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Airgas, Inc. (NYSE:ARG)

Q1 2014 Earnings Call

July 25, 2013 10:00 am ET

Executives

J. Barrett Strzelec - Director of Investor Relations

Peter McCausland - Founder, Executive Chairman, Co-Principal Executive Officer, Chairman of Management Committee and Member of Executive Committee

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

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

Analysts

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

David L. Begleiter - Deutsche Bank AG, Research Division

Thomas L. Hayes - Thompson Research Group, LLC

Christopher Perrella - BofA Merrill Lynch, Research Division

Laurence Alexander - Jefferies LLC, Research Division

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

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

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

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

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Mark R. Gulley - BGC Partners, Inc., Research Division

Vincent Andrews - Morgan Stanley, Research Division

Operator

Good morning, everyone, and welcome to the Airgas First Quarter 2014 Earnings Conference Call. Today's call is being recorded at the request of Airgas. [Operator Instructions] For opening remarks and introductions, I will now turn the call over to Director of Investor Relations, Mr. Barry Strzelec. Please go ahead, sir.

J. Barrett Strzelec

Thanks, Lynette. Good morning, and thank you for attending our first 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 press 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 the Investor Relations shortcut at the bottom of the screen and go to the Earnings Calls and Events page.

During the course of our presentation, we will make reference to certain non-GAAP financial measures, and unless otherwise noted, metrics referred to in today's discussion will be adjusted for the unusual items identified in our earnings materials. Reconciliations to the most comparable GAAP measures can be found in our earnings release and in the slide presentation.

This teleconference will contain forward-looking statements based on current expectations regarding important risk factors, which are identified in the earnings release and in our slide presentation. Actual results may differ materially from these statements, so we ask that you please note our Safe Harbor language.

We'll take questions after concluding our prepared remarks as time permits. 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

Thanks, Barry. Good morning, and thanks to everyone for joining us. We'll start with Slide 2, and I'd like to begin by giving you an overall view of our quarterly results and our outlook for the rest of the year, the fiscal year.

On the whole, I'm pleased with our performance this quarter in a challenging economic environment. Our earnings were $1.14 per share, representing 1% growth over the prior year's adjusted EPS. And while our earnings were at the lower end of our guidance range, they included a $0.03 greater-than-expected negative impact from refrigerants, which Mike will cover in detail shortly. Absent the incremental refrigerants impact, our results for the quarter were in line with the midpoint of our guidance range.

Overall, organic sales growth was flat as Distribution segment organic sales growth of 1% was offset by the impact of lower refrigerant sales on our All Other Operations segment.

We continue to achieve SAP-related benefits net of implementation costs as planned. Strong cash flow continues to be a hallmark of our business model. Free cash flow increased 31% year-over-year to $100 million in the quarter, and adjusted cash flow from operations increased 15% year-over-year to $178 million in the quarter.

With regard to our earnings outlook, near-term uncertainty persists for our customers, and accordingly, we're revising our full year guidance from a range of $5 to $5.35, to a range of $5 to $5.15, reflecting 15% to 18% growth year-over-year.

The midpoint of our fiscal 2014 guidance assumes modest sequential improvement in daily sales volumes as the year progresses, and low to mid single-digit, year-over-year organic sales growth rates for the remainder of the year, in part due to easing year-over-year comparisons. The low end of our guidance assumes flat volume from here on out.

Given the challenging and unpredictable nature of the refrigerants market, including its impact on our first quarter results, our guidance also assumes an estimated $0.12 to $0.15 year-over-year negative impact related to R-22 pricing and volume, following the EPA's March ruling versus our previous estimate of $0.05 to $0.10.

Consistent with our long-standing target, we expect to achieve a minimum of $75 million in run-rate operating income benefits related to the SAP initiative by the end of calendar year 2013. Our EPS guidance assumes a contribution from SAP benefits, net of expenses, of approximately $0.47 per diluted share in fiscal 2014.

As we look forward, we believe Airgas is well positioned for growth and that our strategic initiatives such as sales and marketing alignment with our customer segments; SAP and the associated benefits; Total Access and eBusiness; as well as our renewed focus on day-to-day selling and customer service, following a long and distracting, and ultimately, very successful, I might add, SAP implementation, all will enhance our future earnings power.

We also continue to be optimistic about the long-term prospects for the U.S. manufacturing and energy industries, as well as nonresidential construction and our ability to leverage our unique value proposition and unrivaled platform to capitalize on the opportunities that lie ahead.

Regarding acquisitions, we are still optimistic that we will hit our standard target of $150 million of sales acquired during fiscal '14.

Now I'll hand it over to Mike to discuss the business and also the refrigerant situation.

Michael L. Molinini

Thank you, Peter. As Peter noted, our earnings for the quarter included a $0.03 greater-than-expected year-over-year negative impact from refrigerants than we had estimated. Absent this incremental impact, our earnings were in line with the midpoint of the guidance range. I'll come back to refrigerants momentarily, but I'd -- first, I'd like to recap our performance as it pertains to key initiatives in our core business. Please turn to Slide 3.

Our sales and marketing strategy, which is 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 line, services, locations and represents approximately 25% of sales.

In our first quarter, Strategic Accounts business was up 5% from the prior year, with new account signings and positive pricing driving much of the improvement. Strategic products continue to be an important part of our value proposition to customers, and from a product standpoint, have a strong growth profile due to their use in favorable customer segments, application development, increasing environmental regulation, strong cross-sell opportunities or a combination of these factors.

In the first quarter, sales of strategic products increased 3% over the prior year with the specialty gas category showing the most improvement on increased core spec gas volumes. Sequentially, CO2 and dry ice sales increased 10% on normal seasonality of the business. Our Radnor private-label hardgood sales were flat year-over-year, reflecting outperformance relative to total hardgoods organic sales.

Moving on to SAP. As you recall, we completed the implementation of a new system at our last regional Distribution business in March, marking a major milestone in the evolution of Airgas. All of our Distribution businesses are successfully 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 a 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 a full complement of Total Access telesales representatives trained and deployed across all our regional 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. Most of our regions are leveraging the capabilities of SAP to take a more strategic approach to product pricing and discount management, and efforts in that area continue to bear fruit.

As Peter said, we continue to expect to achieve a minimum of $75 million in run-rate operating income benefits related to the SAP initiative by the end of calendar year 2013, consistent with our long-standing target. And our updated EPS guidance assumes a contribution from SAP benefits, net of expenses, of $0.47 in fiscal 2014.

Our experience with SAP thus far 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.

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.

Though near-term economic uncertainty persists, the heavy lifting associated with our SAP implementation is behind us, and we are exiting the related cloud of distraction. We're focused on gas' growth and tweaking our organizational structure, and I think all of our associates are looking forward to focusing on what they do best, which is servicing our more than 1 million customers.

Now I'd like to give you a brief update on recent developments in the R-22 refrigerant market and their impact on Airgas. But first, let me level set everyone by revisiting some of the background on this issue, which we highlighted on our last earnings calls and on the webcast in June.

The U.S. Environmental Protection Agency has been progressively reducing the allowable production and import of volumes of R-22 since 2003, with the goal of reducing allowable production and import volumes relative to 2003 levels by 90% by 2015, and 100% by 2020.

R-22 is one of the most commonly used refrigerant gases in commercial and residential air-conditioning systems, which will continue to be operational for many years to come, requiring R-22 for initial charging and for replenishment when they're serviced. As production and import of newly produced R-22 are phased out by the EPA, the gap between demand and supply is expected to be filled by reclaimed and recycled R-22, and Airgas is well positioned as a leading reclaimer, recycler and distributor of R-22.

In January of 2012, the EPA proposed to accelerate the phase-out of R-22, and shortly thereafter, our sales volumes and pricing of R-22 increased dramatically. Our refrigerants business experienced significantly enhanced profitability beginning in the fourth quarter of fiscal 2012 and into fiscal 2013.

In late March 2013, however, the EPA reversed course on its proposal, issuing a ruling allowing for an increase in production of R-22 in calendar year 2013, rather than reaffirming the further reduction that much of the industry had been expecting based on the EPA's proposal a year earlier. It was not clear to what's the time of the EPA's ruling, or even at the time of our last earnings call, how market pricing and volumes would impact our results for the first quarter and the fiscal year, so we gave our best estimate based on limited visibility.

R-22 is a gas that is typically inventoried by a good portion of our customer base in large quantities during the winter before real-time demand drives pricing upward in the warmer spring and summer months. Our expectation was that, as the first quarter progressed and weather warmed up, we would see real-time demand for products start to pull inventories off the shelf. Ultimately, however, the unusually cool spring weather across much of the U.S. further pressured sales volumes. Selling prices, although still higher than last year, were lower than expected. The combination of price and volume pressure resulted in a negative $0.07 year-over-year impact on our business in the first quarter compared to the negative $0.04 year-over-year impact we had estimated in our original guidance. And based on what we have experienced so far, we are now estimating fiscal 2014 year-over-year negative impact to be between $0.12 and $0.15 per diluted share.

Currently, the EPA plans to reduce the allowable production in import levels -- volumes in calendar 2014, and compliance with the Montréal Protocol almost certainly requires a more significant step-down in R-22 production by calendar year 2015.

Based on current information, we believe the earnings drag will prove to be temporary in nature with much, if not all, of the year-over-year impact to our business felt in fiscal 2014. However, as we've said before, this is a challenging and unpredictable situation and we'll continue to keep you informed as it develops.

In closing, I would say there's a certain amount of volatility in refrigerants' pricing due to government actions, but we still -- we have built a very strong business that increasingly is focused on end-user demand by selling through our regional distribution businesses, and we expect our broad product offering and position as a leader in refrigerant services and reclamation to be very strong for years to come.

Thank you, and now Bob will give you our financial review of the quarter and provide updated guidance for the year.

Robert M. McLaughlin

Thank you, Mike. Please turn to Slide 4 for a review of our consolidated results for the first quarter. Sales increased 2% year-over-year to $1.28 billion, reflecting a 2% contribution from acquisitions and flat organic sales growth, comprised of a 2% increase in gas and rent, and a 3% decline in hardgoods. In aggregate, volumes were down 3% and pricing was up 3%. On a sequential basis, first quarter sales were up 1% compared to the fourth quarter.

Gas and rent represented approximately 63% of our sales mix in the quarter, up from approximately 62% in the prior year and unchanged from the fourth quarter. Gross margin for the quarter was up -- was 55%, an increase of 60 basis points from the prior year, reflecting the sales mix shift towards gas and rent, as well as margin expansion on price increases, partially offset by supplier price increases and internal production costs and mixed shifts, both within gases and hardgoods, the categories of lower margin products. Also impacting it was a significant margin pressure on our refrigerant businesses.

Operating income for the quarter was $157 million, down 1% from the prior year's adjusted operating income. And operating margin was 12.2%, a 30 basis decline from last year's adjusted operating margin, reflecting the significant decline in operating margins in our refrigerants business, as well as overall margin pressure from low organic sales growth, partially offset by the favorable impact of the increase in SAP-related benefits, net of costs.

EPS of $1.14 increased 1% over the prior year's adjusted EPS, and the current quarter included $0.04 of SAP implementation costs and depreciation expense, which was $0.06 lower than the prior-year quarter. This year-over-year benefit was fully offset by the lower earnings in our refrigerants business.

There were approximately 74.5 million weighted average diluted shares outstanding for the quarter, down 5% year-over-year, driven by the share repurchase program that was completed in fiscal 2013.

Return on capital, which is a trailing 4-quarter calculation, was 12.1%, down 50 basis points year-over-year, reflecting low operating income growth due to the challenging economic environment and the operating income declines in our refrigerants business.

Free cash flow for the quarter was $100 million, up 31% over the prior year, and adjusted cash from operations was $178 million, up 15% over the prior year. The increase in cash flows was driven by the lower required investment in working capital in the current quarter compared to the prior year quarter.

Total debt increased by approximately $433 million year-over-year, the $2.5 billion at June 30, driven primarily by the fiscal 2013 share repurchase program and acquisitions, partially offset by strong operating cash flows during the past 12 months.

Our fixed load debt ratio at the end of June was approximately 78% fixed and our debt-to-EBITDA ratio was 2.8%, 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 the consolidated adjusted operating results, have not been allocated to our business segments.

Distribution sales in the quarter were up 3%, versus the prior year, to $1.1 billion. Organic sales for the Distribution segment were up 1%, with pricing up 3%, and volume down 2%. Distribution gas and rent organic sales were up 4%, with pricing up 4%, and volumes flat year-over-year.

Distribution hardgoods organic sales were down 3%, with pricing up 2%, and volumes down 5%. Gas and rent represented 58.9% of Distribution sales in the first quarter, up from 57.4% in the prior year and flat compared to the fourth quarter.

Distribution gross margin was 55.7%, an increase of 110 basis points in the prior year, reflecting the sales mix shift towards gas and rent, as well as margin expansion on price increases, partially offset by supplier price increase and internal production cost increases and mixed shifts within both gases and hardgoods categories to lower margin products.

Operating expenses in the Distribution segment increased 5.6%, with acquisitions and expense increases associated with the expansion of our telesales platform, our strategic pricing initiative and other strategic growth initiatives, accounting for more than 2% of that increase. The benefit of lower year-over-year SAP implementation costs do not flow through the Distribution segment, but are reflected in the consolidated results. Operating income in the Distribution segment increased 2% year-over-year to $141 million, while operating margin declined 10 basis points to 12.4%.

The year-over-year decline in operating margin reflects margin pressure from low organic sales growth, partially offset by the favorable impact and the increase in SAP benefits. On a sequential basis, Distribution operating margin declined by 40 basis points, driven by stock-based compensation expense, which is front-end loaded in our fiscal year due to the retiree eligible vesting provision. Incremental stock-based comp reduced operating margin on a sequential basis by 80 basis points.

All Other Operations reflects our CO2, dry ice, refrigerants, ammonia and nitrous oxide businesses. Sales from All Other Operations were down 4% from the prior year, with organic sales down 5%, as sales increases in our CO2, dry ice and ammonia businesses were more than offset by the decline in sales in our refrigerants business. Sequentially, sales in All Other Operations segments increased by 2% as the normal seasonality in our CO2 and dry ice businesses more than offset the decline in refrigerant sales from our fourth quarter. Gross margin for All Other Operations was 46.4%, a decrease of 330 basis points from the prior year, primarily driven by margin compression in our refrigerants business.

Sequentially, gross margin expanded by 30 basis points, primarily due to higher margins in our ammonia business, offset by lower margins in refrigerants.

Operating income for All Operations was $18 million, a decrease of approximately $11 million, compared to the prior year, and operating margin of 12.4% was down 620 basis points year-over-year, driven primarily by margin pressure in refrigerants, as well as margin pressure related to outages in our CO2 and dry ice businesses.

Please turn to Slide 6, capital expenditures. First quarter CapEx represented 6.4% of sales, consistent with the prior year. Excluding major projects, CapEx, as a percentage of sales, was approximately 4%.

Now I'd like to discuss our guidance for the second quarter and full fiscal year.

Slide 7 presents a walk through the primary elements of our second quarter guidance using fourth -- first quarter EPS of $1.14 and fiscal 2013 second quarter adjusted EPS of $1.05, respectively, as the starting points. The left-hand column on this slide shows the sequential walk from the second quarter using the first quarter EPS of $1.14 as the starting point. SAP benefits, net of costs, are expected to contribute $0.05. Variable compensation expense reset is expected to reduce earnings by $0.02, and the base business is expected to contribute between $0.06 and $0.10 to EPS, reflecting sequential growth in EPS in the base business between 5% and 9%. In aggregate, we are estimating EPS for the second quarter to be up 8% to 11% on a sequential basis.

The middle column on this slide shows the year-over-year walk for the second quarter using 2013 second quarter adjusted EPS of $1.05 as the starting point. SAP benefits, net of costs, are expected to contribute $0.20, which represents the difference between $0.09 of net expense in the second quarter of fiscal 2013 and an expected $0.11 benefit net of costs in the second quarter of fiscal '14.

The reduction in share count, net of projected share creep and the related interest costs to fund the 2013 share repurchases is expected to contribute $0.04. We expect the $0.03 contribution from 1 additional selling day in fiscal 2014 second quarter, compared to the prior year.

Variable compensation reset is expected to be a headwind of $0.03, and refrigerants are expected to reduce EPS by $0.03 in light of the EPA ruling and challenging market conditions. And the base businesses is expected to decline by $0.03 at the low end and improve by $0.01 at the high end.

In aggregate, we are estimating EPS for our second quarter to be in the range of $1.23 to $1.27, representing year-over-year growth of 17% to 21% and reflecting organic sales growth in the low to mid single digits driven by pricing. And it also reflects cost containment actions that we are taking.

The right hand of this slide shows the year-over-year walk for our updated fiscal 2014 EPS guidance. We are expecting SAP benefits net of cost to contribute $0.65 to the year-over-year earnings growth, which represents the difference between $0.18 of net expense in fiscal 2013 and the expected $0.47 of net benefits in fiscal 2014. The reduction in share count, net of projected share creep and the related interest cost to fund the fiscal 2013 repurchases is expected to contribute $0.16. We expect tailwinds of $0.03 from the impact of 1 additional selling day in fiscal 2014 and $0.02 from acquisitions, net of divestitures closed in fiscal 2013.

Variable compensation reset following a below-budget year is expected to be a headwind of $0.08 at the low end of our guidance and $0.10 at the high end. Refrigerants are now expected to be a $0.12 to $0.15 headwind year-over-year.

And on a year-over-year basis, our base businesses is expected to contribute an incremental $0.02 to $0.16, representing flat to 4% improvement in -- representing 4 -- 0 to 4% growth.

In aggregate, we expect EPS for fiscal 2014 to be in the range of $5 to $5.15, which represents year-over-year growth of 15% to 18%, and reflects slight sequential improvement in daily sales volumes at the midpoint, organic sales for the full year in the low- to mid-single digits, as well as cost containment actions.

I'll now turn it back to Barry to begin our Q&A.

J. Barrett Strzelec

Thanks, Bob. That concludes our prepared remarks. [Operator Instructions] We'll now give instructions for asking questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take your first question from Robert Koort from Goldman Sachs.

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

Peter, I was wondering if you could give us some sense of putting the current cycle your business has been going through in a historical context. I just -- I guess, I've been hoping to see this industrial revolution, the renaissance in the U.S. leading to a little bit better volume growth relative to some of these negative gas comps. So is there a precedent for this happening? And how do you see sort of the lift-off from here in volumes looking forward?

Peter McCausland

Well, I've been an optimist when it comes to the U.S. economy, energy, manufacturing. And this slow patch, I think, is related to a lot of different things, especially slowness in Asia and Latin America and Europe mining and commodity weakness. But we're seeing our customers invest in a lot of automation. We know that there are a tremendous number of new projects on the books, B of A calls it the $100 billion wave of chemical and fertilizer investments that's coming. We're starting to see the construction market show us some new starts, and there are a lot of big ones on the books, so we think that's beginning to happen, but it's nowhere near lift-off yet. And I think -- you know the reasons why I think the U.S. is in a good position. Energy independence is certainly one of the drivers, and the energy industry is doing well. We have a glut of gas right now because in some areas, you can't get it out of the ground. In other areas, we're waiting for conversions of power plants and for other applications to use the gas. And in terms of where we are in the normal cycle, it's a little bit confusing for us. The normal metal fab cycle starts with equipment and ends with gas growth. The equipment is a capital item, and that usually is the beginning of sort of the metal fab recovery, and gas growth tends to be strongest at the end of the cycle because you have the best pricing at the end of the cycle and you have full production, so in terms of the volume driver. It's a little different in terms of what we're seeing right now because some parts of metal fab seemed to have peaked, like mining equipment, but there's other parts like tank manufacturing and transportation equipment that are still going strong in most categories, not all categories, and there's a lot of investment in automation. In terms of volume growth in gases, there's clearly weaknesses in some industries that are driving that, but other industries seem to be expanding, and it's a little bit murky, I would say, overall, but I think there are a lot of positive signs in the economy out there, and it might be another few quarters before we start seeing a positive impact on our numbers. But I'm pretty optimistic.

Operator

We'll move next to David Begleiter from Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

Peter, just on your guidance, x the refrigerants reduction, what was the biggest change, versus your views, versus 3 months ago, to lower the top end of range?

Peter McCausland

We don't want to miss, no. I guess, we've seen this persistent softness in some of our customer segments. And as I said, it's spotty. And construction, some of these construction jobs that we've all been talking about haven't broken ground yet, and our customers are telling us that the big surge is going to come in a couple of quarters. And although we're seeing some projects break loose now, not all of them, and I think overall, we're cautious in the near term, optimistic in the longer term. One thing I didn't mention in relation to Bob's question is that we're seeing pickups in some of the areas that were really hard hit by the last big recession and credit crunch in health care and the sequester, health care and research and things like that. So those kind of noncyclical parts of the economy seem to be recovering now, and that's another reason for my optimism.

Robert M. McLaughlin

David, this is Bob. I'll add on to that and also in addition to maybe a little bit more cautious view on volume in the back half of the year, a good chunk of it, half of it is related to where we came in at the first quarter, at the low end of our guidance, and obviously, also have a more pessimistic view of refrigerants, which we talked about a lot in the call. So those 2 elements were more than half of the drop from the top and then slightly muted cautious outlook on volume growth in the back half than when we originally -- in part, influenced by where we're at through the first quarter.

David L. Begleiter - Deutsche Bank AG, Research Division

That's very helpful. And just last thing, Peter, one of your competitors and suppliers mentioned some margin pricing pressure in the U.S. Are you seeing any evidence of that in your ASU business?

Peter McCausland

There's always good competition with the bigger customers. But overall, we're doing pretty well with our pricing, and I'd say the economy is certainly strong enough to support pricing right now.

Operator

Tom Hayes from Thompson Research Group has your next question.

Thomas L. Hayes - Thompson Research Group, LLC

First question. Maybe, Bob, you had mentioned as far as the change in the guidance, you also had some new cost containment actions. Could you just provide a little bit detail on what you guys are working on?

Robert M. McLaughlin

Well, we're very cautious in terms of adding a hiring freeze with respect to running the business. We have a fair amount of costs that have been tied up in overtime, temp help and travel, in part related to a lot of the initiatives that we've done but beyond that, so we have quite a large basket of expenses that we're aggressively tacking to control that. And then as each month goes by, we're looking at other opportunities.

Thomas L. Hayes - Thompson Research Group, LLC

Okay. And then on the SAP side, do you guys still have the training teams in the field and your expectations for how long they'll be there? And I guess, is that driving some of your confidence in taking up the bottom end of the expected SAP benefits?

Robert M. McLaughlin

I don't know if that's changed much in our view relative to that. There's an element, you see the expense has dropped fairly significantly in the quarter we just reported, so we certainly have scaled back. We're continued to have additional costs that we'll go through at least the next quarter. And so that's an element of it, and then we have a little bit more cautious optimism around the low level of the pricing.

Michael L. Molinini

I want to add something to that. Before we ever did SAP, we had IT training for our employees. We've always done that. Every company does that. So what's happening here over time is the blending -- what was historically known as SAP training is kind of merging what with -- it's shrinking, but it's going to continue to migrate itself to replace the kind of training we used to do before we started SAP. So I don't want to make it sound like we're never going to do any IT or computer training of new employees and things like that in the field, but it's going to get down to a level that's sufficiently small, pretty soon here. I think we're near the end of what would be the major training, retraining effort of SAP and will then morph itself into an ongoing new employee training programs.

Thomas L. Hayes - Thompson Research Group, LLC

Okay. And just one more, if I could real quick. Did you guys close any acquisitions in the quarter?

Peter McCausland

Small one.

Operator

Up next is Kevin McCarthy from Bank of America Merrill Lynch.

Christopher Perrella - BofA Merrill Lynch, Research Division

This is Chris Perrella on the line for Kevin. I was wondering if you could give a little more color around the cost in the Total Access program and perhaps its contribution to sales growth within strategic products for the quarter.

Michael L. Molinini

Well, first of all, in order to grow the sales, you have to hire and train and deploy the people. And so in our cost, we have well over 100-plus new employees that have been hired, trained and deployed, who are not yet nearly loaded to what the sales level that they're going to generate. So that's a drag on expense right now. But it is clearly contributing to sales. Now most of what they sell is not strategic products. It's mostly the core. I mean, there's safety, and we haven't really separated the growth which overall has been very encouraging, but I'm not sure we've ever separated it into the 3 separate components yet for gases, welding, safety and things like that. But it is clearly a contributor, a material contributor, to our year-over-year SAP benefit improvements.

Christopher Perrella - BofA Merrill Lynch, Research Division

And a follow-up question on the ASU utilization, where did that fall out for the quarter?

Michael L. Molinini

In the low 80s.

Christopher Perrella - BofA Merrill Lynch, Research Division

All right. Still on the low 80s?

Michael L. Molinini

Yes.

Operator

Laurence Alexander from Jefferies, your line is open.

Laurence Alexander - Jefferies LLC, Research Division

Just 2 quick ones. Given the more muddled external environment, are you seeing any shift in the willingness of smaller competitors to enter into a transaction with you? And secondly, on cost cutting, can you give an update on, aside from the SAP initiative, how much scope you might have to trim costs without impacting your growth rate on 4 to 6 quarters out?

Peter McCausland

Okay. Regarding acquisitions, I would say that most independents are still pretty damn optimistic about the U.S. economy, and therefore -- and still aren't back to even in terms of volume that they enjoyed prerecession. So there is a reluctance there, I think. However, there are some very good distributors that are considering sale for reasons other than the economy, retirement and lifestyle changes and things like that. So we're trying to focus on the very best distributors in the country right now, and we're optimistic that we're going to get our share. Prices are higher than they were a few years ago, and I think that's partly reflective of the industry's view that we're sort of in the downside of the cycle in terms of volume and that things will get better in the future. In terms of cost, we turned cautious about 9 months ago when we saw softness start to develop and we saw events in Asia and Europe and South America begin to have an impact on some of our customers. And we just became -- we just tightened the reins when it came to expenses and to capital expenditures, and I think we've done a good job. We haven't had any rifts or anything like that, and we're hiring people for key positions, but overall probably keeping employment flat right now and certainly not cutting any key programs.

Operator

Up next is Ryan Merkel from William Blair.

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

I was hoping to get a little more information on refrigerants. Just wondering what the volume and price mix was in the quarter? And then to get to the $0.12 to $0.15 hit, what are you assuming for sales and margin for the full year? And if you don't want to be too specific, maybe you could give ranges?

Michael L. Molinini

I got to think how I want to answer that.

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

Or maybe just give the volumes, Mike, if you don't want to give the rest of it.

Michael L. Molinini

Bob, you got the -- what's the impact, the volume impact?

Robert M. McLaughlin

Well, we were down 25% year-over-year in sales.

Michael L. Molinini

Yes. I think the -- refrigerants is a very seasonal business. And when we look at the year-over-year and we look at the impact to the first quarter and we look at the way the business is trending now, the likelihood that the $0.15 is about as bad as it could be is very high.

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

Okay, and that kind of led to my second question which was, there was a $0.07 hit this quarter from refrigerants going to $0.03 next quarter. So what kind of explains that?

Robert M. McLaughlin

Huge, huge first quarter last year, Ryan. If you look at our Other Operations segments, you'll get some sense as to the trend, but it was -- the profit in the first quarter was triple what it was in the second quarter of last year.

Michael L. Molinini

Like I said, it was very seasonal. Our fiscal first and fiscal fourth quarters are really the 2 biggest quarters for refrigerants. And I think we feel that with the $0.12 to $0.15 drag, we're in much better position to bracket that now than we were on the last call.

Operator

Up next is Mike Sison from KeyBanc Capital Markets.

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

In terms of refrigerants, is there any need to restructure, reduce, sort of maybe optimize the business, given demand conditions that you're seeing?

Michael L. Molinini

Obviously, there are things you can do, which we are doing, which reduce expenses but don't rip the business apart. And seeing as how this is a -- what we expect to be primarily a 1-year phenomenon with the outlook -- I mean, the 2012 and 2013 results and the improvement that we were making has -- we are absolutely sure that our thesis as to what this business is going to generate is very sound and very solid. So controlling expenses, tightening your belt, not replacing positions you don't need to replace for right now and all those things are absolutely in play right now, but restructuring in any material way for a 1-year event, we have not pursued that.

Peter McCausland

Overall, we really like this business. It's got a very broad product and service offering. We're a leader in reclamation, as Mike pointed out. The sales mix is shifting from wholesale to end-user sales through our regional companies. Our regional company's sales force makes this part of their offering, which makes the broadest product and service offering in the industry. And it's a very nice business. We've brought some nice technology to it, and we're very happy with it, even though it's been very cyclical lately, mostly as a result of the government changing course.

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

Got it. And then one quick one on acquisitions. I know it's still early in the year. Do you think it's still possible to hit your annual goals for acquisitions as the year unfolds?

Peter McCausland

I think we will hit the goal this year. I'm optimistic, but I can't guarantee it. We've got a pretty good pipeline, and it's early in the year. And as I said, we've decided to focus on the very best distributors out there, and I think we'll get our share.

Operator

Up next is David Manthey from Robert W. Baird.

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

First off, same on the refrigerants topic here, the downside that you're seeing this year. As you think about how the EPA is going to continue to tighten going forward, is the $0.12 to $0.15 -- I realize some of that is volume that's sort of gone forever, but if we baseline starting this year and we look to next year and the following year assuming that tightening schedule, is that the type of magnitude we should expect that you could realistically gain annually going forward, as we move toward the EPA gates?

Michael L. Molinini

Yes. And Barry, for anybody that's really interested in a lot more detail on how many pounds are allowed to be produced and what the schedule for reduction, he's got a lot of that data, which we won't go through now. And it paints a very clear picture on the future. And I think the piece to keep in mind is that we've had significant improvements over the last several years in refrigerants, and it's very related to the supply/demand curve. As supply shrinks, demand is not declining. And with investment in -- I mean, they're still shipping dry Refrigerant 22 systems for home air-conditioning systems and commercial systems. So the tail on this, the demand tail on this is very, very long. And as production and importation declines, and there's a specific schedule for the Montréal Protocol here, reversing this trend, we expect to be rather quickly once you run into the supply/demand curves and supply is tight.

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

Okay. And I'll go the other way on this and ask you, does this reset that we've seen here in the R-22 volumes and pricing, does that create any acquisition opportunities that may not have existed, maybe some smaller players getting in trouble or something that you could take advantage of?

Michael L. Molinini

Anything's possible. We have a really good infrastructure, and we don't really need an acquisition to execute, I mean, our strategies. But we're always looking for opportunities to strengthen our position.

Operator

Your next question will come from Mike Harrison from First Analysis.

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

Peter, I was hoping you could talk a little bit about what you're seeing in the pricing environment right now. Obviously, you guys just made a recent announcement. How would you expect realization on that announcement versus maybe in a stronger demand period or in a period where you didn't have some of the potential benefits from SAP on the strategic pricing side?

Peter McCausland

Well, let's -- business isn't awful. It's flattened out in the last year and declined a little bit, but overall, the conditions aren't such that pricing isn't attainable. And overall, we're confident that our price increase that was announced is going to deliver the expected range.

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

And maybe if I could ask one on refrigerants. Mike, how much of a decline have you seen in the value of reclaimed or dirty gas? And do you feel that, that's driving it all a step back in reclamation activity, where the hope is that over time, you have more of these service guys doing the "right thing" in capturing this gas...

Michael L. Molinini

Probably, yes. I would say, and I don't know this precisely, so this is an opinion, that our reclamation volumes, which had been growing, have probably stabilized at this stage. Because most of the reclamation programs that were being embraced were with larger firms and larger companies with large service organizations, where the price of the reclaimed product that we'd be willing to pay was not the only reason they were embracing the program. Now with that said, obviously, when the price comes down, we can afford to -- we have to pay less for the reclaim. So I don't -- and that's what's going to drive the big driver. I mean, you can have whatever laws and rules and things you want to have, but the big driver of reclamation is going to be supply and demand and the price you pay for the reclaimed product. And when you can no longer buy virgin R-22, and if you want to be in the business of servicing people that need it and the only way you're going to get a reclaim cylinder is if you have reclaimed dirty product to sell back to the reclaimer, you're going to see a dramatic change in those volumes. But it's all about supply and demand.

Operator

Up next is Don Carson from Susquehanna Financial.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

I just want to go back to pricing. I know one of your hardgoods competitors recently said that they had canceled the scheduled midyear hardgoods price increase. So is there quite a different competitive environment in getting price increases for gases, where I know you're trying to get 6% to 12% more in helium and argon versus, say, hardgoods?

Michael L. Molinini

Well, I mean historically, on the hardgoods side, the market price increases followed the manufacturing increases that the manufacturer would pass on to us, so I'm not sure if it was a competitor that canceled their increase or whether it was one of our supplier, manufacturers that canceled the increase.

Peter McCausland

He said supplier.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

No, this was a competitor. I mean, MSC Direct was talking about how they had canceled their scheduled midyear price increase for hardgoods.

Michael L. Molinini

To the extent that we would get inflationary pressure on the cost of the product from the manufacturer, we would be passing that along on, on hardgoods.

Peter McCausland

And Don, there's hardgoods and there's hardgoods. There's machines and then there's replacement parts. And on the other hand, there's filler metals which are used in production and then there's a lot of hardgoods, welding hardgoods that are used in maintenance. Then the safety products tend to follow employment. So there's a lot of different areas of hardgoods involved and when one considers pricing actions. And I would say, regarding gases, it's very different. As Mike said, hardgoods pricing, at least on machines and filler metals are generally driven by costs that come through from the manufacturers. And then -- but on gases, they're driven by that, but also operating expenses, pressure -- inflationary pressures.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Then just, can you update us on the helium situation and whether availability has improved or what impact that had in the quarter and what you expect it to have for the full year?

Michael L. Molinini

Availability has not improved. One of our suppliers recently reduced their allocation down to 50%. There are some issues at the Bureau of Mines. There's a shut down -- the Bureau of Land Management, there is a shutdown planned. I think we're expecting for the next several months, at least, the availability to remain at the level we are at today. The new production plant in Qatar, Qatar 2, has started up, and there is some product entering the marketplace, at least begun to enter the marketplace, which over time, is going to help the situation. And as we get into Q4 or our Q3 and Q4, we are expecting additional supplies.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

So no change in the earnings impact then versus...

Michael L. Molinini

Not until we know we're really going to get -- how much product we're going to get and if we really get it and when we really get it.

Operator

Mark Gulley from BGC financial has your next question.

Mark R. Gulley - BGC Partners, Inc., Research Division

A lot of focus on some of the near-term earnings issues this year, but I wanted to ask you to raise your sights a little bit and think about next year. One, in terms of SAP, the vast majority of the benefits are being felt this year. So on SAP, what do you do for an encore? Are there follow-on benefits and pricing enforcement, other activities that will allow you to realize the benefits even after this year that you can quantify here?

Peter McCausland

Well, I would say, SAP, we gave a range of benefits and we gave a minimum that we were going to achieve by the end of fiscal '13. We think the opportunities for increases in operating income from our various SAP programs that are in the works now and ones that we're working on will help us for years to come. And so it's not -- we don't view it as a one-time event. We view it as an opportunity to enhance our operating income percentages and our return on capital dramatically as we move forward. And in the out years, I'm just trying to get by this year, but we've always -- I think we've always taken short pain term -- short-term pain for long-term gain as a company. And as I told you how optimistic I am for long-term for the U.S. economy and energy independence and all that stuff.

Robert M. McLaughlin

Yes. We've put some pretty good goals out there at our Analyst Meeting.

Mark R. Gulley - BGC Partners, Inc., Research Division

Right. Mike, a great review of the R-22 situation, but I can assume -- if I'm assuming that the -- there are a lot of protests on the basis of the customer base, that they were getting squeezed. Could those protests resume next year? And once again, the EPA would relax these quantities available for a second year, and then this sort of thing would perhaps drag out a little bit longer than just the 1 year that you talked about?

Michael L. Molinini

Well, if that happens, then Congress is going to have to not agree to comply with the Montréal Protocol.

Peter McCausland

And our information was that the EPA's action was driven by a complaint by a producer and not a customer. I think everyone in the world has the expectation that the price will rise. That's what the program is about. The price will rise and that forces recycling and reclamation. And so I don't think any customers are ever going to scream about that. That's what it's all about.

Robert M. McLaughlin

We'll get some help, Mark, too. I mean as Mike said, that demand is there, you need the product. Since there's an ample supply and it's one section of the supply [ph] chain as it relates to refrigerant. As those supplies are dwindled, then we're going to -- we and others will be replenishing it at a lower cost. So we'll get some relief from the cost side if this were to drag further and as it drags.

Operator

Vincent Andrews from Morgan Stanley.

Vincent Andrews - Morgan Stanley, Research Division

I also have sort of a longer-term oriented question that goes back to sort of the U.S. sort of chemical or fertilizer renaissance, if you will. Have you guys looked or put pen to paper in terms of -- if there's a plant starting up in, let's say, 2016, when do you begin to start to feel the impact of the construction and so forth and everything in and around that plant in your business? And what do you think of a plant in general that could potentially be worth to your sales across your entire portfolio and for -- what period of time do you enjoy the benefits of that construction?

Peter McCausland

Well, these projects are usually 2 to 5 years, depending on the type of project, and we don't really get much out of it for the first 6 months when they're moving dirt and things like that. But when the steel erection and the mechanical work starts in earnest, they become a big customer of ours. And we have gas and special construction containers. We have hardgoods. We have Red-D-Arc equipment for rent. We have welder trainer trailers that Red-D-Arc provides. I mean, there are so many different places on a construction site, including safety services that -- where we participate. And these big projects can be $1 million or more a year in business for us, depending on how well we penetrate with our products and services. There are 2 big drivers of our business. The 2 things we track are non-tech industrial production and nonresidential construction. I think -- the way I do the business is we're doing okay right now when you consider that nonresidential construction is almost nonexistent. In the last 9 months, the big projects have wound down and it's only been in the last month or 2 that new projects have started up. So it's certainly not a normal period of time. We went from having quite a few projects to a total drought and now they're talking about a huge amount of them. If half of those are built, it's going to be very good for our business.

Vincent Andrews - Morgan Stanley, Research Division

And so maybe sort of looking at -- it seems like maybe the second half of next year could begin to sort of find you in the sweet spot related to all that activity.

Peter McCausland

They'll be in calendar -- starting calendar -- what we're hearing is starting January, we're going to start to see some of these projects take off. And I don't know how many, but we're in constant contact with our big construction customers and they have pretty good backlogs. But some of these things do get canceled at the last minute, and some of these companies will dump a couple hundred, $300 million, $400 million into the feasibility and planning for a project and then not go forward with it. So I can't predict the future, but I can say that based on discussions with our customers and everything we read and the energy situation in the United States, we're pretty optimistic that we're going to have a pretty good run in nonresidential construction starting sometime in the next few quarters.

Michael L. Molinini

Okay. Let me add one thing to that. Don't just view this as a one and done opportunity. I mean, these projects, when they are completed, are tremendous long-term customers for Airgas for cylinder gases, specialty gases, bulk gases, hardgoods, safety hardgoods, maintenance, turnaround services. These are -- the maintenance of keeping these facilities operating is almost as much of an opportunity as is the initial construction.

Peter McCausland

That's a very good point. And another point I left out is that many of the components that go into these sites like boilers and vaporizers and compressors are fabricated by our customers off-site and then brought to the site for installation. So it really does drive non-tech industrial production. That's the relationship between the 2.

Operator

And at this time, there are no further questions in the queue. Mr. Strzelec, I'd like to turn the conference back to you for any additional or closing remarks.

J. Barrett Strzelec

Thanks, Lynette, and thanks to everyone, for joining us today. Joe and I will be available for follow-up calls all day today. Thanks, again.

Operator

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

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