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Airgas (NYSE:ARG)

Q2 2011 Earnings Call

October 26, 2010 11:00 am ET

Executives

Michael Molinini - Chief Operating Officer and Executive Vice President

Peter McCausland - Chairman, Chief Executive Officer, President and Member of Executive Committee

R. Worley - Vice President of Communications & Investor Relations

Robert McLaughlin - Chief Financial Officer and Senior Vice President

Analysts

Mark Gulley - Soleil Securities Group, Inc.

Michael Sison - KeyBanc Capital Markets Inc.

Holden Lewis - BB&T Capital Markets

Michael Harrison - First Analysis

Lucy Watson - Jefferies & Co.

David Manthey - Robert W. Baird & Co. Incorporated

Thomas Hayes - Piper Jaffray Companies

Operator

Good morning, and welcome to the Airgas Second Quarter 2011 Earnings Conference Call. [Operator Instructions] For opening remarks and introductions, I will now turn the call over to Vice President of Communications and Investor Relations, Jay Worley. Please go ahead.

R. Worley

Good morning, and thank you for attending our second quarter earnings teleconference. Joining me today are Peter McCausland, Founder and CEO; Mike Molinini, Executive Vice President and COO; and Bob McLaughlin, Senior Vice President and CFO.

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 on the Investors shortcut at the top of the screen and then go to the Earnings Calls & Events page.

During the course of our presentation, we will make reference to certain non-GAAP financial measures. Please note that unless specified otherwise, metrics referred to in today's discussion will be adjusted for legal and professional fees related to Air Products' unsolicited takeover attempt, as well as for debt extinguishment and multi-employer pension plan withdrawal charges. Reconciliations to the most comparable GAAP measures can be found in our earnings release in the slide presentation and on our website.

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 also ask that you note the additional information and certain information regarding participants provided on Slide 1 of our presentation.

We'll take questions after concluding our prepared remarks, and we plan to end the teleconference by noon Eastern Time. Now I'll the turn the call over to Peter to begin our review.

Peter McCausland

Thanks, Jay. Good morning, and thank you all for joining us. Our second quarter results served to reinforce the message we have expressed for some time now, that Airgas shareholders are poised to reach significant benefits as the economy recovers from recession.

Our business, which historically lags the economic cycle, is gathering momentum in the economic recovery and this growth engine runs on far more than just six cylinders.

In addition, Air Products' takeover attempt has cast the bright light on our business, revealing how undervalued the company was and energizing the 14,000 Airgas associates out there, who make up the best team in the business. We have proven year after year our ability to create real shareholder value. And as our results show, we're continuing that trend this year.

Before reviewing our earnings results, I'll briefly address the Air Products' unsolicited offer. In September, the Airgas Board determined that Air Products' unsolicited tender offer of $65.50 is grossly inadequate, and does not sufficiently compensate Airgas stockholders for the company's excellent prospects, inherent value and impressive economic performance.

Today, the newly constituted Board of Directors of Airgas sent a letter to Air Products unanimously reaffirming this position. Further, the letter made clear that if Air Products were to provide sufficient reason for the Airgas Board to believe that negotiations would lead to a transaction at a price that is consistent with the Board's valuation of the company, which is meaningfully in excess of $70 per share, the Board will authorize negotiations with Air Products. The letter was made public earlier today in a press release and is available in the Investor Relations section of the Airgas website.

As you know, we are appealing the Delaware Chancery Court ruling related to the Air Products bylaw amendment proposal that would require an annual meeting of stockholders to be held on January 18, 2011, and all future annual meetings to be held in January. We firmly believe that Air Products' bylaw amendment proposal is invalid under both Delaware Law and Airgas' Certificate of Incorporation. We also believe that the proposal has not been approved because it received the affirmative vote of less than 67% of the shares entitled to vote generally in the election of directors.

Since Air Products commenced its tender offer, we have delivered excellent results and economic conditions have continued to improve. We have reduced our adjusted debt by more than $200 million since Air Products approached us for the $62 offer. And we are now generating earnings in excess of 20% over last year.

We believe that the improving sales climate bolsters the expectations of greater value. Our strategy through the downturn was to position Airgas to emerge from the recession as an even stronger company, and our results demonstrate our success.

With that, I want to turn to the matter at hand today, our strong financial and operational performance this past quarter. Please turn to Slide 2. Adjusted earnings per diluted share of $0.83 for the second quarter were up 22% from the prior year. We again delivered the second-best earnings quarter in our history, matching our first quarter earnings results in spite of $0.06 of sequential headwinds that we identified in our second quarter guidance.

Total sales on the quarter were $1.06 billion, an increase of 10% over the prior year, driven by a robust sound same-store sales increase of 9%. Gas and rent same-store sales increased 7% and hardgoods increased 12%. Acquisitions contributed sales growth of only 1%.

Conditions continued to improve in most of our customer segments and geographies this quarter, led by Manufacturing, and with a graded strength in our Great Lakes region. Our core Distribution business continues to reflect the improving industrial conditions in the U.S. Distribution segment same-store sales increased 8% over last year and were up 1% sequentially.

Hardgoods' growth is now significantly outpacing gas and rent, consistent with an economic recovery. We announced some important customer winds this quarter, including a contract to build an on-site air separation unit in Clarksville, Tennessee, to supply Hemlock Semiconductors $1.2 billion alloy silicon manufacturing facility when completed in 2012.

The new ASU will produce nitrogen and other atmospheric gases for Hemlock and the merchant market in the region. Our June 1 price increase has now been fully implemented and is producing results, as pricing accounted for roughly 1/3 of the same-store sales increase in the Distribution segment and for the total company.

Cash flow continues to be one of the strengths of our business model. Year-to-date, free cash flow of $179 million was driven by $290 million of adjusted cash flow from operations, as well as continued CapEx discipline. As a percent of sales, our capital spending this year is down 120 basis points from last year to 5.5%. Our adjusted debt at the end of September was $1.7 billion, a reduction of $127 million this fiscal year.

Our acquisition activity has historically slowed during recessions and then accelerated during the recovery phase of the business cycle, as owners are more interested in selling their businesses during strong performance. While we have acquired a few small businesses this year, we are more encouraged by recent signs of increased activity in our acquisition pipeline.

Our acquisition strategy is unchanged, we have capacity to purchase and integrate quality businesses and we remain diligent in sourcing transactions. We will continue to evaluate international opportunities as they arise, but our primary focus remains on our domestic core businesses and related adjacencies.

Looking forward, in the third quarter, we expect another sequential improvement in daily sales. September was a strong sales month and October is tracking well. We expect the U.S. Manufacturing will continue to expand and will continue to outpace GDP as it has so far this year.

Given our strong performance and expectations for steady growth, we raised our fiscal 2011 earnings guidance to $3.22 to $3.32 per share, which now represents a year-over-year increase of 20% to 24% over fiscal 2010, and 24% to 28% increase in underlying earnings before $0.11 of SAP cost.

As I mentioned earlier, our strategy was to position Airgas to emerge as an even stronger company in the economic recovery. And our results are a testament to the success of that strategy, as we are running very close to record earnings and margins. In fact, this quarter would've been a record but for the $0.04 incremental SAP cost, which we recorded this quarter. And that's very impressive when they consider that we're still 9% below peak revenues.

We intend to stay focused on our fundamental strategies, enhance our sales organization and performance and continue to train our associates as we position Airgas to drive significant shareholder value creation during the recovery. Mike will now give us a review of market strategy and operations.

Michael Molinini

Thank you, Peter, and good morning, everyone. As Peter had mentioned, our business, which historically lags the economic cycle, is gathering momentum in the economic recovery. This morning, I'm going to give you a few examples of metrics we watch in our business to illustrate this momentum. We'll review the operating results and I'll finish with a brief update on our SAP implementation.

In the second quarter, our Equipment sales began to accelerate, outpacing growth in total hardgoods sales, both sequentially from the first quarter and year-over-year. Equipment, which consists primarily of welding and cutting machines, represent the capital purchase for our customers and Equipment sales tend to rise as customers recapitalize for future production.

In the Gas business, production, distribution and asset management are the key drivers of profitability and returns. We refer to cylinders in our customers' possession as utilized cylinders. This quarter marked the first quarterly increase in the number of utilized cylinders since June of 2008, an indication that the increased working stocks of cylinders are needed to support growing customer demand.

Accounts receivable metrics and administrative error rates are also indicative of the health of any business. Our DSO and collection rates have improved noticeably this year through the second quarter, as have our invoice error rates. These are all the more impressive in the face of a hostile takeover attempt and are characteristic of a motivated and focused Airgas workforce.

Our sales and marketing strategy, focused on segment alignment, also continues to gain momentum. Success thus far has been most pronounced in our Strategic Accounts program where the strategy originated and was already underway in Medical and Construction segments.

For the second quarter, our Strategic Accounts business was up 9% from the prior year, driven by new account signings across All Customer Segments and by increased activity in our existing Metal Fabrication and materials and conglomerates customer bases. Strategic Accounts presents tremendous cross-sell opportunities both in terms of product lines and locations and now represents 20% of total sales.

Turning to Slide 3. Sales of our Strategic Products, which combine and make up over 40% of our revenue, increased 10% for the quarter, stronger than the overall same-store sales increase of 9%. Our Strategic Products as a group continue to have particularly good long-term growth profile, as many of our growth accelerators impact their performance.

Safety Products grew 13% year-over-year in the quarter, comparing favorably to the overall hardgoods same-store sales increase of 12%. Particularly noteworthy is that this strong growth occurred during the quarter in which we converted the majority of our safety business to SAP. On a sequential basis, sales of safety products were essentially flat after adjusting for the first quarter impact of revenue related to the Gulf oil spill remediation. Safety products sales still represent a strong cross-sell opportunity for us, as our customers realize good value and vendor consolidation.

Bulk Gas sales were up 12% compared to the prior year and up 5% sequentially compared to the first quarter, as Bulk sales to industrial manufacturing and petrochemical companies customers continue to recover, and bulk nitrogen for food freezing applications continued to show strength.

Medical sales, which were relatively resilient throughout the downturn, were up 4% compared to prior year and 1% sequentially, outflowing in elective and non-critical procedures were more than offset by new customer signings.

Specialty Gas sales increased 10% year-over-year and 2% sequentially. The growing demand for core specialty gases reflects further strengthening of our market position in EPA protocols and other calibration gas mixtures, as well as improving conditions in petrochemical markets.

Solid year-over-year growth in our CO2 and Dry ice business was primarily driven by new customer signings. Sequential growth was driven both by new customer signings in the normal seasonality and as our second quarter includes the hottest months of the year.

Our Radnor private label products were up 12% for the quarter. The long-term growth opportunity for the Radnor brand remain strong. In addition to building brand loyalty within our customer base, gross margins on Radnor products are 1.5x or more than those of comparable OEM products.

Our operating efficiency programs, which focus on cylinder maintenance and testing, distribution of fill plant logistics, and freight and fuel management are progressing according to schedule. At our December Analyst Meeting, we set a goal to attain $40 million of new operating efficiency savings over the next four years, driven largely by logistics plant studies and cylinder testing. We are on track to deliver the $10 million of those savings that are included in our fiscal 2011 guidance.

I would like to conclude my remarks by providing an update on the status of our SAP conversion. The commencement of our planned phase rollout, whereby business units implement the new SAP system in succession, marks a major milestone in the structural development of our company.

In August, we provided you with an update regarding the value represented by the ongoing implementation of our highly customized SAP system, including quantification of the economic benefits expected to be achieved in three key areas: accelerated sales growth through expansion of the Telesales platform; price management; and administrative and operating efficiencies.

Upon full implementation, we expect these three areas alone to yield an aggregate of $75 million to $125 million in incremental operating income on an annual run rate basis and we expect to identify additional economic benefit as the implementation progresses. This will further optimize the power of the Airgas platform and we are excited about it's game-changing implications.

As planned, we successfully converted our hardgoods supply chain infrastructure to SAP in early July 2010. The Airgas hardgoods supply chain includes more than 300,000 stock-keeping units, six national distribution centers, four buying centers and a safety products Telesales organization, and serves as the hardgoods fulfillment source for over 875 regional company branches.

As a result, the Airgas hardgoods supply chain touches nearly every area of our company and therefore, its successful conversion to SAP is a significant indicator of the future success and timeline of this project.

Based on the conversion of the hardgoods supply chain, I'm happy to highlight for you some of the positive results we've seen so far. The SAP system is stable and our associates are becoming more proficient every day.

Customer service levels have remained as high as they were in the legacy system as many of our associates have noted that it's much easier to access account information on SAP. Hardgoods fulfillment rates remain at free conversion levels. Accounts receivable metrics have exceeded plan in every month since conversion, and there has been no increase in the number of billing errors or credit memos issued.

Our national distribution center personnel have been improving their productivity and accuracy every day through the use of SAP-enabled handheld radio frequency devices. Our Safety Telesales business had exceeded both forecast and prior year sale and EBITDA in every month since converting to SAP. And the new system has enabled a much faster month-end close process. Lastly, we are on track for our first regional company, Airgas South, to go live on SAP on April 1, 2011.

The regional SAP implementation plan called for full conversion of all Airgas businesses with the exception of Red-D-Arc by the end of calendar 2013. Based on our early success and the magnitude of the benefits, we've developed a modified and accelerated implementation plan. Under the accelerated schedule, we expect full implementation at nearly all our regional distribution companies where the majority of benefits are expected to be realized to occur by the summer of 2012, with implementation reaching all remaining business units by December 31, 2012.

Through September 2010, we've invested more than 75% of our original $85 million SAP project estimate. And the decision to accelerate the implementation was based on the early success of system conversions and the substantial benefits to be realized.

We expect the additional implementation costs of the accelerated schedule to be approximately $20 million, which will be more than offset by the economic benefits that will begin to accrue during the conversion process. These additional costs do not impact any previously issued earnings guidance we have provided.

Based on everything we've experienced to date, we are highly confident that by the end of calendar 2013, the benefits detailed in our August 31 announcement will be achieved and will constitute a minimum of $75 million in aggregate annual run rate benefits and operating income, with a strong likelihood that these benefits will reach or exceed $125 million in the aggregate.

Now Bob will give you our financial review of the quarter.

Robert McLaughlin

Thanks, Mike, and good morning, everyone. I'd like to start today by reviewing our consolidated results. Please turn to Slide 4. As I go through these results, please note that we have GAAP reconciliations for various metrics on Slides 10 through 15.

Sales increased 10% year-over-year to $1.06 billion, reflecting acquisitions growth of 1% and total same-store sales growth of 9%, comprised of the 7% increase in gas and rent and a 12% increase in hardgoods.

Volume was up 6% and price was up 3%, reflecting a full quarter's impact of the June 1 price increase. Sequentially, sales increased by 1%.

Both hardgoods and gas and rent sales improved sequentially, with hardgoods outpacing gas and rent as is typical in an industrial economic recovery. Consistent with the first quarter, gas and rent represented approximately 64% of our sales mix. The gas and rent mix was slightly higher in the second quarter of last year, at 65%.

Gross margin was 55.1%, a decline of 80 basis points from the prior year, primarily reflecting the expected sales mix shift toward lower margin hardgoods. Sequentially, gross margin expanded by 20 basis points. Excluding pretax charges of approximately $4.7 million related to Air Products' unsolicited takeover attempt and approximately $1.4 million related to the withdrawal from multi-employer pension plans, adjusted operating income for the quarter was $128 million, up 15% from last year.

This is a strong performance, particularly in light of the significant year-over-year increases in variable compensation expense due to favorable performance relative to plan in the current year versus below-plan performance in the prior year, as well as incremental expenses in the current year related to our SAP implementation.

Adjusted operating margin for the quarter was 12%, a 40 basis point improvement over the prior year, driven by operating leverage on sales growth, which more than overcame year-over-year expense headwinds from variable compensation and SAP implementation costs.

Sequentially, adjusted operating margin was down slightly from 12.3% in the first quarter, reflecting 30 basis points of incremental impact from the commencement of our SAP system conversions in July. Adjusted earnings per diluted share increased 22% from the prior year to $0.83 in the second quarter, above our guided range and matching the first quarter as the second-best earnings quarter in our history.

There were approximately 85.6 million weighted average diluted shares outstanding for the quarter, up about 3% year-over-year and flat sequentially. Return on capital, which is a trailing four quarters calculation, was 10.9%, a 40 basis point improvement sequentially on the strength of our improving operating income. We expect our return on capital to continue to expand with operating income as the recovery continues and our business benefits from the significant capital investments we have made in the past few years, including new air separation plants, Bill Plant upgrades and SAP.

With respect to accounts receivable, our collection rates and our DSO for the quarter improved year-over-year and we're relatively consistent with the first quarter.

Inventory turns held consistent with recent trends, reflecting our disciplined management of inventory levels during the significant uptick in hardgoods sales. Year-to-date, we generated strong free cash flow of $179 million, driven by adjusted cash from operations of $290 million. We have reduced our adjusted debt by approximately $127 million fiscal year-to-date, to $1.7 billion at September 30. Over the past 12 months, we have reduced adjusted debt by more than $200 million.

Our fixed flow of ratio at the end of September was 60% fixed, and our adjusted debt-to-EBITDA ratio was 2.4% within our revised target range of 2% to 3%. During the quarter, we refinanced our revolving credit agreement, which would have matured in July 2011, at an approximate rate of LIBOR plus 212 basis points, and issued $250 million of 3.25% senior notes due in 2015. Both arrangements position us well for the future by extending our debt maturities and reducing our reliance on bank financing.

Now turn to Slide 5 and we'll look at our segment results. Distribution sales in the quarter were up 10% versus the prior year to $944 million, with same-store sales up 8%. Gas and rent same-store sales were up 6%, and hardgoods were up 12%, with pricing up 3% in both categories driven by a full quarter's contribution from our successful June 1 price increase.

On a sequential basis, Distribution sales increased by 1%. Both gas and hardgoods sales improved sequentially, with hardgoods outpacing gas and rent. Distribution gross margin was 55.5%, a decrease of 90 basis points from the prior year, primarily reflecting the expected sales mix shift towards lower margin hardgoods.

Sequentially, distribution gross margin was consistent with the first quarter. As in the first quarter, gas and rent represented close to 60% of Distribution sales in the second quarter.

Adjusted operating income in the Distribution segment increased 13% year-over-year to $106 million. And as noted in my comments on our consolidated results, Distribution operating income growth was also negatively impacted by incremental variable compensation and SAP implementation costs.

Adjusted operating margin in the Distribution segment was 11.3%, a 40 basis point improvement over the prior year, driven by operating leverage in sales growth, which more than overcame year-over-year expense headwinds from variable compensation and SAP implementation costs. Sequentially, adjusted operating margin was down slightly from 11.5% in the first quarter, reflecting 30 basis points of incremental impact from the commencement of SAP conversions in July.

All Other Operations reflects our CO2, Dry ice, Refrigerants, Ammonia and nitrous oxide business units. Sales for All Operations (sic) [All Other Operations] were up 12% in total and on a same-store basis from the prior year, driven primarily by higher pricing for certain refrigerants, higher pricing in volumes for ammonia used in DeNOx applications in chemical processing and new customer signings on our liquid CO2 business.

Sequentially, sales for All Other Operations declined 2% as seasonal strength in our Ammonia, CO2 and Dry ice businesses was more than offset on a comparative basis by the effect of the significant outperformance in our Refrigerants business in the first quarter.

Gross margin for All Other Operations was down 50 basis points from the prior year, primarily driven by higher costs in the Ammonia business relative to pricing. Sequentially, gross margin was up 180 basis points as lower margin Refrigerants represented a smaller portion of the sales mix.

Adjusted operating income for All Other Operations was $21 million. Adjusted operating margin increased 150 basis points year-over-year, as operating leverage on sales growth in our Refrigerants and CO2 businesses more than offset the impact of a slight gross margin compression in our Ammonia business.

Sequentially, the 60 basis point decline in operating margin is primarily attributable to the gross margin compression in the Ammonia business and reduced operating leverage on lower sales in the Refrigerants business relative to the first quarter.

Please turn to Slide 6, capital expenditures. We have continued to be disciplined in our capital spending this year, as reflected in the 120 basis point year-over-year reduction in capital expenditures as a percent of sales to 5.5%.

Slide 7 presents our fiscal 2011 third quarter and updated full-year guidance. For the third quarter, we expect earnings per share to be in the range of $0.76 to $0.80, an increase of 17% to 23% over the prior year, impressive growth in the face of significant year-over-year headwinds in the third quarter from our variable compensation reset. Excluding $0.01 of incremental SAP implementation costs, our guidance represents a 19% to 25% improvement over the prior year.

For the full year, we are raising our earnings per share expectations to be in the range of $3.22 to $3.32, from $3.15 to $3.30, up 20% to 24% over adjusted EPS for fiscal 2010, which includes significant year-over-year impact of increased variable compensation and SAP implementation costs.

We expect same-store sales growth to be in the high-single digits in the third quarter and in the mid- to high-single digits for the full fiscal year. Operating margin is expected to be in the 12% to 12.5% range, and we continue to estimate capital expenditures to be approximately 5.5% of sales. We expect our tax rate to be in the range of 38% to 39%, and our guidance excludes debt extinguishment charges, multi-employer pension withdraw charges and costs and charges related to the unsolicited takeover attempt.

Slide 8 presents a walk through the primary elements of our third quarter guidance, using second quarter adjusted EPS of $0.83 as a starting point. We have also included in this slide a walk through the primary elements of the resulting fourth quarter guidance implied by our third quarter and updated fiscal year guidance, using our third quarter guidance range as a starting point.

Sequentially, the third quarter includes a headwind of between $0.05 and $0.06, due to two fewer selling days and the impact of holidays in the third quarter as compared to the second quarter.

The third quarter also has a headwind of approximately $0.05 to $0.06 due to the seasonality of our CO2, Dry ice and Refrigerants businesses which typically slow during the cooler months of the year, partially offset by higher sales in our Red-D-Arc Rental Welder business due to the fall turnaround season.

We expect $0.02 of sequential benefit from lower SAP implementation costs in the third quarter, as we successfully completed the conversion of our first business units during the second quarter.

We expect the core business to expand sequentially, contributing $0.03 to $0.05 on continued modest improvement in the manufacturing economy, and on solid execution of our operating efficiency programs. In the fourth quarter, the addition of two selling days and the loss of the negative third quarter impact of holidays should provide a $0.05 to $0.06 benefit to EPS.

The seasonal nature of our CO2, Dry ice and Red-D-Arc businesses will continue to be a headwind, and the preparation for implementation of SAP at our first regional company on April 1 is expected to be a headwind of approximately $0.03 relative to the third quarter.

We expect our core business to expand sequentially over and above the incremental selling days, contributing $0.03 to $0.04 on a continued modest improvement in the manufacturing economy and continued solid execution on our operating efficiency programs.

The underlying business improvement is consistent with the plan we developed in conjunction with our midterm financial goals we announced at the December Analyst Meeting. And in fact, our current trajectory is higher. I'll now turn it back to Peter.

Peter McCausland

Thanks, Bob. Before we turn to Q&A, I'd like to highlight some of the reasons that underscore our confidence in Airgas' prospects for continued growth and shareholder value of creation, and some of our views on valuation.

Slide 9 illustrates the EPS growth Airgas generated in the economic recovery from calendar 2002 through calendar 2005, and contrast that with the growth represented by our current midterm goals.

In the three-year period following the last recession, we delivered compounded annual EPS growth of 18%. Our earnings growth tends to accelerate as an expansion continues, particularly after overcoming the initial headwinds of variable costs at the outset of recovery.

Our high EBITDA margins so early in this recovery bode very well for our earnings growth. Last year at our December Analyst Meeting, we announced a new set of financial goals consistent with our practice over the past decade.

The bottom chart shows the earnings growth trajectory from calendar 2009 to our calendar 2012 target of $4.20 plus per share. The 16% CAGR is more conservative than our performance in the last recovery in spite of the fact that we are a much stronger operating company today. You can clearly see that our revised fiscal 2011 guidance range is above the earnings trajectory on which these current midterm goals are built, even though the recent low and acquisition activity has us behind the acquisition assumptions in our plan.

In other words, if we continue with our current pace, I expect us to beat our target of $4.20-plus per share for calendar 2012, and an improving acquisition environment would then provide further upside to that target.

On September 2, we published a slide deck titled, "It's All About Value", wherein we highlighted many reasons that we believe Air Products' offer is inadequate and opportunistic. An important takeaway is that in the five-year time frame leading up to February 4, 2010, the day before Air Products announced its offer, Airgas had a median next 12 months price earnings multiple of 16.7x. That five-year period includes significant impact from the recession and almost all of our peers today are trading at or above their respective five-year average multiples.

Digging deeper into that same timeframe, when GDP growth was between 0% and 3%, our average NTM EPS multiple was 17.7x. Calendar 2010 is rapidly drawing to a close, and investors are sharpening their focus on calendar 2011 earnings. Since February, there's been a significant increase on our actual and expected earnings growth, substantial improvement in the markets and meaningful reduction of our debt.

We point out these factors to underscore our Board's view that Air Products' $65.50 offer is grossly inadequate. The benefits of our customer-centric culture and new sales alignment are just starting to develop. Our industry is still very fragmented and acquisitions are our core competency in Airgas. We've never been stronger than we are today. We appreciate the tremendous amount of support we have received from our shareholders, and look forward to continuing to deliver outstanding value to you in the future.

Thank you, and now I'd like to turn it back to Jay to begin our question-and-answer session.

R. Worley

That concludes our prepared remarks. As we begin the Q&A portion of the call, we ask that you maintain a focus on earnings and business fundamentals. Please limit yourself to two questions and one follow-up, and then get back in the queue if you have further inquiries. The operator will now give instructions for asking questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Tom Hayes from Piper Jaffray.

Thomas Hayes - Piper Jaffray Companies

I was just wondering if you maybe provide some color or a comment as far as the growth, are you seeing it coming from the smaller accounts, the larger multilocation accounts or kind of across-the-board?

Robert McLaughlin

Well, our strategic account growths for the quarter was 10%, which was slightly above our same-store sales growth. And it's pretty broad-based, I would say that the medium to larger customers are growing a little faster than the smaller customers. Mike might have better color on that.

Michael Molinini

I think I'd say in general, the companies that are performing the best or those that have a significant industrial manufacturing embedded customer base. And whether it be a large customer or second-tier suppliers that supply those large manufacturers, those are the ones that are -- that's where the strongest growth is coming from.

Thomas Hayes - Piper Jaffray Companies

I guess, secondly, in the face of very solid results, I was just wondering if maybe that could have been even higher? I was just wondering, are you getting a pushback or a delayed decision-making from prospective customers to the overhang of the Air Products offer?

Peter McCausland

Well, that's come off a few times. And there is some concern out there. But I would say, it hasn't had a material impact on our business yet. And of course, I don't know how long this is going to go on. But I guess, eventually, it could have. But so far, there are 14,000 people, are just doing an amazing job taking care of our customers. And this performance is just -- everyone in Radnor is just in awe of everyone in the field for the job they've done and the way they've stayed focused.

Operator

And I'll take our next question from Mike Sison from KeyBanc.

Michael Sison - KeyBanc Capital Markets Inc.

Peter, it sounds like the acquisition environment is getting a little bit better. If you headed into calendar '11 and got back on your normal 3% to 5% type of earning growth, what do you think that $4.20 could eventually look like given that you'd have two years of the acquisitions in your pocket?

Peter McCausland

Well, I'm not allowed to say what I really think. I think we've put a good target out there. We're on track to beat it. As I said, having such high EBITDA margins so early in the recovery bodes very, very well for our fall-through. And we're beating the plan that assumed $150 million a year in acquired revenue, basically without that acquired revenue. So I do think acquisitions are going to come back and they could be a fairly significant upside. There's no one that has more -- we have the biggest platform in the country, so no one has more synergies that we do and we've gotten pretty good at integrating companies. Regarding the activity, it has picked up in terms of the number of companies we're looking at. Most of them are domestic but there are some international opportunities as well. And we're looking forward to putting some acquisitions, getting some acquisitions under our belt over the next nine months.

Michael Sison - KeyBanc Capital Markets Inc.

And then, you tended to have a pretty good feel for industrial America. Do you see it continuing to improve? Is it picking up, stabled? Could you just give a little bit of some commentary there?

Peter McCausland

Well, I think our business is a good mirror of the overall economy and industrial America, as you call it. And this looks and feels to me like a typical recovery. It's a little bit slower, it's like we're in the early tentative stages of a recovery, when people aren't sure that it's going to happen. But it's there, it's pretty broad-based. Mike talked about an increase in Equipment sales. And in the past, that has always been a precursor to more manufacturing activity and higher consumable sales and gas sales. And so it looks pretty much like a broad-based recovery to us and not too soon.

Michael Sison - KeyBanc Capital Markets Inc.

And then final question, when you take a look at gases and rent overtaking Equipment sales or accelerating historically, and you sort of apply that going forward, which would really boost your margins a little bit, even more than you see now. Is that something that happens like mid-cycle, sooner than later?

Peter McCausland

Well has has tended to pick up mid-cycle and, of course, they tend to be the lagging part of our business because a lot of our gases are used in production and so that part of the gas business lags. And there's another reason that gas sales lag. And that is, early in the recovery, price is tougher to come by because there's excess capacity in the system and the hangover of the recession. When you get later into a recovery and you have cost pressures, customers are more willing to accept larger price increases and they're easier to come by. And because the competitors are healthier and they need to cover their increased costs as well. So you get the double impact at causing that lag.

Robert McLaughlin

We were pleased to see, Mike, the increase from 5% same-store sales and gas and rent to 7%. And we see that kind of incremental trend in the foreseeable future continuing.

Operator

And your next question comes from Laurence Alexander from Jefferies.

Lucy Watson - Jefferies & Co.

This is Lucy Watson in for Laurence today. Would you mind discussing, I guess, a little bit more or can you provide a little bit more color on regional and end market trends, including any areas where you might see the December quarter? You might see them being potentially weaker in the December quarter?

Peter McCausland

Well, we said that we had a seasonal downturn in our CO2, our Dry ice and our Refrigerants businesses in the December quarter, so we expect that. In terms of our Distribution business, the strongest part of the country right now is Great Lakes in North Central, the Upper Midwest manufacturing parts. But that tends to lead in an economic recovery any way. California continues to have its problems, so it's been a little slower to recovery but we're seeing solid signs of recovery out there now. I don't anticipate any areas turning down, geographies turning down. I do see an increase in our non-residential Construction business. Part of that will be seasonal, there are a lot of turnarounds that take place in the December quarter at refineries and paper mills and power plants. And a lot of our construction sales are into that sector, into the turnaround business. And there are a few projects starting up as well. So that one pretty low, non-residential Construction, I think, 28% unemployment. And so it's nice to see that come back and that might help us a little bit in the quarter, as well offsetting the two less selling days and the impact of the holidays --

Lucy Watson - Jefferies & Co.

And then in your last Investor Day, you highlighted several growth prospects such as retail and the ODmax? How are you, I guess, tracking?

Peter McCausland

I'll let Mike answer that.

Michael Molinini

Let me start with the Ammonia question because we talked about the depth, which is the urea-based solution that's being introduced for newer engines to remove nitric oxide. Now that has begun to take hold. It's slow, it's going to be slow, we think we said that. Most of the containers that are being sold for that today are gallon jugs and totes and things like that. But one of the things that's happening, and keep in mind that was for DeNOx for trucks and cars and things like that, mobile. What's happening is a significant acceleration in DeNOx in general in stationary sources, smokestacks, cement kilns, power plants. And there's also a move, a higher growth than we we're expecting in Ammonia that is sold in aqua form, which is a water solution of Ammonia, which is less -- has lower risk in handling for customers. And as customers attempt to manage risk there's a high interest in this product. And what's interesting about it is that since it's mostly water, you can haul it very far. And our network of Ammonia locations, which is the most expensive in the country, I think, per tank trucks, is uniquely positioned. So we're getting higher growth than we expected from DeNOx, from the development and evolution of aqua Ammonia as a source. That's the Ammonia story. In the Retail story, that continues to go quite well and it's expanding. When we started it and told you about it in December, we were talking primarily about helium for balloons and things like that. It's now expanding into chains of grocery stores and chains of auto parts, auto body centers, repair centers, auto dealerships and things like that. And it's going well.

Operator

[Operator Instructions] And next we'll hear from Mike Harrison at First Analysis.

Michael Harrison - First Analysis

Peter, I wanted to ask you about the Bulk Gas organic growth number, 12% is a pretty impressive number given your North America focus. Was wondering if you could put that number in context in terms of how much of that is coming from new on-site customers? How much is coming from new liquid customers? And how much should we think of as volume growth at existing liquid customers? And what do you think is the sustainable growth rate for the Bulk Gas business?

Peter McCausland

Well, I'll take the last point later. I think we're going to grow faster than the market in Bulk because we've started out in this business as a package gas company, and we have a million customers. And a lot of those customers buy everything from us expect Bulk, because we weren't in that business except in a few small geographies. And so I think we'll continue to outperform. The Bulk business is getting better in the United States, but I think we're growing faster than the industry. And if you look at our CapEx, so far this year, you can see that our cylinders and Bulk tanks are still pretty robust and most of that is Bulk tanks. And we have a lot of relationships or, as I said, we have all the business, we're in there. Three times a week sometimes on the more active customers, at least a couple of times a month on the medium-sized customers. So we know the people and when these bulk accounts come up for renewal, we have an opportunity. Also, for new applications. We have 1,500 sales people out there beating the streets every single day and the chances of them tripping over -- and it's not tripping, believe me, they're well-trained, then digging up Bulk prospects are very, very good. And that goes to the strength of our operating model. And that Bulk volume has nothing to do with on-sites. On-sites are -- we report them separately. We have started up a couple for customers this year, but that number doesn't include them.

Michael Harrison - First Analysis

The Bulk is completely liquid then. Peter, it sounds you're kind of bullish on the turnaround side of the business. I know that last year's December quarter, Red-D-Arc kind of fell flat and I think part of that was due to a specific customer. But was wondering if you could just give us maybe a little bit more detail about your outlook there? And are you seeing that there's pent-up demand on the turnaround on the maintenance side? And is that what we're starting to see here?

Peter McCausland

Well, Mike is preparing a presentation to our Board on this very subject. So I'm going to let him answer that one.

Michael Molinini

If you recall, our Construction effort -- if you go back a couple of years, you'll remember one of the things we said was we were underrepresented in this segment. And you'll also remember that we said, we had a very compelling value proposition for large contractors that did jobs in multiple locations around the country. So as relates to Construction sale, those efforts, even though overall those contractors' business is down, our sales to those contractors are up. And in fact, on Construction sales, we are now in positive territory. And expect -- based on what we know in their pipeline, again, even though their business is down, our piece of the pie is up pretty significantly and we have positive Construction sales. Now with that said, Red-D-Arc is not yet in positive territory. But based on what's on the books right now, in this quarter we're entering right now, at the end of this quarter, if those jobs don't get canceled, and we've had far fewer cancellations now than we had a year ago. Everything was being taken off even at the time after we made deliveries. So subject to the jobs actually occurring, which we believe they will, Red-D-Arc will be in positive same-store sales territory.

Michael Harrison - First Analysis

Last question I had is on the beverage carbonation front. Praxair recently sold their beverage CO2 business to NuCO (sic) [NuCO2]. Was that a property that you guys looked in? And can you give us some thoughts on how you're thinking the beverage carbonation businesses sits within Airgas overall given that you guys are a distant second in that market?

Peter McCausland

Well, it's a business that continues for us to grow very nicely. And we have been slowly and methodically growing that business, we have been slowly and methodically adding more cities in which we offer that service. We have standardized, if you will, our image in the marketplace with our trucks and our branding. And I don't know off the top of my head what the growth rate is of that business. But there's a very high probability it's small, but it's a double digit kind of growth rate. And I think as more and more of these large customers look at their current supply, they are looking at wanting to have more than one choice. And from my perspective, from being a number two guy that has the ability to serve large swaths of the country for those customers that aren't happy with the supply they have or looking to split their business, we're positioned very, very well for that.

Michael Harrison - First Analysis

And did you look to subtract their CO2 business at all?

Peter McCausland

I don't believe so.

Operator

And next, we'll hear from Holden Lewis from BB&T.

Holden Lewis - BB&T Capital Markets

You talked about a 1% sequential increase in sort of the gas revenues. And if I remember correctly, you put the price increase through pretty late in the last quarter so that it would've impacted you more significantly this quarter versus last one. And I guess I just sort of expected that if you add a 3% or 4% price increase going through that fiscal year, you'd expected to see more than the 1% sequential increase that you saw. I know days are the same and all that, can you sort of explain the comment that you're getting the 3% to 4% but it doesn't seem to be there in the numbers?

Robert McLaughlin

I think we got it. I think we had a little bit of a summer slowdown impacting some of our gas customers and a few other things. But we feel pretty good about what we've got on the price increase. And we had a nice pickup in sales as we got through the summer, September and October, in gases have been very strong. So I think it's just normal seasonality.

Holden Lewis - BB&T Capital Markets

So absent the pricing, you feel like you would have had a sequential decline in the gas rent (sic) [gas and rent] business?

Robert McLaughlin

Yes.

Holden Lewis - BB&T Capital Markets

And you think that's just normal seasonality?

Peter McCausland

July is typically very slow for us, coming off the first quarter. So that was nothing unusual and it picks up as you get into the latter part of August and noticeably into September and October. Nothing unusual there.

Holden Lewis - BB&T Capital Markets

But you do feel like the 3% or 4% is in there?

Peter McCausland

We know quite precisely that 3% is in there.

Holden Lewis - BB&T Capital Markets

And then you talked about the revenue, that you only got 1%. Can you just talk about what that is for the gas rent, the hardgoods and the Other Ops [All Other Operations]. I don't think there's much in Other Ops but I mean is gas rent (sic) [gas and rent], hardgoods both about 1% too? Or is that split on how disproportionately towards one or the other, do you know?

Robert McLaughlin

No, it's fairly proportionately split on a sequential basis. Maybe slightly higher on the hardgoods side.

Operator

Our next question comes from David Manthey from Robert W. Baird.

David Manthey - Robert W. Baird & Co. Incorporated

I know that non-tech industrial production is the key indicator for you. But in the past, you said that swings in non-residential Construction can also move the needle. And Mike, I believe in your commentary, you mentioned that you saw growth in non-res Construction during the second fiscal quarter. Could you tell us as of today, what percentage of revenues that represents for you?

Michael Molinini

10%-ish.

David Manthey - Robert W. Baird & Co. Incorporated

Did you say 10%?

Michael Molinini

Yes, it's plus or minus point around 10% probably. I mean, it's pretty close.

David Manthey - Robert W. Baird & Co. Incorporated

And then Peter, could you talk about the contribution from price increases as you look at the 2005 or the 2002 to 2005 time frame in your slide? As you started moving through that cycle, maybe you could talk a little bit about the type of price increase that you were able to achieve and at what point in that curve?

Peter McCausland

Well, I'm really not prepared to answer that. But I do have a vague recollection of that time. Do you remember that commodity prices hit 30-year lows in 2002? And we had some -- they started to talk about deflation. It was very, very hard to get price for a long time there. And I remember that most of the price increases in that period were backend-loaded because pricing was tough to come by. That's my vague recollection, we could check on that and give you a more specific answer after the call. But that's my recollection. And the fact that we were able to get through a decent price increase wasn't our best in history by any stretch, but it was a decent price increase so early in the recovery. I think it was a good thing, it was supported by cost increases that our customers bought, and I think it reflects the fact that we're doing a good job for our customers.

Operator

And our last question comes from Mark Gulley from Soleil Securities.

Mark Gulley - Soleil Securities Group, Inc.

I had two questions, really, on Slide 9. My first question had to do with you showing sort of a midpoint to your halftime or the $3.22, $3.32. That looks to be on track between the two points and yet you were saying there's something about that doesn't your underlying performance. Can you refresh my memory as to what you're pointing out there, Peter?

Peter McCausland

It looks to me like it's above the trajectory by a decent margin there, but...

Mark Gulley - Soleil Securities Group, Inc.

Are you saying it's not linear, yet it's...

Peter McCausland

Right. And then number two is that this $2.67 to $4.20-plus included an assumption of $150 million a year and acquisitions. And obviously, we haven't made that from the December '09 through where we are today. And we're still running above the trajectory. And we're projecting that we're going to continue to run above that without acquisition. So to the extent we get acquisitions, it's going to represent upside.

Mark Gulley - Soleil Securities Group, Inc.

And then finally, if I may, what same-store sales growth, can you refresh our memories, is embedded in that forecast?

Peter McCausland

I think it's 7%.

Peter McCausland

Yes, it's 7% compounded.

Operator

That concludes the question-and-answer session today. At this time, I would like to turn the conference back over to Mr. Jay Worley for any additional or closing remarks.

R. Worley

Again, we thank you all for joining us today. And I will be available all afternoon for follow-up questions.

Operator

That does conclude today's conference. Thank you for your participation.

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