute ago, and as we highlighted at our December Analyst Meeting, our investment in SAP crates the foundation on which to build a consistent eBusiness platform across all customer touch points. In April, we announced a partnership with a leading digital marketing company to significantly enhance our eBusiness platform, creating a digital experience that will enable customers to interact and transact with Airgas at any time across all channels, including mobile and social interactions.

While there has been much focus on the areas of SAP-related benefits that we have announced, there's much more going on at Airgas to position this company for long-term growth, including our investment in eBusiness.

I'm excited about the future, especially as we exit the cloud of distraction from the SAP implementation. There seems to be a spring in the step of our field organizations as the challenges of converting computer systems starts to fade and they can begin to get back to what they do best, taking care of their customers.

Thank you. And now, Bob will give you our financial review of the quarter and provide guidance for the first quarter and fiscal year 2014.

Robert M. McLaughlin

Thank you, Mike, and good morning, everyone. Please turn to Slide 4 for a review of our consolidated results for the fourth quarter.

Sales increased 2% year-over-year to $1.3 billion, reflecting a 2% contribution from acquisitions and flat organic sales growth comprised of a 4% increase in gas and rent and a 5% decline in hardgoods. Total price was up 5% and volumes were down 5%.

Gas and rent represented 63% of our sales mix in the quarter, up 170 basis points from the prior year. Gross margin for the quarter was 54.7%, an increase of 80 basis points from the prior year, driven by the sales mix shift towards higher-margin gas and rent, as well as margin expansion on price increases, partially offset by supplier price and internal production cost increases and mix shifts within both the gases and hardgoods categories to lower margin products.

Adjusted operating income was $154 million, up 1% from the prior year. Not included in adjusted operating income was a pretax charge of approximately $1.6 million related to business support center restructuring. Adjusted operating margin was 12.2% equal to the prior year. Excluding the $0.01 restructuring charge, adjusted earnings per diluted share were $1.14, an increase of 3% from $1.11 in the prior year. Consistent with our guidance, adjusted EPS of $1.14, included $0.04 of SAP-related benefits realized, net of implementation cost and depreciation expense, reflecting a favorable year-over-year swing of $0.13 compared to prior year's expense of $0.09.

There were approximately 76.5 million weighted average diluted shares outstanding for the quarter, down 2% year-over-year and down 3% sequentially, reflecting the impact of the completion of the share repurchase program, which Peter noted earlier.

Return on capital was 12.3% for the 12 months ended March 31, 2013, down 20 basis points from the prior year as adjusted operating income grew at a slower rate than our capital base due to the challenging economic environment.

In February, we raised an aggregate of $600 million in debt comprised of $325 million of 5-year notes at approximately 1.7% and $275 million of 7-year notes at approximately 2.4%. The proceeds of these debt issuance -- debt issuances, which were in part, time to capitalize in attractive debt markets together with our strong cash flow from operations, provide us with ample funding to complete the share repurchase program, which we did in the fourth quarter, and to repay the 2.85% notes that mature this upcoming October, as well as to meet our other financing requirements.

Total debt increased $447 million year-over-year to approximately $2.6 billion at March 31, driven primarily by the share repurchase program and acquisitions partially offset by net pay down activity during the past 12 months. Our fixed load debt ratio at end of March was approximately 76% fixed and our debt-to-EBITDA ratio was 2.9 within our target range of 2 to 3.

Turning now to Slide 5, we'll look at our segment results. SAP implementation costs, which are included in our consolidated adjusted operating results have not been allocated to our business segments, nor have the special items that have been excluded from consolidated adjusted operating results.

Distribution sales were up 1% versus the prior year and more than $1.1 billion. Organic sales for the distribution segment were down 1% year-over-year with pricing up 4 and volume down 5. Gas and rent organic sales were up 3% with pricing up 5% and volume down 2%. Hardgoods organic sales were down 5% with pricing up 3% and volumes down 8%.

Gas and rent represented 58.9% of distribution sales in the fourth quarter, up from 57.2% in the prior year and down from 59.7% in the third quarter. Distribution gross margin was 55.4%, an increase of 90 basis points from the prior year, reflecting the sales mix shift towards higher-margin gas and rent, as well as margin expansion on price increases, partially offset by supplier price and internal production cost increases and mix shifts within both the gases and hardgoods categories to lower margin products.

Operating income in the distribution segment declined by 1% from the prior year to $144 million and operating margin declined by 30 basis points to 12.8% as the favorable impacts from the achievement of SAP-related benefits were more than offset by the impact of lower year-over-year sales volumes.

All Other Operations reflects our CO2, dry ice, refrigerants, ammonia and nitrous oxide business units. Sales for All Other Operations were up 3% from the prior year with organic sales up 3% as well. The increase was largely driven by higher ammonia pricing and volume partially, offset by a decline in R-22 volumes, and noting that the prior year fourth quarter experienced elevated R-22 volumes as a result of the EPA's proposal at the time to accelerate the R-22 phaseout.

Gross margin for All Other Operations was 46.1%, an increase of 60 basis points over the prior year, primarily driven by less refrigerants in the mix and higher margins on refrigerants. Operating income from All Other Operations was $16 million compared to $15 million in the prior year.

Operating margin of 11.1% was up 20 basis points year-over-year, driven primarily by gross margin improvement in refrigerants, largely offset by outage-related margin pressure in our CO2 business.

Please turn to Slide 6, capital expenditures. Year-to-date CapEx represented 6.6% of sales, down from 7.5% of sales in the prior year on decreases in most categories. Rental welders spend increased by $33 million on the strong growth in our Red-D-Arc welder business. Excluding major projects, CapEx as a percentage of sales was approximately 4%.

Turning now to our outlook. Slide 7 walks through the primary elements of our fiscal 2014 first quarter and full year adjusted EPS guidance. The left-hand column on the slide shows the sequential walk for the first quarter, using fourth quarter adjusted EPS of $1.14 as the starting point. SAP benefits, net of costs, are expected to contribute $0.02.

The reduction in share count resulting from the recently completed share repurchase program net of projected share crypt is expected to contribute $0.03. We're expecting a tailwind of $0.03 from the impact of one additional selling day in the fiscal 2014 first quarter. Variable compensation reset following a below-budget year and stock-based compensation expense are expected to be -- to reduce earnings by $0.03 and $0.08, respectively. Seasonality in the businesses and our All Other Operations segment, excluding refrigerants, are expected to be a tailwind of $0.04, and refrigerants are expected to reduce earnings by $0.01. And the base business is expected to contribute between $0 and $0.06 to EPS, reflecting a contribution from the sequential growth -- reflecting a contribution to sequential growth of between 0% and 5%.

The middle column on this slide shows the year-over-year walk for the first quarter, using fiscal 2013 first quarter adjusted EPS of $1.13 as the starting point. SAP benefits net of cost are expected to contribute $0.16, which represents the difference between $0.10 of net expense in the first quarter of fiscal 2013 and an expected $0.06 of benefits net of cost in the first quarter of fiscal 2014.

The reduction in share count, net of projected share creep, is expected to contribute $0.04. Variable compensation reset is expected to be a headwind of $0.03. And strong performance in our ammonia business in the first quarter of last year will present a headwind of approximately $0.02.

Refrigerants are expected to reduce EPS by $0.04 in light of the recent developments combined with a difficult comp against the strong prior-year first quarter performance. And the base business is expected to decline by between $0.04 and $0.10, reflecting flat the low-single-digit sales growth.

In aggregate, we are estimating EPS for our first quarter to be in the range of $1.14 to $1.20, which represents year-over-year growth of 1% to 6%. The right-hand column of this slide shows the year-over-year walk for our fiscal year 2014 adjusted EPS guidance.

We're expecting SAP benefits net of cost to contribute $0.63 to year-over-year earnings growth, which represents the difference between the $0.18 of net expense in fiscal 2013 and the expected $0.45 of net benefits in fiscal 2014, which Mike noted earlier.

The reduction in share count net of projected share creep is expected to contribute $0.16. We expect tailwinds of $0.03 from the impact of 1 additional selling day in fiscal 2014 and $0.03 from acquisitions net of divestitures closed in fiscal 2013. Variable compensation reset following a below-budget year is expected to be $0.13 headwind. Refrigerants are expected to be a $0.05 to $0.10 headwind year-over-year. And on a year-over-year basis, our base business growth is expected to contribute an incremental $0.03 to $0.33, representing a 1% to 8% growth on organic sales growth in the low- to mid-single digits.

In aggregate, we expect EPS for our fiscal 2014 to be in the range of $5 to $5.35, which represents year-over-year growth of 15% to 23%.

And now I'll turn it back to Joe to begin the Q&A session.

Unknown Executive

Thanks, Bob. That concludes our prepared remarks. [Operator Instructions] The operator will now give instructions for asking the questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Ryan Merkel with William Blair.

Ryan Merkel - William Blair & Company L.L.C., Research Division

First, I wanted to ask about what you saw in April. Did that square with the flat to low single-digit organic sales guidance that you gave?

Michael L. Molinini

Yes.

Ryan Merkel - William Blair & Company L.L.C., Research Division

It did. Okay. And then why are you forecasting the base business to be down 4% to 9% in the first quarter? Because this excludes refrigerants and the variable comp, so just seems that the base business is deleveraging more than I would have thought.

Michael L. Molinini

Well, it's pretty consistent, Ryan, with what we just saw in the fourth quarter. Our base business after you take into account SAP one less selling day, declined about 8%. So on just the normal inflation of expenses, if you take 2% to 2.5% of our expense base, that's roughly $0.09 to $0.11. So on flat sales growth, that's what going to fall down to the bottom line after accounting for all the other items in the walk.

Ryan Merkel - William Blair & Company L.L.C., Research Division

Okay. And then just last question, if I can. In the refrigerants business, are you already seeing pricing and volume soft? Or another way, how do you arrive at the $0.05 to $0.10 hit? Because I thought R-22 prices were holding at pretty high levels thus far.

Michael L. Molinini

Keep in mind, the EPA announcement on the additional significant volume that was -- it only came out at the very end of March is pretty much a realtime event. But in the month of April, our R-22 prices were down about 7.5% and our volume was down over 50%.

Operator

And we'll take our next question from Laurence Alexander with Jefferies.

Jeffrey Schnell - Jefferies & Company, Inc., Research Division

This is Jeffrey Schnell for Laurence. What's driving the large organic growth rate? And which end markets are you most uncertain in?

Michael L. Molinini

Say that -- well, we have low- to mid-single digits organic sales growth, so I guess we wouldn't characterize those as strong. And clearly an element of that is related to our strategic, our SAP benefits and to pricing. That would be the first this comment.

Peter Mccausland

But we are seeing across-the-board weakness. This is Peter. And we had really nice growth in chemicals and metal fab throughout the year and that's decelerated. But it's pretty much across the board and, of course, nonres construction. Over the last 2 or 3 quarters, a lot of large jobs wound down and the new ones, there's a ton of work on the books, but they really haven't started yet. And we expect those starts to be sort of a second half event for us.

Michael L. Molinini

In terms of how it impacts us.

Jeffrey Schnell - Jefferies & Company, Inc., Research Division

And Rob, can you elaborate on the amount of cost cutting you could potentially pull if sales volumes continue to be sluggish?

Peter Mccausland

Well, as I said in the press release, we won't hesitate to take action if we have to and try to protect the low end of our guidance. I don't want to be specific, but if you look and see what we did from 2009 when the economy went south, I think we were very, very effective in reducing our expenses without damaging our ability to respond to opportunity when the economy came back.

Operator

And we'll take our next question from Robert Koort with Goldman Sachs.

Robert A. Koort - Goldman Sachs Group Inc., Research Division

I guess the extension of the training cost to other costs on SAP, was that a surprise or is there some reason that you wouldn't have seen that coming before? And how significant did you say that would be again?

Michael L. Molinini

Well, that was -- we talked about that last quarter. We told everybody last quarter that we had -- we were finishing the rollout and rather than disband the training team, because proficiency of using the system is so important to us to getting the benefits and taking -- in long-term, getting the cost out that we were going to keep the training team together for a couple of quarters to go back and do advanced training, refresher training, new employee training and things like that. And that it was going to be a couple of cents a quarter, for the next couple of quarters. So this is really just reaffirming that we are still planning to do that and it's long term. I already know it's a tremendous -- it's going to pay tremendous dividends to do this, but it does impact the near term.

Robert A. Koort - Goldman Sachs Group Inc., Research Division

Sure. And Peter, I get a sense a lot of investors might seek placing leverage on this industrial renaissance that I guess we're still late in fully catching gear, but could you sort of frame for us what it means that we start building a lot more pipelines and methanol and ammonia and ethylene plants? And how significant in the grand scheme would this be for you or is it just a small part of a broader mosaic?

Peter Mccausland

No, it would -- it's going to be huge for us when it happens. But people have heard me talk about this for quite some time and for fear of looking silly, maybe I should contain my enthusiasm. But I think what happens when they build these big energy projects and petrochemical projects and power projects, there is a huge amount of field work that takes place and we have all the products and services and the specialized equipment to support that kind of activities. And with the strategic agreements with a lot of the major E&C companies in the U.S., and they're telling us that they have big backlogs and it's going to start this year.

In addition, a lot of the components that go into these jobs like boilers and compressors and vaporizers are fabricated in factories and brought to the site after they're fabricated. And so that's really does drive our metal fab business. And it's surprising, our metal fab business has decelerated, but it's still pretty strong and we're doing well in that business in terms of acquiring new customers. So nonresidential construction and nontech industrial production are the 2 drivers of our businesses. And our business performs the best when you have them both of those things on the rise. And so that's the upside I think in our guidance is that this nonres construction, the economy stabilizes overall and the nonres construction really does finally start to get some traction.

Operator

And we'll take our next question from Tom Hayes with Thompson Research Group.

Thomas L. Hayes - Thompson Research Group, LLC

Peter, we've talked -- I kind of realized a couple of quarters that the larger customers has really been holding up better than the smaller ones. I was just wondering if that's changed recently as sales have kind of slowed down?

Peter Mccausland

No, it hasn't changed appreciably, but what we saw in the last 6 months some improvement in the small customers. Now part of that is driven by our Total Access program. But I wouldn't say it's been a major change. Mike, do you have anything to add to that?

Michael L. Molinini

No. But the -- with 25% of our business in the Strategic Accounts and you're seeing it's only 1% growth for the quarter, obviously, they have moderated as well.

Robert M. McLaughlin

But clearly, ahead of the minus 1 for the group and...

Michael L. Molinini

Right.

Thomas L. Hayes - Thompson Research Group, LLC

Okay, great. Just kind of a quick follow-up. The turnaround activity, I'd like to get your thoughts for this year as it may apply to both the Red-D-Arc and the base business.

Peter Mccausland

Well, we're looking for some pretty good activity in this first half of the year on turnaround. And hopefully the second half of year on major projects.

Michael L. Molinini

Let me -- if you go back 5 years, Red-D-Arc's business was a nice mix, 50/50 mix of new construction and repair and maintenance turnaround type construction. In the recession, that went to probably the 90, 10 repair and maintenance and turnround. Last year, Red-D-Arc had a very good year, but it was almost all repair and turnaround activity. Red-D-Arc is -- we're planning Red-D-Arc to have another good year, but again, it's primarily based on turnarounds and maintenance. Red-D-Arc will have a phenomenal year when the new construction in energy and things like that really started to takeoff.

Operator

And we'll take our next question from Mike Harrison with First Analyst.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

Just to go back to the refrigerants question, it's my understanding that R-22 prices were up pretty dramatically year-on-year to start the year. And even since the regulatory ruling came up, they're still up year-over-year. So I guess can you help me frame up that, that 7.5 [ph]...?

Robert M. McLaughlin

Absolutely. Let me frame it this way. Let me start with some background that this R-22 has been in a phase out from 2009 and it has to be total -- production has to be completed by 2020. And so in 2010, there was 100 million pounds allowed to be produced and imported; 2011, 90 million pounds; 2012, 55 million pounds. 2013, which was proposed to be 40 million pounds, the new ruling at the end of March allowed it to jump to 63 million pounds. Now many of the buyers of R-22, particularly the more sophisticated ones watched this very closely and their anticipation was that 55 million was going to 40 million and some of these folks buy very seasonally and preseason. So yes, in Q4, or our Q4, which is the first calendar quarter, there were significant sale at much higher prices in anticipation that the amount for the year was going to be reduced from 55 million to 40 million pounds. Now those folks that bought all that product have quite a bit of high-priced inventory that they now -- and many of these were resellers, who are selling it to small users and maintenance people and contractors. So they obviously have a strong interest in trying to move that product in through the marketplace at higher prices. So even the reduction that I mentioned earlier that we saw in April was still higher than it was a year ago in April. So although prices have moderated, they're still not down to the level that they were before. Now in April, the big killer was less the price than it was the volume. Because all trading basically -- until all these users sort out what they have, how much inventory they have, what the cost is, how long it's going to take them to sell it, there's not much product moving new product from people like us and the manufacturers that's moving through the system. So this is a March 25, 26 announcement. We're about a month later. This is a realtime developing -- oh, and by the way, we have very, very cold weather still in the Midwest and in the West. So all of these dynamics are related to the weather, we don't know of all these details because this is happening realtime. So but on the other hand, we know it's going to be significant. We just -- so we have to take a stab at what we think is reasonable.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

All right. And then I have a couple of questions related to the guidance. You've got 2 things in there that you have kind of point estimates for that I would think would be ranges. One of them is SAP year-over-year tailwind, if you will. I would think to some extent, those are subject to market conditions that is if demand is better, you would end up toward the higher end of the range and obviously, if it's worse, you'd end up at the lower end. And then similarly on the variable comp reset, I understand last year was a below-budget year. But again, surprised to see that, that's not a range. Doesn't that become less of a headwind year-on-year if the performance is weaker and it's more of a headwind then if the performance exceeds your expectations?

Michael L. Molinini

Yes, I think on that one, Mike, there's no question about that to the extent that we come at the low end, we are not going to have a variable comp reset for that magnitude. So maybe think of that more as the mid range SAP as we talked about that could be impacted to some degree, specifically timing, around the economy. But we made the decision to kind of just stick with the low end associated with that given where we're entering the year and our commitment to do it right and the retraining, et cetera. So there could be some flex and that those estimates are certainly not perfect but...

Operator

And we'll take our next question from David Manthey with Robert Baird.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

First off, just checking my math here in terms of SAP and what the impact should be relative to your guidance. If I'm doing the math right, you had $0.63, which would equate to something like $75 million pretax. And if I think about that in terms of the impact on the operating margin based on 5.2 billion, that would be about 150 basis points. And I guess you're coming off a base of 12.2. So just with SAP alone, it would put me at about 13.8. And based on your guidance of 12.8 to 13.2, it looks like you've got some offset there and I'm just wondering if you can talk about what that offset is.

Michael L. Molinini

Well, this would probably be a better one to work off-line because there's many components to it. Because some of that benefit is driven by, I'm not sure what Math you're doing, some of that benefit the driven by higher sales. And so that comes into play as well. So you just can't take that incremental operating income benefit and you need to bake in higher sales in order to generate that operating income contribution.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Okay. But the $75 million, that's basically the swing factor of SAP, right, from last year to this year?

Michael L. Molinini

It is.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Yes. Okay. All right, maybe we can catch that one off-line. And then second, just in terms of your assumptions about mix in hardgoods and so forth. Just wonder if you could talk about the hardgoods trends specifically and maybe if you could address the differentials between like safety products, consumables, equipment, et cetera, and you've already addressed Red-D-Arc, but can you just talk about the trends within those because it seems like there's got to be some differential of gases are holding up the way they are to have hardgoods down as much as they are consumables relative to the bigger-ticket equipment.

Robert M. McLaughlin

As we look at -- the one we look at hardgoods the most is the equipment. We have the leading indicator and we have definitely seen a significant slowing in equipment sales. And have nothing that we see on the horizon nor that any info that we get from our suppliers that would indicate that we or they expect that to turn around quickly. And I think the consumables, the safety products are much more related to actual production. You produce a widget, you're going to need some amount of that, and it's not really as related. It's not really had been as volatile as has any equipment has been. One other point that's important, there is still a very strong demand and a lot of quoting going around on related to automation equipment, which is really the big and really expensive product. And that part of equipment continues to grow, which really bodes better to support the idea of a manufacturing renaissance. But it also is indicative of how you can grow manufacturing without adding a lot of jobs because there's a lot of people looking at automating rather than hiring.

Operator

And we'll take our next question from Mike Sisson with KeyBanc.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Peter, when you think about acquisitions in this environment, it slowed over the last couple of quarters. It's an area that is a good way for you guys to grow. So when you think about the environment going forward, what do you think could be a realistic outlook for acquisitions? And do you see any life as the year unfolds?

Peter Mccausland

Yes, good question. I'm sticking to story which is our plug number of 150 a year and I think we've done -- we've averaged that or even better over the years. It continues though to be slow because you've got understand that these independent distributors still are back to even to pre-2009 volumes. And so I think they know that these are good businesses with good steady cash flow that when the economy turns down, their working capital strengths, they can cut their expenses, they have a fair amount of variable expenses. And so they tend to be holding on. I can't say that we have a renewed effort to buy the very best distributors in the business. And we have -- we're in dialogue with quite a few of them and we hope to have a good year on acquisitions. But I can't predict it. We're also looking for alliances with other companies that aren't necessarily acquisitions, but where we might form partnerships that leverage our platform and the other companies platform and generate sales. So it's not just acquisitions that we're looking at. I do think with half of the market, which is a $13 billion market, half of the market in the hands of independents just gets in terms of the amount of regulation and the cost of insurance and litigation and everything else, it's hard for a small company to operate safely and in compliance. Airgas has a lot of resources dedicated to those in those areas. It's hard for small company to match that. And also with large companies with multiple facilities looking to consolidate vendors across the country. It gets harder for the small customers. So I mean the small distributors. So I think the consolidation trend continues and this pause is more about waiting for the economy to get better and to sell off higher numbers than anything else.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Okay, great. And then looks like pricing has been a positive component of your organic sales growth for the last couple of quarters. The price increase of that seem to be working. Can you give us a feel for how much pricing is there for the rest of '14? And are you planning any more increases going forward?

Peter Mccausland

Well, if you look at our history, we've increased prices every year, I think, but we don't preannounce our price increases. So I don't want say anything regarding that. Mike, you might have some color on the pricing environment?

Michael L. Molinini

Well, as we've said in the past, the SAP data we can now have access to really gives us the ability to be much more precise and scientific as to how we price. And it's a key part of our SAP benefit. But at the same time, it needs to be done in conjunction with our normal inflationary increases, which we do from time to time. So last year, we did -- we had an increase, and I'm not sure exactly when it was, but we had an increase in about half of our company did it using the SAP-driven strategic pricing approach that we're using and half did it the old-fashioned way. And I suspect that this year, whenever we decide to do what we're going to do, 100% of those regions will be doing it the right way. But rest assured, it's a material piece of realizing our SAP benefits.

Operator

And we'll take our last question from Holden Lewis with BB&T.

Holden Lewis - BB&T Capital Markets, Research Division

Just make me try to understand sort of the interest expense block that you guys are kind of talking about. You're likely to have the next couple of quarters interest expense at the level that you're seeing in Q4. And then they should drop down probably about $4 million per quarter from there. Is that right?

Peter Mccausland

It will certainly drop down and depending upon what we do relative to the 7 and 8 notes that are callable in October. But depending what happens there, we could see a meaningful drop in our interest expense.

Holden Lewis - BB&T Capital Markets, Research Division

Okay. And then I'm also trying to get a sense of just how the quarter plays out because if you -- or how the year plays out by quarter? And I ask because you think your Q1 number and get to your guidance. It looks like you're looking for some pretty significant ramp as the year goes on in the quarterly numbers, perhaps sort of out of the seasonal norm, but when I look at kind of how you're walking it looks like the SAP, I mean, $0.16 swing in Q1, it looks like you're sort of running that straight through across the year. Yes, share count, obviously, again, looks like it's going give you the same impact off the year. I'm just trying a get a feeling for if it's not SAP, then things like that, it seems like we have a very aggressive ramp throughout the year to get Q1 to full year number. Can you provide some color on that?

Peter Mccausland

Well, the SAP definitely ramps up significantly as you move through the year and is heavily weighted to the back half. So the $0.16 obviously, that's going to depend on what the book end was in the prior year. So we had our heavy expenses -- heavy equip expense quarters in the first half of last year. So that's providing a lot of the year-over-year tailwind. As we get to the back half of fiscal '13, we were -- we went from $0.09 and $0.10 to $0.03 and a positive 4. So that's influencing that. So there's quite a significant ramp up as one would expect as we move through the year in SAP. And clearly, we're are expecting we're coming from a rather slow sales growth environment that we are hoping will improve as we move through the year.

Robert M. McLaughlin

And without saying when we will increase prices. Certainly, pricing will have a more significant impact in the last quarter than it will in the first quarter.

Michael L. Molinini

As well interest expense what you pointed out.

Holden Lewis - BB&T Capital Markets, Research Division

Okay. I mean, I'm just looking at the numbers. You're expecting a $0.16 year-over-year benefit in Q1 from SAPs. $0.64 for the year, that's basically $0.16 per quarter and it's not like you had a big ramp through the year in 2013. So I mean in order to have that back-end loaded ramp, I don't see SAP doing a lot of it. So is it really hinged on the macro and pricing?

Michael L. Molinini

Well, if you look at -- I would argue, we did have quite a bit of ramp. We went from a $0.10 hit in the first quarter of the year or just completed it to a $0.04 benefit. That's a $0.14 swing.

Robert M. McLaughlin

Are you saying this is for our guidance?

Michael L. Molinini

No, I know. I understand that. But my point is, you need to really look carefully at how it marched through this year, Holden.

Robert M. McLaughlin

And pricing is a significant piece of the SAP benefit story.

Holden Lewis - BB&T Capital Markets, Research Division

Okay. And then just last thing, can you just walk through sort of the variable comp and I know you sort of gave the number and suggested there could be range, but I mean sort of go through what exactly is that, how did it get created this year and that sort of thing?

Michael L. Molinini

Well, we were below -- we had a below-budget year obviously. We came into your as Peter highlighted. We were 7% below our original guidance, low end of our guidance. So that clearly did not result in a full payout of bonuses. And as we -- if we assume that we hit our targets, then that's going to create an increase of about $16 million or $0.13.

Michael L. Molinini

Which is 2% of total comp.

Michael L. Molinini

The swing is, Peter.

Robert M. McLaughlin

Exactly the same thing that happened in 2009. It was a $0.10, it was a $0.10 walk when we went from fiscal '10 to a fiscal '11.

Peter Mccausland

Yes, it's a downside of a highly leveraged comp system and we benefit -- our shareholders benefit from it when the economy turns down, but you've got to climb the hill on the other side.

Operator

And that does conclude today's question-and-answer session. At this time, I would like to turn the call over to Mr. Joe Marcelli for any closing or additional remarks.

Unknown Executive

Again, we thank you for joining us all today. And I'll be available all day for any follow-up questions. Thank you.

Operator

And that does conclude today's conference. We thank you for your participation.

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