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Airgas (NYSE:ARG)

Q4 2014 Earnings Call

May 01, 2014 10:00 am ET

Executives

J. Barrett Strzelec - Director of Investor Relations and Corporate Communications

Peter McCausland - Founder, Executive Chairman and Member of Executive Committee

Michael L. Molinini - Chief Executive Officer, President and Director

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

Analysts

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

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

Vincent Andrews - Morgan Stanley, Research Division

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

Laurence Alexander - Jefferies LLC, Research Division

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

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

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

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

David L. Begleiter - Deutsche Bank AG, Research Division

Shivangi Tipnis

Operator

Good morning, and welcome to the Airgas Fourth 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 turn the call over to Director of Investor Relations and Corporate Communications, Barry Strzelec. Please go ahead, sir.

J. Barrett Strzelec

Thanks, Danny. Good morning, and 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 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 & Events page.

During the course of our presentation, we will make reference to certain non-GAAP financial measures. And unless otherwise noted, metrics reported 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 our 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 and -- as time permits, and we plan to end the teleconference by 11:00 a.m. Eastern Time.

Now please turn to Slide 2. And I'll hand the call over to Peter to begin our review.

Peter McCausland

Thanks, Barry. Good morning, and thank you all for joining us. I'd like to start by giving an overview of fiscal 2014 and our outlook for fiscal 2015 before I hand it off to Mike. Despite sluggish conditions in the U.S. industrial economy throughout fiscal 2014, we generated record free cash flow of $441 million on adjusted cash flow from operations of $776 million and delivered a 9% increase in adjusted earnings per diluted share to $4.72.

Our fourth quarter adjusted EPS was $1.15, which was slightly below our guidance range. However, absent the greater than expected impact from severe weather and refrigerants on our fourth quarter earnings, our results were within our guidance range for the quarter. Both the full year and fourth quarter were highlighted by our achievement of SAP-related benefits as planned.

In fiscal '14, we acquired 11 businesses with aggregate annual sales of approximately $82 million, including the Encompass Group of Rockford, Illinois. This was below our target of $150 million, but I'm encouraged by the discussions we're having with independent distributors. And I think that once the U.S. economy starts to show signs of sustained improvement, we'll see more interest from potential sellers. On that note, I must say, we had clearly expected the U.S. industrial economy to be much stronger by now.

There are bright spots. And many significant nonresidential construction projects are just now starting to move forward, which is a good sign. But areas of strength within certain industries, such as railcar production, are still being weighed down by weaknesses in other areas, like mining and defense. Given the persistent uncertainty in the U.S. industrial economy over the past 2 years, and with overall sluggishness still apparent, growth in fiscal 2015 is very difficult to predict.

For fiscal 2015, we're projecting EPS of between $5 and $5.20 per share, representing growth of 6% to 10%, which I consider to be good in a tough economy. The low end assumes the gradual uptick in growth rates as the year progresses, with average organic sales growth of 4% for the full year. The high end assumes a more robust acceleration in growth rates over the course of the year, with average organic growth of 6% for the full year. We believe these are achievable growth rates. And some of the hardest hit segments like mining are starting to bottom out and, therefore, will be less of a headwind for us as compared to last year. We also have a proven track record of strong execution on internal growth initiatives, and we expect to get a little help from an improving economy.

I know I've been talking about an industrial and energy renaissance for 2 years. And admittedly, it hasn't manifested itself yet. I still think I'm right directionally. I believe that inexpensive natural gas from shale, automation, a healthy banking system, which is now exhibiting loan growth, a dire need for investment and infrastructure, a much more competitive wage position vis-a-vis the rest of the world, and the reversal of the fiscal drag we've experienced for the last several years all will result in a significant increase in industrial production and nonresidential construction in the years ahead. Therefore, I'm still very bullish on the U.S. economy and Airgas' fortunes as a result of that economy and the self-help of which we are capable and have demonstrated for many years, including the last few years during our SAP conversion.

The timing and pace of our near-term improvement continues to be difficult to predict. Fiscal 2015 will be of year in which we continue to invest in the business, to enhance our long-term growth prospects through strategic initiatives such as our new eBusiness platform and enhancements to our regional management structures, which Mike -- all of which Mike will cover in a minute. We expect these and other initiatives to help drive decision making as close to our customers as possible, bring additional focus to our sales efforts, and increase operating efficiencies enabled by SAP and, ultimately, strengthen our competitive position and ability to capitalize when sustained improvement in the industrial economy returns.

And finally, given our strong cash flow, expectations for earnings growth, and confidence in Airgas' long-term growth prospects, we announced this morning that the Airgas board increased the quarterly dividend by 15%, from $0.48 per share to $0.55 per share, starting in the first quarter.

Throughout our history, we've experienced periods of slow growth, but we have always strived to build the best and most customer-focused industrial gas company for the long term. Despite these periods of slow growth, we haven't overreacted by dismantling strategic programs like other companies have. As a result, Airgas has an outstanding track record of industry-leading earnings and cash flow growth. We don't like missing our numbers, but this quarter's miss isn't that large and it's explainable. And I don't believe it is relevant to our long-term prospects. I hope our investors understand and are patient. Those that have been patient and understanding in the past have been handsomely rewarded.

Now, I'll turn it over to Mike to provide an update on refrigerants and a review of some of our key growth initiatives.

Michael L. Molinini

Thank you, Peter. I'll start with refrigerants and weather. We said at the beginning of fiscal 2014 that we would face a challenging and unpredictable year for our refrigerants business, following the EPA's late-March 2013 ruling to allow for an increase in production of R-22, rather than a decrease, as most of the industry had been expecting.

The year was, indeed, challenging and unpredictable. In the fourth quarter, due to both price and volume declines, compared to last year's record quarter for refrigerants, total year-over-year impact was $0.08 versus the $0.05 we had projected. Since our update on our last earnings call, the EPA has conducted hearings on the subject of future reductions. The opinions presented were heavily weighted toward recommending an accelerated phaseout of R-22, with many supporting an immediate move to 0 production and importation. This position, supported by many in the industry, including Airgas, was further enhanced when a letter to the administrator of the EPA was sent on February 21, urging an accelerated phase down of Virgin Refrigerant 22 and signed by 17 United States senators.

The industry is currently awaiting a final ruling from the EPA on the pace and magnitude of the step down in allowable production of R-22 during the calendar 2015 to 2019 time period, after which it must go to 0. It is our belief that once EPA issues its rulings, the industry will assess the implication and begin again the migration towards the use of reclaimed product. Although we cannot, at this time, predict the timing and speed of this transition, we remain very well positioned as the leading reclaimer and recycler of R-22. Though we still face a slight year-over-year headwind in the first quarter of fiscal 2015, we expect that to shift over the course of the year to become a slight tailwind for the full year.

With regard to the impact of severe weather in the fourth quarter, Airgas, like many companies, was negatively impacted in terms of both sales and expenses. It's very difficult to precisely measure the impact on sales, but they were clearly hurt by our inability to distribute product and customer closures in some of our hardest hit areas during January and February, and it's not clear how much was recovered in March. One of the most challenging weather-related issues was a significant spike in power cost at our production plants. Only a part of which, we were able to recover through surcharges during the quarter. We estimate that between lost sales, higher maintenance and operating cost, and unrecovered power costs, severe weather cost us the total of $0.05 during the quarter compared to the $0.03 we had projected in our guidance.

Now please turn to Slide 3. We continue to tailor our value proposition to the unique needs of each major customer segment. Our Strategic Accounts program, which leverages the segment-driven approach, represents approximately 25% of total sales. In the fourth quarter, our Strategic Accounts sales were flat compared to the prior year, reflecting the choppiness within various sectors that Peter noted a minute ago. Strategic Products increased 1% over the prior year, with bulk and specialty gases outperforming the category overall.

Moving on to our strategic initiatives. I mentioned on our last call that we had achieved our long-standing goal of more than $75 million in incremental annual run rate operating income by the end of the year through implementation of SAP. The rollout of our expanded telesales channel, Airgas Total Access, is progressing well and in line with our expectations. And proficiency with the new SAP system among our associates continues to improve every day, as we expected. We're also nearing the launch of our new 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.

As Peter mentioned, we will also continue to focus in 2015 on the organizational structures of our regions. The structure of our distribution regions was last reviewed and adjusted in 2003. At that time, the company had sales of approximately $2 billion and was comprised of 12 regions. Over the last 10 years, the number of regions has remained constant, but the size of many of our regions has more than doubled. In addition, the geographies have expanded, and new products and services added to our core offering. Sizing complexity has grown exponentially. The packaged gas business is the sum of many typically small gases and hardgoods transactions containing numerous details. And having the time to pay attention to these details, is essential to effectively compete with the well-run independent distributor and lead to long-term success.

For some time, we have been evaluating structural modifications we could make to increase our speed to market, as well as increasing the time our managers have to worry about the details. Any changes, however, were dependent on completing the SAP implementation and effectively migrating the back-office functions, historically housed in the regions, to our 4 business support centers.

With all that work now behind us, we've begun rightsizing some of our regions. In the past 18 months, we have split our East, North Central and Southwest regions and created the Northeast, Gulf Coast and Mid-West regions.

Although we're not planning to split all of our legacy regions, there are several others we are evaluating. We expect these changes will serve to enhance regional management focus on growing the top line, maximizing gross profits and improving customer service, as well as driving a realization of additional SAP-enabled operating efficiencies. In addition, we have introduced and are rolling out a new district manager role within our regions, designed to drive decision making even closer to the customer and bring additional focus to our sales and customer service efforts. A district manager position has been in place for many years at one of our top-performing regions, and it essentially creates smaller sales and operations teams, covering narrow geographic markets, reporting to a district manager who owns the P&L responsibility for the sales, margins and expenses within the district. We're now approximately 75% complete on the selection and deployment of our district managers, and we will complete the rollout over the next year.

We're very excited about the long-term potential impact that will result from rightsizing of certain regions and the creation of a district manager position. I also echo Peter's sentiments about the long-term prospects of the U.S. are strong. And the investment Airgas has and continues to make in many areas continues to strengthen our long-term competitive position and will make for a very nice tailwind once sustained growth returns to the economy. And with that, I'll hand it off to Bob to give our financial review of the quarter and full year, as well as to provide more color on our guidance for the first quarter and fiscal year 2015.

Robert M. McLaughlin

Thank you, Mike, and good morning. In the interest of time, I'll focus on the key elements of our fourth quarter results and move on to our fiscal 2015 guidance.

Please turn to Slide 4. Fourth quarter consolidated sales were up slightly year-over-year to $1.3 billion, with a 1% contribution from acquired sales, largely offset by a 1% decline in organic sales, which was comprised of a 1% decline in gas and rent, and a 2% decline in hardgoods. The decline in consolidated gas and rent organic sales was driven primarily by the impact of refrigerants, price and volume declines in this year's fourth quarter as compared to last year's record fourth quarter performance in our refrigerants business.

Consolidated organic sales growth was comprised of a 1% increase in price and a 2% decline in volumes. Gas and rent represented approximately 63% of our sales mix in the quarter, consistent with the prior year. Gross margin for the quarter was 54.9%, an increase of 40 basis points from the prior year, driven by margin expansion on price increases, partially offset by supplier price and internal production cost increases, including higher power costs at our Merchant gas plants related to severe weather during the quarter, which we expect to be substantially recovered over time.

Also pressuring margins was a decline in refrigerants' price and volumes from the record fourth quarter last year and sales mix shifts within gases to lower margin fuel gases, particularly propane. Adjusted operating income was $150 million, down 2% from last year. Adjusted operating margin was 11.8%, down 40 basis points compared to the prior year.

Excluding a $0.02 income tax benefit, adjusted earnings per share were $1.15, an increase of 1% from adjusted EPS of $1.14 in the prior year.

Consistent with our expectations, adjusted EPS included $0.16 of SAP benefits realized, net of implementation cost and depreciation expense, reflecting a favorable year-over-year swing of $0.12 compared to the prior year's net benefit of $0.04.

There were approximately 75.2 million weighted average diluted shares outstanding for the quarter, down 2% year-over-year, reflecting the impact of the share repurchase program completed during the prior year's fourth quarter. Return on capital was 12.2% for the 12 months ended March 2014, down 10 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. Net total debt decreased by a net $113 million year-over-year to approximately $2.5 billion at March 31, as our strong free cash flow enabled us to make this net debt paydown while funding acquisitions and $140 million in dividend payments. Our fixed float debt ratio at the end of March was approximately 70% fixed, and our debt-to-EBITDA ratio was 2.7 within our target range of 2:3.

Now turning 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 had the special items that had been excluded from consolidated adjusted operating results. Distribution sales in the quarter were up 2% versus the prior year to approximately $1.2 billion. Organic sales for the distribution segment were up 1% year-over-year, with pricing up 3% and volumes down 2%.

Gas and rent organic sales were up 2%, with pricing up 4% and volume down 2%. Hardgoods organic sales were down 2%, with pricing flat and volume down 2%. Gas and rent represented 59.8% of distribution sales in the fourth quarter, up from 58.9% in the prior year, and down slightly from 59.9% in the third quarter. Distribution gross margin was 55.3%, an increase of 10 basis points from the prior year, reflecting margin expansion on price increases, the sales mix shift towards gas and rent, partially offset by supplier price and internal production cost increases, particularly higher power costs on our Merchant gas plants driven by the severe weather conditions, and mix shifts within gas -- gases to lower margin fuel gases.

Operating income in the distribution segment was flat compared to the prior year at $144 million. And operating margin declined by 30 basis points to 12.5%, 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 reflect our CO2, dry ice, refrigerants, ammonia, and nitrous oxide business units. Sales for All Other Operations were down 15% from the prior year, with organic sales down 16%, largely driven by a decline in refrigerants, price and volumes, noting that the prior year fourth quarter experienced elevated R-22 volumes as a result of the EPA's proposal at that time to accelerate the R-22 phaseout. Gross margin for All Other Operations was 48.5%, an increase of 240 basis points over the prior year, primarily driven by higher margins on ammonia and less lower margin refrigerants in the mix, partially offset by margin erosion within our refrigerants business. Operating income for All Other Operations was $8 million compared to $16 million in the prior year. Operating margin of 6.5% was down 460 basis points year-over-year, driven primarily by the declines in our refrigerants business.

Please turn to Slide 6, capital expenditures. CapEx for the year represented 7% of sales, up slightly from 6.6% of sales in the prior year on increases in cylinders and bulk tanks and rental welders. Excluding major projects, CapEx as a percent of sales, was approximately 4%.

Turning now to our outlook, Slide 7 walks through the primary elements of our fiscal 2015 first quarter and full year EPS guidance. The left-hand column on this slide shows a sequential walk for the fourth -- first quarter, using fourth quarter adjusted EPS of $1.15 as the starting point. Variable compensation reset following a below-budget year is expected to reduce earnings by $0.06 to $0.07. Refrigerants are estimated to be a tailwind of $0.01 to $0.02, and we are expecting a headwind -- no, a tailwind of $0.01 to $0.02. And we are expecting a tailwind of $0.02 from the impact of 1 additional selling day in fiscal 2015's first quarter, offset slightly by the Easter holiday. And the base business is expected to contribute between $0.03 and $0.08 to EPS, reflecting a contribution to sequential growth in EPS of between 3% and 7%. In aggregate, we are estimating EPS to be in the range of $1.15 to $1.20, representing sequential growth of 0% to 4%. The middle column of the slide shows the year-over-year walk for the first quarter, using fiscal 2014 first quarter adjusted EPS of $1.14 as the starting point.

Variable compensation reset is expected to be a headwind of $0.01 to $0.02. Refrigerants are expected to reduce EPS by $0.02 to $0.03. Acquisitions closed in fiscal 2014 are expected to contribute $0.01. And the base business combined with SAP benefits will increase by between $0.04 and $0.09, representing 4% to 8% growth. In aggregate, we are estimating EPS for our first quarter to be in the range of $1.15 to $1.20, which represents year-over-year growth of 1% to 5% on an organic sales growth rate in the low-single digits. The right-hand column on the slide shows the year-over-year walk for our fiscal year 2015 adjusted EPS guidance range. Variable compensation following a below-budget year is expected to be an $0.11 to $0.16 headwind. Refrigerants is expected to be a $0.03 to $0.04 tailwind year-over-year. Acquisitions closed in fiscal 2014 are expected to contribute $0.03. And on a year-over-year base -- basis, our base business growth, combined with SAP benefits, is expected to contribute a net incremental $0.33 to $0.57, representing 7% to 12% growth on organic sales in the 4% to 6% range. In aggregate, we expect EPS for our fiscal 2015 to be in the range of $5 to $5.20, which represents year-over-year growth of 6% to 10%. And now, I'll turn it back to Barry to begin our Q&A session.

J. Barrett Strzelec

Thanks, Bob. That concludes our prepared remarks as we begin the Q&A portion of our call to allow as many participants as possible to ask questions. [Operator Instructions]

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Kevin McCarthy with Bank of America Merrill Lynch.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Peter and Michael, I was wondering if you could speak to the sales trends that you've observed thus far in the month of April. And to what extent, if any, maybe some of the weather-related disruptions are unwinding?

Peter McCausland

Well, Mike, you're probably watching it closer than I am. I have been seeing a lot of change. It's kind of like the first -- like last quarter, just bumping along. Some sectors up, some down.

Michael L. Molinini

At the moment, same-store sales were able -- look like they're coming in around 1.5% year-over-year.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Okay. And as a follow-up on a different subject, you raised your dividend about 15%. And if I look at the mid-point of your EPS growth guidance, it's maybe roughly double the pace of the growth you're expecting. So, obviously, a nice vote of confidence there. Peter, I'm curious as to whether or not that speaks to your expected M&A prospects. In other words, is there a conscious decision to return some more capital to holders at this point, given what you're seeing in the private market?

Peter McCausland

No, not really. We're disappointed that we missed our earnings, even though it wasn't that much and it's explainable. But I think, given our very strong cash flow, it was a time to reward our shareholders in a different way, and that's why we went a little higher. But the amount of money involved isn't that significant and wouldn't impact our ability to pay for acquisitions anyway. And we're really focused on acquisitions. We have the most synergies and we -- but we're disciplined. And there aren't that many great prospects out there right now that want to sell their businesses. We were able to buy a couple of nice companies this year, below our target, but we continue to look at all the uses of our capital: acquisitions, dividends, share buybacks. Every quarter, our board goes through those. And so I wouldn't read too much into it except that maybe a little bigger increase in normal was appropriate, given that we weren't able to deliver the kind of earnings growth that we expected.

Operator

Our next question comes from Ryan Merkel with William Blair.

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

I was hoping we could pull apart, maybe, your base business assumptions for the year and SAP. So of the 4% to 6% same-store sale outlook, how much do you assume SAP is adding there?

Michael L. Molinini

Probably in the neighborhood of 1.5%, Ryan.

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

1.5%. Okay. And then if you do the same thing for your base business EPS growth? I want you to include the variable comp. What does that look like excluding the SAP benefits?

Robert M. McLaughlin

Well, maybe I'll come at it in a different direction. If you look at our base business growth on the high end at 12%, that includes SAP carryover, and it also includes the sales related to that carryover. So if you look at our guidance from last year, where we had SAP as a separate component, sales growth of around 5-plus percent drove 8% organic growth. Now, we combined our SAP benefits in that line. And at 6% growth, it's generating 12%. So there's quite a bit of fall through relative to SAP benefits in that number.

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

Okay. So I'd just like to clarify. By adding the variable comp to that base business growth, I'm kind of coming up with 2% to 7% base business growth with kind of 3% to 5% from base business sales growth. Does that sound about right?

Robert M. McLaughlin

Not doing the math on the fly. I guess the other way to think about it in the gross, because -- in the gross percentage, if you exclude variable comp, the total growth, that 6% to 10%, becomes 8% to 14%. On a base growth of 6%, which includes that 1.5-plus percent from SAP. So strong fall through on that 6% growth.

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

All right. And then just another question on non-res. I mean, we've been talking about this potentially picking up for 6 months now. There hasn't been a lot of progress. So I'm just wondering, absent weather, was there any evidence in the quarter that this end market is picking up or any discussions with customer that suggest it will pick up in the near future?

Michael L. Molinini

Very little evidence in our financial results because the -- once a project's finished up in the quarter and the ones that have started, and there are many of them that have started, haven't really been using our products yet. They're still moving dirt and are in early stages. But what has picked is the number of new projects that have finally gotten through the permit stage, and they've began to issue purchase orders to us. And so we expect an uptick and that the -- and that our non-res construction sales will grow throughout the year as these projects advance.

Operator

Our next question comes from Vincent Andrews of Morgan Stanley.

Vincent Andrews - Morgan Stanley, Research Division

You kind of just started to get to it, but I wanted to talk a little bit about your expectations for the cadence of your sales growth during the year. And then, also, if you can give some thoughts around the split between volume and price? But it looks like, 1Q organic sales growth of low-single digit. So you're expecting something to get better as you move through the year?

Peter McCausland

Yes, there's no question that, I guess, the big -- the cadence will be -- will start out in the low-single digits, start to approach mid-single digits as we get into low mid-single digits as we get into our second quarter and then continue to build from there, with the strongest growth coming in the fourth quarter, which will be held by the severe weather comps. And then, hopefully, some gradual uptick in economic activity in the U.S.

Vincent Andrews - Morgan Stanley, Research Division

Yes. Just on the price versus volume, how are you thinking about that?

Michael L. Molinini

We're thinking about it fairly equally split.

Vincent Andrews - Morgan Stanley, Research Division

Okay. And just as a last follow-up, you mentioned a sort of investment in the business. Is the actual growth dollar level of investment any different year-over-year?

Michael L. Molinini

Well, it's probably higher relative to what we would call non-SAP benefits, relative to some of the structural things that Mike discussed. But, really, SAP is now part of the fabric of the business. So it's tough to make that split.

Operator

Up next you have Mike Harrison with First Analysis.

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

Just looking at the gross margin in distribution, you mentioned the mix shift within gases over to fuel gases. What is the gross margin -- fuel gases look like versus atmospherics and, I guess, what should we read into that mix shift? What does that mean is doing on in the marketplace and, I guess, how long ...

Michael L. Molinini

It's propped up -- the colder the weather, the more propane we sell for temporary heating. And, so it's very seasonal, and I would guess it's probably half -- half the margin, maybe, of industrials, probably on order of magnitude.

Peter McCausland

But this year, we got squeezed.

Michael L. Molinini

Yes, in this year you had the propane shortage and you had prices rising and we're trying to catch up in. So I don't really see that as something I would model as a permanent change.

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

All right. And then, just looking at that refrigerants business, it sounds like pricing was down pretty hard at the start of the year, and I think I heard you comment the volume was also negative after a pretty strong start last year. What -- can you talk in any greater detail on what you were seeing in pricing and volumes, and maybe what does the $0.03 to $0.04 headwind assumed for pricing and volumes going forward?

Robert M. McLaughlin

Well $0.03 to $0.04 is a tailwind. So we're expecting incremental profit year-over-year from the refrigerants business as we certainly believe and hope that it is bottomed out during this past fiscal year. So, that's a tailwind. So that's a plus. And, I think predominantly, we will be driven by some recovery in volumes jump for the most part.

Michael L. Molinini

Yes. But again, we're -- this could be very variable depending on what the EPA ruling actually is. So, at the current time, at least for the next quarter, or maybe 2, until we see that, we are continuing to drive our refrigerant efforts focused on selling refrigerants to end-user customers that buy other products from us that have typically a bit -- a higher margin profile than some of the other refrigerant channels that we sell refrigerants through, where we -- which were more subject to the price and volume declines.

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

And the expectation on EPA ruling, you're hoping to hear on that by year-end?

Michael L. Molinini

Well, they have to respond by year end. Most of the pressure that the EPA is getting from all areas, would say whatever you're going to do, please do it as soon as possible, so everyone can adapt their businesses to whatever the rules are. So that's about as much as I can -- as I know.

Operator

And our next question comes from Laurence Alexander with Jefferies.

Laurence Alexander - Jefferies LLC, Research Division

Two quick questions. First on the variable comp. Can you give a little bit more detail on how to think about that going forward? Is it a onetime reset, or should we expect a similar kind of step-up in 2016 and 2017? And, secondly, for the strategic account -- strategic products. Some of the categories seem to now basically be delivering organic growth pretty close to your overall distribution segments. Is it time to overhaul the categories?

Peter McCausland

Well, let me just first talk about the reset and Bob will give you the numbers. When -- we don't do well, here when our shareholders don't do well. So in years, when we miss our bonus -- when we miss our guidance, our people don't get -- they don't make their bonuses -- bonus targets. And, this year, there will be bonuses paid that are significantly below the targets as a result. Bob, do you have the exact...

Robert M. McLaughlin

Well, I think we had the numbers kind of laid out there. So if you can reverse the $0.16. And it is a onetime. So, this assumes that -- the high-end assumes that we make 100% of our plan throughout the organization, and, then as we move forward into the next year, it will not be a reset. It would just be normal wage inflation. So, assuming we make our full-year plan, we will not have a reset going into fiscal '16.

Laurence Alexander - Jefferies LLC, Research Division

What about the growth areas?

Peter McCausland

I think the growth areas -- it's interesting. I don't know, 10 years ago, we used to be focused on the products, which is how we got the Strategic Products. But in the last 5 years, really most of the emphasis, at least within the company, is now more related to the segments. So the potential for overhauling the Strategic Products and doing more -- providing color on the different segments is probably in work [ph]. The idea of the Strategic Product categories was to move towards the faster growing products and the gases, that would improve our mix, and it really has happened over the years. Our gas to hardgoods mix is improved dramatically. So, we're going to look at it. At our next analyst meeting, we'll probably give you more information on that. That's probably going to happen sometime in December. But, I wouldn't overreact. We're in one of those slow-growth periods that I referred to in my opening remarks, and we have, I mean, we're going to come out of this. And we make our money during these periods and we count it when the economy turns around. And we've done a lot of good work in these product areas and, yes, they may need some tweaking or transforming them or more transitioning them to the customer segments, as Mike pointed out, but there is still good, we have a lot of good specialists out there and doing some good work.

Operator

Our next question comes from David Manthey with Robert Baird.

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

First off, Bob, when you said that same-store sales were up 1.5% in April, does that include the negative impact from Easter? Or is that a daily sales kind of apples-to-apples type number?

Robert M. McLaughlin

That would include the Easter.

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

Okay. So underlying will be a little bit better than that because you're seeing a bit of a drag from that year-over-year impact?

Robert M. McLaughlin

Could be, yes.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Okay. All right. So then thinking about the guidance here, using the $472 as a starting point, and if you're getting net SAP benefits of, let's call it, $0.30, you're picking up $0.06 for refrigerants and acquisitions combined, that -- when I do the math on that, it implies they're at $508 million, excluding the base business, meaning the base business plus this variable comp reset, which is in that 5% to 5.20% guidance range. As I'm looking at that, and help me if I am reading this wrong, it looks like on 4% to 6% growth, you're sort of base business all in, is looking like kind of flattish down a little bit, up a little bit. Can you help me understand where I'm not seeing that right?

Robert M. McLaughlin

Yes, I think one of the biggest things, Dave, is that the same-store sales assumption does include that 1.5% plus from the SAP. So you're double counting the SAP benefits. So, underneath that sales assumptions, if you strip out the benefit of the sales from SAP, that's more of a 4% to 4.5% growth rate.

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

But on an EPS basis, SAP is probably, roughly $0.30 net benefit this year, year-to-year, right?

Robert M. McLaughlin

Well, there is a tailwind. Again, we were not talking about the breakdown of base business versus SAP, because it's becoming so co-mingled. What we do have is, we have roughly a tailwind of $0.20 that's coming over from the run rate and the drop-off of SAP implementation costs as we exited fiscal 2014. So that's the in-the-bank tailwind, and then the rest really becomes co-mingled with the base business very -- increasingly difficult to separate.

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

Okay. But even if you use the $0.20, I'm still coming up with sort of $498 million, which gives you $0.02 to $0.22 of benefit in the base business, and I guess that seems low relative to the operating leverage, you normally should get. And I think last quarter, you said on mid-single-digit growth you should be expecting something more in the double-digits, at least, if not the teens?

Robert M. McLaughlin

Well, when we talked about -- when I did mention that, it was in the context of not separating out SAP benefits. And, in other words, they'd become part of the base business. So, in a mid-single-digit 6%-type arena, we said that we should be in the low teens, say 10% to 15% range. And that's where we're at. The top end is at 12%.

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

Okay. And then just finally on price, if I can here. You've -- over the past, since about 2010, you've implemented broad price increases every 7 to 11 months, and I know you're not on the same schedule as every other gas company out there. But should we expect that Airgas would put up a relatively broad pricing increase here beyond just helium in the near future based on that pattern?

Robert M. McLaughlin

Well, this forecast and this guidance assumes continued pricing actions.

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

Okay. So your last will run off the end of -- well, now, essentially?

Robert M. McLaughlin

Our last price increase was July 1.

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

Oh, July 1?

Robert M. McLaughlin

Broad pricing.

Operator

Up next we have Mike Sison with KeyBanc.

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

In terms of the SAP benefits, you expect to -- maybe more qualitatively, what you expect to see potentially this year, and what could accelerate as we look into '16 and '17?

Michael L. Molinini

Well, I mean, we're going to still -- in these numbers, our additional benefits from our pricing actions, additional benefits from our total access telesales program, we continue to work on overhead reductions, but that's probably later -- late -- that's probably late this year, but more substantial next year on the overhead reductions.

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

And then eBusiness, Mike?

Michael L. Molinini

Yes. The eBusiness. As adoption grows, again, we launched here in the next 30 days, probably. As adoption grows, costs, operating efficiency benefits increase. So again, that's another one where I would say this year, is more about adoption, meaning getting customers to use it, and next year, is a better ramp for realizing the operating efficiencies you get when they, in fact, use it. There's some additional chunks out there, but we have to get through some checkpoints first before they start filtering in.

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

Okay. Great. And then, Peter, historically Airgas has been really good at sort of getting a good feel of what the growth rate for organically they can produce, and it's been a tough year or so. When you think about the 4% to 6% you're looking for fiscal '15, and you've been through more cycles than anyone here, I mean, how do you feel about that? I mean, do you think it's realistic goal based on what we've seen over the last several quarters?

Peter McCausland

Yes, I definitely think it's realistic. I think it's very realistic. We try to be realistic. The last few quarters have pounded us because we expected much higher same-store sales rates in fiscal '14 than we actually experienced. And, you're right, I've seen these periods of time, over the last 20 years and, actually, in preparation for this meeting, I went back and I had Kent, our chief analyst, pull out the information from the last 20 years. And there's been periods of time for 2 or 3 years where we've had slow growth, and we worked through it. And you make your money during the tough times, and it's always turned out to be fine. They've been followed by periods of more robust double-digit growth. But when that's going to happen, I don't really know if there's still -- I mentioned a lot of positives, but there are still some negatives, like business CapEx really hasn't let loose yet. Certainly, tax reform is an issue. There is a lot of uncertainty out there among business executives, and so it's the best we could come up with, and it's colored by our experience of the last 24 months. And, we're just going to do what we've always done, is really focus on our strategic initiatives and make Airgas better and better and focus on acquisitions, and I'm confident that we're going to do really well.

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

Okay. And then last one on acquisitions, your goal, $150 million per year. There's not a lot of big ones out there, and seems like you and Praxair have done a lot over the years. So I mean, is it feasible to do even that much given that you probably had to buy a lot of little businesses to get there?

Peter McCausland

Well, we figure now about 45% of the $13 billion package gas/welding market is in the hands of independents. So -- and there are certainly not as many as there was when that was 85% when we got started. But there are still some very attractive targets for us. We have great synergies. The nice thing, though, is that we don't have to buy because we have the biggest platform. We have the industry-leading national platform. So, we're not going to go crazy and pay up for some of these companies. And the prices have been much higher in the last 12 months for the big ones than what we've been seeing historically. And other companies are willing to pay a tremendous price. And this is a great industry, and it's pretty forgiving, but overpaying by twice is something that you don't get forgiven for. And, so, we've lost a couple of ones that we would have like to have had, because of pricing. But we've also stepped up and paid higher prices for the really good ones like Encompass, and we know we're in competition and the competition ebbs and flows over the years. And usually the companies that end up paying the highest price for these distributors, end up restructuring couple of years later. So, maybe we will get a second bite at some of those apples. But I don't know if $150 million is the right number. I know it wasn't the right number when we did $350 million in 1 year. But we always said that it's -- acquisitions are a function of lot of different things, demographics, tax policy, the economic cycle, and that they were difficult to predict. And that was a plugged number. But, I hear you. We've missed it now for a couple of years, and maybe we ought to have a lower plugged number.

Operator

Up next, we have Mark Gulley with BGC Partners.

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

I was intrigued by the comments regarding the pilot region, where you've already deployed district managers. Are you able to compare that pilot region to a comparable one to give us an idea of what kind of sales and margin benefits you may have enjoyed from that pilot program?

Michael L. Molinini

Well, it's not actually a pilot program. It's a region that's been operating that way for many, many, many years. And, I would say, I don't have all the specifics in front of me but, on balance, if you would have go -- and it's not in one of these markets that's got all the energy in oil and shale and all that. So it's kind of a blocking and tackling kind of place. But if you go down in a number of dynamics, clearly sales were at least as good, if not better, than the average. But other dynamics like customer intimacy, customer service, errors, receivables, inventory management, all of those other things that define how good a job you're doing with your customers, and the ability for you to maintain customers, and the ability to raise prices at customers were all very superior.

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

Okay. that's helpful. Peter, as I look back over the last 4 years, clearly the bid energized the company in 2010 and, the SAP rollout, I think, energized the company, certainly from an earnings per share perspective. Now in the next 3 years, what can you do to energize the company at this juncture while you wait for the economy to cooperate? For example, just a few moments ago you alluded to the fact you don't have to do acquisitions. You have a great footprint already. For example, maybe a push for scratch starts, brand-new facilities. I'm not trying to come up with a strategy for you, but what can you do to energize the company at this juncture?

Peter McCausland

Well, we're doing a lot. There is going to be a lot of SAP benefits that flow to this company beyond the initial $75 million in a lot of different areas, Total Access is a growing business for us, and the way we're -- improvements in the way we face the customer in the various channels, the district manager structure, the smaller regions and areas that Mike mentioned, eBusiness. We've enhanced our functional capabilities in many parts of the company targeting gases' growth, whether they be in our segmentation or in our gases sourcing group. So there's a lot going on at this company. And we just finished SAP, and that was a hell of a distraction. So, I think having that behind us and being able to focus again on our customers and growing our sales, I think, is going to be a factor as well. Mike?

Michael L. Molinini

Yes, I want to comment on that because there is a lot of energy right now in Airgas in the field. And I think the -- having SAP behind you, and having the tools that we now have in the toolkit to take out -- take to the market has got everybody very, very energized. And when you look at the data they can have, the ability to target, the offerings in the individual segments, the ability to support customers of all sizes and of all locations through multiple channels seamlessly, the capabilities we will have that they can bring to their customers with the -- in the new SAP -- in the new eBusiness platform, I mean, I've been in the field a lot in the last 3 months, and there is a noticeable energy level which is what makes me feel really good about where we are right now.

Operator

Up next we have Don Carson with Susquehanna Financial.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Two questions. One, near term. One of your industrial distribution competitors is actually talking about how as they focus on this metalworking index they were seeing a slight improvement in demand. And I'm wondering if you've seen that in any of your hardgoods consumables? And then, longer term, and on the last call, you talked about how obviously you rethought your 2016 sales growth target. Just wondered if you could formally restate that either in absolute number or what you think a sustainable organic growth between now and then might be? And are you still thinking you can hit the low end of your 15% to 16% target by 2016, operating margin target? Or with lower base business growth and less opportunity for operating leverage, is that 15% no longer a target of yours?

Peter McCausland

First, on the metalworking index, I assume you're talking about MSC.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Yes.

Peter McCausland

Is that right? Pardon me?

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Yes.

Peter McCausland

That's machine tools metalworking. It's not really related to -- we follow fabricated metals. And then what was the other question? The...

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

It's on your 2016 targets. Where you said you have a new target.

Peter McCausland

Yes. I looked at that. We're going to need some robust same-store sales growth to make that 15% operating margin. And it's just probably 10% for the next 24 months, and that's not baked into our guidance for the next 12 months. So, I would say, we need a nice pickup in the economy, and a continued good pricing environment to make that low end. But we're revisiting it, and by December, we'll have a better handle on how this year is playing out, and we will be able to be more definitive about our chances for that number or whether or not we have to revise it.

Operator

Following up, we have David Begleiter with Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

Peter, in prolonged periods of industrial weakness, do you typically see some increase in competitive intensity, and has that happened this time?

Peter McCausland

In some areas, it has. I mean, overall the pricing environment is pretty good in our industry. There's a few things, like shortages of helium and shortages of argon, that have kind of added to it. And -- but, yes, I mean, we -- it's around the fringes. I think compared to most industries, people are pretty disciplined because you've got a hell of a lot of money invested in serving a customer, either in a bulk installation or a lot of cylinders. So, but, yes, we compete hard, and in the last 24 months, I would say it hasn't -- there's been pockets of firefights, which is what happens when the economy gets weak. And, as soon as the economy picks up, the competitors try to -- they spend more time taking care of the new orders from their customers than they do in attacking their competitors. But in the bulk business, certainly, you have a right to react to that and keep the business. And in the cylinder gas business, we have strong relationships, multifaceted relationships with various people at the customers. So, we usually get a look, but it can have a negative impact on pricing. But I don't want to overstate the case. The economy hasn't been in free fall like it was in 2010. It's just been a steady decline over the last 24 months. And pricing has been overall relatively good.

David L. Begleiter - Deutsche Bank AG, Research Division

And just to look at the Gulf Coast. You've seen some increases in costs from this large chemical projects. As those get built up, do you have -- can you take advantages of these tighter markets down there and the increasing cost by, over time, raising your prices on these larger projects?

Peter McCausland

Well, certainly, argon is a big -- one of the biggest products and most important products that we sell into construction projects, and argon is tight right now across the country, and we're looking at our options regarding pricing actions on argon. And, but these are -- these projects are -- they're all bid, and, it's often about how much -- what kind of equipment you can bring to the site, and what kind of services -- supply chain services you can supply to the customer at the site, and not always about price. So it's hard for me to answer that question. I think that, the economy down there is pretty damn good in the Gulf Coast. If you had to pick a region, that would be the best region, and I would say that when the economy gets hotter, prices go up. That's just the name of our industry. So, as these projects develop, I wouldn't be surprised if we were able to get higher prices.

Operator

Our last question comes from Shivangi Tipnis with Global Hunter Securities.

Shivangi Tipnis

Most of my questions have been answered. But then you commented only that, you expect the final ruling by the end of this year. So does your guidance include a favorable ruling or are you still being conservative?

Michael L. Molinini

We are not trying to assume what the ruling is going to be. We are assuming that the year will continue -- we're guiding based on what we know today.

Shivangi Tipnis

Okay. That sounds conservative [ph]. And the organic growth in 2014 was, like, down 1%, and it's a lot steeper recovery in 2015 that you're expecting, with about 4% to 6% organic growth. Can you just talk about the major drivers for this organic growth, especially like the end markets and what kind of industries are we talking about in particular?

Peter McCausland

Yes, well, certainly nonresidential construction, although it's starting the year slow because of the runoff of old projects and just -- and the slow ramp-up of new ones. It's going to get progressively better as we move through the year. Certainly, the energy industries are -- some of them are doing well. The oil & gas and the shale plays and the infrastructure to support them with -- as governments get healthier fiscally, we're seeing an increase in research dollars, and things like that, which we expect to continue throughout the year. We continue -- we will see continued pressure on the healthcare markets probably because of ObamaCare and other trends in there. And we do expect that metal fab will pick up, not across the board in this fiscal year, but there are certain strong sectors. And then there is -- it will be a lot of metal fabrication done for equipment that is moved on to these construction sites eventually, like vaporizers and boilers and things like that. So, we expect a gradual pickup in metal fab as the year moves on.

Shivangi Tipnis

And one last question. The interest rate -- the interest expenses will increase like about 10% in 2014. Do we expect to see a higher interest expense even in 2015 as well?

Michael L. Molinini

What expense?

Robert M. McLaughlin

Interest expense.

Shivangi Tipnis

The interest expense.

Michael L. Molinini

Well, we don't -- no, we're not projecting a significantly higher interest expense in the new year, if that was the question.

Robert M. McLaughlin

And a large percentage of our debt is fixed -- at fixed rates. 60%.

Operator

That concludes today's question-and-answer session. Mr. Strzelec, at this time I will turn the conference back over to you for any additional closing remarks.

J. Barrett Strzelec

All right. Well, thanks, everyone, for joining us today. Joe and I are available for follow-up questions. Have a great day.

Operator

That concludes today's conference. We appreciate everyone's participation.

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