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Executives

Michael Molinini - Chief Operating Officer and Executive Vice President

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

R. Worley - Vice President of Communications & Investor Relations

Robert McLaughlin - Chief Financial Officer and Senior Vice President

Analysts

Brian Maguire

Mark Gulley - Soleil Securities Group, Inc.

Edward Yang - Oppenheimer & Co. Inc.

Ryan Merkel - William Blair & Company L.L.C.

James Sheehan - Deutsche Bank AG

Michael Harrison - First Analysis

David Manthey - Robert W. Baird & Co. Incorporated

Laurence Alexander - Jefferies & Company, Inc.

Kevin McCarthy

Thomas Hayes - Piper Jaffray Companies

Unknown Analyst -

John E. Roberts - Buckingham Research Group

Airgas (ARG) Q4 2011 Earnings Call May 5, 2011 10:00 AM ET

Operator

Good morning, and welcome to the Airgas Fourth Quarter 2011 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] For opening remarks and introductions, I'll now turn the call over to the Vice President of Communications and Investor Relations, Jay Worley. Please go ahead, sir.

R. Worley

Good morning, and thank you for attending our fourth quarter earnings teleconference. Joining me today are Peter McCausland, 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 the Investors shortcut at the top of the screen, and go to the Earnings Calls and Events page. During the course of our presentation, we will make reference to certain non-GAAP financial measures unless specified otherwise, metrics referred to in today's discussion will be adjusted for the unusual items identified in our earnings materials. Reconciliations to the most comparable GAAP measures can be found in our earnings release, 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'll take questions after concluding our prepared remarks as time permits and we plan to end the teleconference by 11am, Eastern Time.

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

Peter McCausland

Thanks, Jay. Good morning, and thank you all for joining us. Please turn to Slide 2. Fiscal 2011 was a remarkable year primarily due to the tireless efforts and can-do attitude of our more than 14,000 Airgas Associates. We delivered record adjusted earnings of $3.34 per diluted share on sales of $4.3 billion and adjusted operating margins of 12.2% generating tremendous free cash flow of $387 million driven by adjusted cash flow from operations of $617 million. Most impressive is that we delivered these results on sales that were still below prerecession levels and in the year where we incurred $0.08 of incremental expense related to the SAP implementation and associated depreciation.

We also delivered record adjusted earnings per diluted share of $0.88 in the fourth quarter, a 28% increase over the prior year. On sales that are still below prerecession level and while incurring $0.03 of incremental expense related to the SAP implementation and depreciation.

Fourth-quarter sales of $1.1 billion marked by a strong same-store sales increase of 11%, gas and rent same-store sales increased 9% and hardgoods, 14%. Acquisitions contributed sales growth of 1%.

The Manufacturing recovery that began in the central regions of the U.S. among larger customers is now evident more broadly throughout the country and in smaller manufacturers. Our Medical business began to accelerate this quarter and encouraging trends continued in utilities of petrochemical markets as well as customers using our products for repair and maintenance operations.

We continue to leverage our national footprint and industry-leading platforms as sales volumes improved and adjusted operating margins for the quarter increased 140 basis points year-over-year to 12.1%. During fiscal 2011, we acquired only 8 businesses with $21 million in annual revenues. But our acquisition activity typically begins to accelerate on the heels of the recovery phase of the business cycle. We recently signed an agreement to acquire our Pain Enterprises Inc., a producer and distributor of carbon dioxide and dry ice throughout the Midwest. Pain, established in 1957, is based in Bloomington, Indiana and has more than 20 locations and 140 employees and generated revenue of $33 million in calendar '10. Pain's business fits well with our carbonic and dry ice network and we expect to close the transaction within a few days. We have recently experienced a renewed level of interest from possible sellers and we expect our acquisition pipeline to continue to improve.

During the fourth quarter, we announced and completed a $300 million share repurchase program buying $4.78 million Airgas shares on the open market at an average price of $62.76, which we expect will provide attractive earnings accretion for our shareholders. This morning, we announced a new $300 million share repurchase program, which reflects our continuing confidence in the future. Our business is strengthening, our balance sheet is solid and we continue to generate strong cash flow. Accordingly, we are able to repurchase shares and realize attractive earnings accretion while funding our growth strategies. When completed, the share repurchase program announced today will result in total shares outstanding about equal to 2004, 2005 levels.

Looking forward, we're pleased to announce earnings guidance for next year that represents 12% to 17% growth over fiscal 2011 and 17% to 21% growth after accounting for the SAP headwind noted in our guidance. Our customers are exhibiting an improved degree of confidence in the future investing capital and adding staff.

April sales were as expected based on historical trends and the timing of the Easter holiday, slightly below March but well above January and February and consistent with today's guidance. Our strategy was to position Airgas to emerge as an even stronger company in the economic recovery and we are realizing the success of that strategy. As you can see in Slide 3, our revenues and earnings were resilient, given the severity of the downturn. And now, we are delivering record earnings while our revenues have yet to recover to pre-recession levels. Our leverage to economic expansion is very attractive.

Turning to Slide 4. Cash flow continues to be 1 of the strengths of our business model. We generated $617 million of adjusted operating cash flow in fiscal '11 representing a 17% compounded annual growth rate since fiscal 2001. The modest increase from fiscal 2010 was driven by working capital builds to support robust sales growth. We held capital spending roughly flat year-to-year leveraging our significant asset base in sales volume to strengthen. Because of the huge investment in capital expenditures, approximately $2.5 billion that we've made since 2007 and because of the depth of the recession, Airgas still has unused capacity in many of our asset classes and that bodes well for our EBITDA pull-through in fiscal '12.

Free cash flow of $378 million for fiscal '11 was about 9% of sales. There is tremendous opportunity for Airgas stockholders to benefit from the future value of the execution of our business strategies. Our industry is still very fragmented and we have built the only true nationwide platform in the business with the broadest available product and service offering. The benefits of our customer centric culture and new sales alignment are just starting to develop and will yield even greater value for our customers, more than 1 million strong who have selected Airgas as their supplier of choice.

Completing our SAP implementation over the next couple of years will only enhance our value proposition. We are well-positioned as the U.S. economy revised with the emergence of a stronger manufacturing base. And further opportunity beckons as spending to rebuild America's infrastructure begins to materialize. As I love to remind people, the best time at Airgas is now. Mike is here to give us a review of market strategy in operations.

Michael Molinini

Thank you, Peter, and good morning, everyone. Please turn to Slide 5. As Peter mentioned, our core business is continuing to gain momentum at the U.S. Manufacturing recovery expense geographically and into smaller customers as well. Our sales and marketing strategy focus on segment alignment also continues to gain momentum. Success thus far has been most pronounced in our Strategic Accounts program when this strategy originated and was already underway in Medical and Construction segments.

With the fourth quarter, Strategic Accounts business was up 13% from the prior year, driven by new accounts signings across all customer segments and by increased activity in our existing Metal Fabrication, Materials and Conglomerates, Healthcare and Petrochemical Customer bases. Strategic Accounts represent tremendous cross-sell opportunities both in terms of product lines and locations and currently represent more than 20% of sales.

I encourage you to review our Strategic Products slide in the appendix in detail after our call, but in the interest of time will provide you with an overview of the fourth quarter. Strategic Products, which combined, make up over 40% of our revenue, increased 10% for the quarter. Each of our strategic product categories experienced strong year-over-year growth this quarter with the exception of CO2 and Dry Ice, which experienced normal seasonal declines and further impact of the loss of certain locations of a major food processing customer emerging from bankruptcy. Each strategic product category also continued to improve sequentially compared to the third quarter.

Our Radnor private label products were up 19% for the quarter, a long term growth opportunity for the Radnor brand remains strong. In addition to building brand loyalty within our customer base, gross margins on Radnor products are 1.5x or more than those on comparable OEM products. Before I update you on the SAP implementation, I'd like to review an incident that is having an industry-wide impact on the availability of acetylene gas in the United States.

In late March, a catastrophic explosion occurred at 1 of 2 plants of the nation's primary supplier of calcium carbide, which is the raw material used in the generation of acetylene gas. The implications for industry-wide availability of acetylene are significant. The supply disruption in the United States is expected to last for sometime and details are still unfolding. In response to this disruption, Airgas is utilizing a combination of alternatives in an attempt to compensate for the lack of carbide. Including increased use of chemical acetylene, reallocation of available calcium carbide and potential sourcing of calcium carbide from outside the United States. We're also encouraging customers to adopt the use of alternative fuel such as propylene or plasma technology where appropriate.

While we are working across our national infrastructure to optimize every element of our acetylene supply chain, cost as a result of the calcium carbide shortage are now escalating due to both rising raw materials and distribution costs. Airgas and its subsidiaries have declared force majeure for all bulk in cylinder acetylene, product allocations and product surcharges are already in effect to help mitigate the financial impact to Airgas. This is a fluid situation however, and we could be facing a mild earnings headwind in the near term as a result.

I would now like to conclude my remarks by providing an update on the status of our SAP conversion.

Please turn to Slide 6. 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 we expected to achieve in 3 key areas: accelerated sales growth through expansion of telesales platform; price management; and administrative and operating efficiencies. Upon full implementation, we expect these 3 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 benefits as the implementation progresses. This system will further optimize the power of the Airgas platform and we are excited about its game-changing implications.

Our hardgoods infrastructure businesses including Airgas safety and our national buying centers and distribution centers have been running successfully on SAP since going live in July, 2010. All fulfillment metrics have been at or above pre-conversion levels. Our first regional distribution company, Airgas South, successfully went live on SAP on April 4, 2011. We trained more than 850 associates at over 120 locations and together with the hardgoods infrastructure converted in July of last year, now have about a 1,800 active SAP users. All major processes are working on SAP at Airgas South. We experienced no system downtime in making the switch to SAP from CU and all interbranch and customer shipments were on schedule, day 1 of the conversion.

We measured 25 key metrics on a daily basis to assess our performance pre- and post-conversion and all of these metrics at Airgas South have been within the expected tolerance levels. Much like our experience with the hardgoods infrastructure conversion, helpdesk tickets were back to expected levels within 2 weeks following the conversion.

As with any project of this magnitude and complexity, you expect to learn from your experiences early on and adjust your approach accordingly. In fact, our phase approach was specifically designed with this in mind. One of the lessons we learned with the Airgas South conversion is that we need to enhance our training program for our plant associates to better prepare them for the changes and inventory processing and other plant records that come with the new system. We've already begun to address this issue and are incorporating necessary enhancements into the training program for the conversion of our next regional distribution company, Airgas Great Lakes. We are on schedule for the conversion of Great Lakes on September 1, 2011. Our implementation schedule accelerates thereafter and we expect our Distribution business with a majority of benefits are expected to be realized to be fully converted to SAP by the summer of 2012.

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

The graph presented on Slide 7 depicts our SAP implementation cost, depreciation expense and operating income benefit projections by fiscal year as well as the net EPS impact in each year. The red bar is to note implementation costs, the gold bar is to note SAP-related depreciation expense and the green bar is to note benefits to be realized at the operating income line.

We expect fiscal 2012 to be the heaviest net expense year related to the SAP implementation as the majority of our regional distribution companies will be converted to SAP during the fiscal year. This is a necessary cost to bear before we can begin to realize any benefits from the new platform. In fiscal 2013, we begin to accrue benefits at the operating income line in the latter part of the year, partially offsetting implementation cost and depreciation during the year.

By the third quarter of fiscal 2014, which is December 2013, we expect to have achieved our run rate operating income benefits targeted between $75 million and $125 million with approximately $17 million flowing through the financials in fiscal 2014 based on achieving the midpoint of the target benefits range. In fiscal 2015, we're estimating that we will have surpassed the midpoint of our target benefit range with at least $100 million of benefits flowing through operating income for that year. Note that the only expenses incurred related to SAP in fiscal years 2014 and 2015, will be the depreciation of the related capitalized cost which have a depreciable life of 10 years.

As you clearly see, we expect our earnings power to be significantly enhanced in the years following the completion of the SAP implementation.

Please turn to Slide 8 for an overview of the total SAP project spend. Total project spend is expected to be approximately $186 million with approximately $91 million in expense and $95 million in capitalized cost. The expense amounts presented here exclude the depreciation of the related capitalized costs.

Please turn to Slide 9 for a discussion of our new divisional alignment and business support centers which will result in restructuring charges in fiscal years 2012 and 2013. Currently, each of our 12 regional distribution companies operates with it's own regional accounting groups and administrative functions such as IT. In order to better utilize our resources across regional company boundaries, we will realign our regional company support functions including accounting and certain administrative functions into 4 divisional business support centers.

Restructuring our regional company support functions at this time, in the evolution of Airgas is ideal at the conversion to a single data center across our regional distribution companies, which will take place as part of the SAP implementation enables consolidation of many administrative functions. Charges, associated with these restructuring, includes severance, transition staffing, relocation, recruiting and other costs. In fiscal 2012, we expect to incur pretax restructuring charges of $21 million, of which $13 million will occur in the first quarter primarily related to severance. Restruction will be completed in fiscal 2013 during which we will incur pretax restructuring charges of approximately $6 million primarily related to transition staffing, relocation and recruiting.

Bob will now give our financial review of the quarter and provide guidance for next year.

Robert McLaughlin

Thank you, Mike, and good morning, everyone. I'd like to start today by reviewing our consolidated results. Please turn to Slide 10. Sales increased to $1.1 billion reflecting acquisitions growth of 1% and total same-store sales growth of 11% comprised of a 9% increase in gas and rent and a 14% increase in hardgoods. Total volume was up 6% and price was up 5%. Sequentially, total sales increased 7% from the third quarter and sales per day increased 3%.

Daily sales for both hardgoods and gas and rent improved sequentially, with hardgoods outpacing gas and rent. Gas and rent represented approximately 63% of our sales mix in the quarter slightly lower than last year's gas and rent mix of 64%. Gross margin was 54.2%, a decline of 20 basis points from the prior year reflecting the sales mix shift towards lower margin hardgoods. Excluding a pretax charge of approximately $18 million related to Air Products unsolicited takeover attempt, adjusted operating income for the quarter was $134 million up 27% from last year. Our performance is impressive, particularly in light of the year-over-year headwinds from incremental SAP cost of $12 million.

Adjusted operating margin for the quarter was 12.1%, 140 basis point improvement over the prior year driven by operating leverage on sales growth. SAP cost decreased adjusted operating margin by 50 basis points in the current quarter. Excluding $0.14 related to Air Products takeover attempt, adjusted earnings per diluted share increased 28% to $0.88 in the fourth quarter. There were approximately 84 million weighted average diluted shares outstanding for the quarter, down slightly year-over-year and down nearly 2% sequentially driven by the share repurchase authorization announced and completed in the fourth quarter.

Return on capital, which is a trailing fourth quarter calculation was 11.9%, an improvement of 190 basis points over last year and 60 basis points 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 of 46 days improved slightly year-over-year and were relatively consistent with the third quarter. Inventory turns out consistent with recent trends reflecting our disciplined management of inventory levels as hardgoods sales have accelerated.

For the full year, we generated strong free cash flow of $387 million driven by adjusted cash from operations of $617 million and reflecting the increase in working capital associated with higher sales compared to the prior year. On the strength of our earnings, continued strong cash flow and outlook for the future, we increased our dividend payout by 33% during the year. Total debt was approximately $1.9 billion at March 31, reflecting debt reduction of more than $250 million during the year, offset by share repurchases. Our fixed low debt ratio at the end of March was about 48% fixed and our adjusted debt to EBITDA ratio was 2.4 comfortably within our target range of 2 to 3.

Turning now to Slide 11, we'll look at our segment results. Distribution sales in the quarter were up 12% versus the prior year to $997 million with same-store sales up 11%.

Gas and rent same-store sales were up 8% and hardgoods were up 14% with pricing up 4% and volumes up 7%. On a sequential basis, sales in the distribution segment increased by 6% in total and by 3% on a daily basis with hardgoods outpacing gas and rent.

Distribution gross margin was 55.1%, a decrease of 20 basis points from the prior year, primarily reflecting the sales mix shift towards lower margin hardgoods. Sequentially, distribution gross margin increased by 100 basis points from the third quarter reflecting a sales mix shift towards lower margin hardgoods as well as seasonal increases in propane and other fuel gases that carry lower margins, partially offset by the underlying improvement in gas margins from our March price increase. Gas and rent represented 59% of distribution sales in the fourth quarter, down slightly from the third quarter. Operating income in the distribution segment increased 29% year-over-year to $130 million and operating margin improved 170 basis points to 13.1% driven by operating leverage and sales growth.

All Other Operations reflects our CO2, Dry Ice, Refrigerants, Ammonia and Nitrous Oxide business units. Sales for All Other Operations were up 12% from the prior year driven primarily by higher pricing in Ammonia and volumes in our CO2 and Dry Ice businesses. Sequentially, sales in All Other Operations segment increased by 7% in total from the third quarter and by 3% on a daily basis as higher Refrigerants and Ammonia sales more than offset the effects of seasonality in our CO2 and Dry Ice businesses from our third quarter to our fourth quarter.

Gross margin for other operations was down 50 basis points from the prior year. Sequentially the 510 basis point decline in gross margins from the third quarter is attributable to the fact that the seasonality on sales in our CO2 and Dry Ice businesses, higher cost in the Ammonia business relative to pricing and higher sales of lower margin refrigerants.

Operating income for All Other Operations was $9 million and operating margin of 7.6% was up 200 basis points year-over-year driven by operating leverage on sales growth in our CO2 and Dry Ice businesses. Sequentially, the decline in operating margin is attributable to seasonality in CO2 and Dry Ice, as well as higher sales of lower margin refrigerants.

Please turn to Slide 12, capital expenditures. We were disciplined in our capital spending in fiscal 2011 as reflected in the 50 basis point year-over-year reduction in capital expenditures as a percentage of sales to 6%, particularly in light of our strong organic sales growth. Cylinders and bulk tanks are the asset categories with the highest year-over-year growth in spending, has improved gas and rent same-store sales reflect improvements in demand of our core revenue-generating assets.

Slide 13 presents our fiscal 2012 first quarter and full-year guidance. For the first quarter, we expect same-store sales growth in the high single digits with adjusted earnings per share in the range of $0.92 to $0.97, an increase of 11% to 17% over the prior year, which includes $0.08 of SAP implementation cost and depreciation expense, $0.05 of which is incremental over the first quarter of fiscal 2011. Excluding the impact of the increase in SAP cost, the guidance range represents a 16% to 22% year-over-year increase.

For the full year, we expect same-store sales growth in the high single digits with adjusted earnings per share in the range of $3.75 to $3.90, up 12% to 17% over fiscal 2011, which includes $0.32 of SAP implementation and depreciation expense, 18% of which is incremental over last year. Excluding the impact of the increase in SAP cost, the guidance range represents a 17% to 21% year-over-year increase. Operating margin is expected to be in the 12.3% to 12.8% range and includes the dilutive impact of increased SAP cost. Incremental SAP cost reduced this range by approximately 50 basis points.

CapEx is expected to be about 6% of sales. Our fiscal 2012 guidance excludes the impact of the business support center restructuring charges, which are expected to be $0.10 per diluted share in the first quarter and $0.17 per diluted share for the full year. Slide 14 presents a walk through the primary elements of our first quarter and full-year guidance using fourth quarter adjusted EPS of $0.88 and fiscal 2011 adjusted EPS of $3.34 respectively as the starting points.

In the first quarter, we expect headwinds of $0.05 related to stock-based compensation as the largest portion of our full-year stock-based compensation bolts in the first quarter. $0.03 due to incremental SAP implementation cost and $0.01 due to the incremental depreciation of capitalized SAP cost. We expect seasonality in our CO2, Dry Ice, Refrigerants and Red-D-Arc businesses to provide a tailwind of $0.06 to $0.08 and the impact of the share repurchase program announced and completed in the fourth quarter net of stock plan issuance to provide a $0.02 benefit. We expect the core business to expand sequentially contributing $0.5 to $0.08 on 2 months of additional impact from our most recent price increase, continued improvement in daily sales volumes and solid execution of our operating efficiency programs.

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

R. Worley

Thank you, Bob. That concludes our prepared remarks. As we begin the Q&A portion of our call, please limit yourself to 2 questions and one follow-up and then get back in the queue if you have further inquiries.

James will now give instructions for asking questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Tom Hayes with Piper Jaffray.

Thomas Hayes - Piper Jaffray Companies

I guess my first question is on the pricing environment. We've seen both some of the equipment manufacturers as well as some of the gas producers come out with some meaningful price increases and talks of further price increases earlier this summer. I was just wondering, your thoughts on those increases and your ability to pass those through right now?

Peter McCausland

Well it's a good pricing environment over all. I would say we had our price increase effective March 1. We expect to realize more than 3.5%, maybe 3.5% to a little bit over 4% in that range. If the economy continues strong and energy prices continue high, we would expect to have another price increase later in the year.

Thomas Hayes - Piper Jaffray Companies

Okay, great. I guess, Peter, you mentioned you're seeing a broader recovery. We originally talked about coming out the Midwest and growing, are there some regions that are still not forming up to your thoughts where they would be at this point?

Peter McCausland

Well, this is a typical recovery. It's starting in the middle of the country and then spreading out form there. The Southeast and the East and the coast, the West Coast lagged. This recovery started in the Manufacturing center part of the country and in the Southwest Texas area and it continues very, very strong there. But now we're seeing a pickup on the East and West Coast and is broad-based. It started out with mostly bigger companies because the recession impact in small companies is a lot more than it did big companies. About 55% of the unemployment was with firms with 25 or fewer employees. And what we're seeing now is the smaller customers are coming back strong. Now this is a function of higher capacity utilization at the bigger customers, but it's also, I think, a broadening of the recovery.

Thomas Hayes - Piper Jaffray Companies

Okay. And I guess, just maybe one last question for Bob. I just wondered if you could provide a little more granularity on the share count that's baked into the guidance.

Robert McLaughlin

What's baked into the guidance is the share repurchase program that was announced and completed in our fourth quarter and there's 2 components to that in the guidance. One is our normal kind of share creep related to our stock, internal stock purchase plans and options. And then the incremental benefit from the share repurchases. And the incremental benefit from the share repurchases is in the neighborhood of $0.12 to $0.13 offset by the normal dilution that we have every year of about 1.5% on our share base. Yes, for the full year. Which nets down to the 8 that we put in the walk.

Operator

Our next question will come from Mike Harrison with First Analysis.

Michael Harrison - First Analysis

Looking at the same-store sales where you are right now. You're coming up against tougher comps in the first quarter. Also, the first one where we really started to see hardgoods growth outpacing gas and rent. So as I look at the guidance for high single-digit same-store sales growth in Q1, what would the assumptions look like for gas, rent and hardgoods as the separate components for that same-store sales growth?

Peter McCausland

Well, we still have for the first quarter as well as the full year, it's slightly skewed to higher hardgoods growth versus gas and rent. We also, we won't lap to our last year's price increase until the second quarter. So we'll have a little bit of a headwind as it relates to year-over-year comps for our first quarter on the price increase. But for the year, we are still -- given where we're at in the cycle, we still are expecting slightly accelerated sales growth in the hardgoods front versus gas and rent.

Michael Harrison - First Analysis

All right. And with regard to the carbide industry's accident, what portion of your revenues are acetylene? I have something from the past that suggests that fuel gases was about 11% of sales back in the '06 time frame, is that still a good number?

Peter McCausland

No.

Michael Harrison - First Analysis

And is acetylene the largest fuel gas that you guys have in terms of sales?

Peter McCausland

That's probably the single largest one. But I think fuel gases in total is less than 3% of sales. Acetylene was 3% of sales.

Michael Harrison - First Analysis

Less than 3%. And then in terms of...

Robert McLaughlin

We're not adding the Acetylene business, so let's -- I mean, even when things were good, only a portion of our acetylene was generated from calcium carbine.

Michael Harrison - First Analysis

All right. I guess, just in terms of walking through some of the issues around that, you've got your own acetylene production, some of it's from carbide, some of it's from other sources, but then you also purchase acetylene as well. So, I guess, maybe just help us understand -- you're expecting a modest earnings headwind related to this, is that simply because you declared force majeure? You expect to kind of pass along whatever additional cost you incur? And obviously, the situation does remain fluid but, maybe a little more detail on it.

Peter McCausland

Well, it's a very complex situation. This is Peter. Only one of carbide of industry's plants went down. The other one in Pryor, Oklahoma continues to produce even at a higher level. So I don't know of which percentage, but I would imagine that our plants were probably split 50-50 maybe a little higher towards the eastern one that has a fire. We're just giving you a heads up about the situation and we're not too concerned about it. We're doing things to recover our cost through pricing and surcharging and we're also converting customers to other alternative fuel gases. So it is very complex because there's conversion going on, there's importing carbine that's coming in, there's only one plant down and we don't need to get anybody alarmed. This isn't a huge thing but it's something that we felt like we ought to alert people to. It's covered in the low end of our guidance.

Operator

Next we'll hear from Kevin McCarthy with Bank of America Merrill Lynch.

Kevin McCarthy

Peter, in your prepared remarks, you indicated that you're seeing renewed interest from possible sellers in the private market. What is driving that and how much might activity accelerate?

Peter McCausland

Well, Kevin, if you're familiar with that slide that we have that shows 15 years of acquisition activity and we also overlay non-tech industrial production. And non-tech industrial production turns down, acquisition activity dries up because these companies cash flow very well in downturns and most of the owners can afford to wait until of higher numbers that we've been for a year into the recovery. And as it's typical, we're starting to see some people who have postponed marketing their businesses to start to take a look. And so our pipeline is threefold, we're looking at a lot of deals and we're hopeful that we'll be able to make some of these acquisitions in the near future. And in fact, we just mentioned one in my script a very significant CO2, dry ice company in the middle part of the country that we've been trying to acquire for a long time and fill then a big gap in our dry ice production network.

Kevin McCarthy

Okay. And then second question if I may, it looks like your leverage is running about 2.3x trailing EBITDA. How should we expect that metric to trend over the next year or so? And related to that, am I correct in understanding that you would intend to execute the new $300 million share repurchase plan within fiscal 2012?

Peter McCausland

Well, regarding the purchase plan, let me say that we always buy the shares that we authorized, unlike a lot of companies. But we do have flexibility in terms of timing. In all likelihood, I would expect that we would execute that plan starting fiscal '12, I'd be surprised if we didn't. You're correct about our debt to EBITDA on a trailing basis. If we were to complete this in the next quarter or so, our debt to EBITDA would go up slightly, but we generated tremendous amount of cash. And depending on other calls on our cash-like acquisitions and CapEx, but it would implement it but it would go right back down. And we've been operating at the low end of our range. Our range being 3:1 to 2:1 on debt to EBITDA. And about that, I should say that I would -- we're not committing to this but this additional $300 million, we think it's significant and we'll probably take a rest for a while. After that, we like being an investment-grade company and we look forward to someday issuing commercial paper, maybe not in the too-distant future. So we felt like it was important to get our shares outstanding number back down to that 2004, 2005 number and take care of creep and create a lot of value for our shareholders.

Operator

We'll hear from David Begleiter with Deutsche Bank.

James Sheehan - Deutsche Bank AG

This is James Sheehan, sitting in for David. Just wondering if you could comment on the same-store sales trends. As the economy picks up and I would imagine that gas same-store sales will accelerate and begin to overtake hardgoods, what is your outlook for it? When do you expect that to occur when gas same-store sales starts to grow faster than hardgoods?

Robert McLaughlin

Well, for the full fiscal year, as I'd mentioned earlier, we do see hardgoods slightly outpacing gas and rent but we still are projecting strong organic growth in gas and rent. I don't have a particular quarter as to where that may cross over. But strong on both fronts, slightly stronger on hardgoods for this fiscal year upcoming.

James Sheehan - Deutsche Bank AG

Okay. And could you comment on your operating rates for oil gases in the quarter and how has that changed since the previous quarter?

Michael Molinini

Right now, we're in the low 80s. And a year ago, at this time, we were probably in the low 70s.

James Sheehan - Deutsche Bank AG

And what about Q3?

Michael Molinini

Yes, a couple. Yes, I'm sure it's up a little bit, I don't know specifically one quarter over the other. But we continue to see increases in both gas loading sequentially.

Operator

Our next question comes from Laurence Alexander with Jefferies.

Laurence Alexander - Jefferies & Company, Inc.

I guess, couple of questions. First, could you give us an update on your view on your redistribution business? I mean, now that we have ventured into the U.K. environment, I mean, how that ramp up is beginning to look?

Peter McCausland

It is growing. I don't happen to have specific -- it's still very small, but we're seeing increased activity, where it's through a number of different channels, actually. And there is some developments -- it's developing, let me put it that way. Developing kind of as we expected and depending on the speed with which some of these new engines make it into the market could pick up nicely here in the next year or so.

Laurence Alexander - Jefferies & Company, Inc.

And secondly, so I get some updates on your -- now that you've, I guess, buy back in place in the U.S. environment it's looking a little bit better. So your priority for international opportunities or adjacencies that would be outside the traditional package gas market?

Peter McCausland

Well, as you know, we have a healthy balance sheet and a lot of capacity and but our primary, our first priority is investing in our core business here in the states. 50% of the $13 billion market in packaged gases and welding are still in the hands of independents. So we think there's a lot of consolidation left to go. And also, we invested adjacencies like we announced today with the CO2 and Dry Ice business. But that said, we continue to look internationally and but basically, that's on an opportunistic basis. We don't have a program to be in x number of countries for a certain amount of time. And I can't really lay odds on the landing of significant acquisitions internationally anytime in the next year or so. But simply to say that we continue to look and we would go someplace if we got critical mass or we have an opportunity to roll off of price-managed markets.

Operator

David Manthey with Robert W. Baird has our next question.

David Manthey - Robert W. Baird & Co. Incorporated

Just trying to gauge your comfort with the benefits from SAP. I guess, the admin and operating efficiencies seems fairly intuitive. But could you discuss the accelerated sales growth and the price management components. And then adding on to that, is there any demonstrable factors as we roll out SAP? Or do these benefits just accrue to you at the very end upon 100% completion?

Robert McLaughlin

Well, let me answer the last question first. They ramp up overtime. It's not a light switch. But you have to be on SAP and you have to be stable on SAP before you can actually start to work on those pieces. And I'll take the price piece first. We've had extensive discussions with our implementation partner, Deloitte. They have done extensive work with other companies on using SAP's extensive price management and research tool with other companies in improving margins and particularly the more, the broader your product line and the broader the number of customers you have and the higher the number of smaller dollar invoices you deliver and the more decentralized you are in the way you manage pricing, the higher, the greater, the opportunity at the end of the rainbow. And they did a price study with us on real data from one of our companies. And sure enough, everything I just described is exactly what we found. And so, we were very conservative in that benefit for that piece that we identified, we were very conservative and what we came out with publicly based on -- compared to what the study indicated the potential range of benefits was. So we feel pretty good about that one. However, you can't really start using the tools and mining the data and taking the actions until you're on SAP and you're stable on SAP, which we've assumed is probably at least 6 months after you've been on it before you can even start working on it. So that's what that was. We feel pretty good about that. The other one, is that for 12 years, we've owned a Safety Telesales business. That has been growing at dramatically higher rates compounded there annually than the Safety business is growing in the United States. And it's a business that today is a couple $200 million and something million dollars of sales. We have about 185 people on the phones that manage 75,000 customers strictly through a phone relationship. And many of their customers are small. Customers that you can't afford to target or approach with a field sales person in a company car. Up until now, we've piloted for a number of years where we've taken some of these telesales people. We've sent them to welding school, we trained them to weld and we've turned them loose on some exiting Airgas customers, and the sales have grown significantly. We've turned them loose on some target customers and the sales have grown significantly. Using this channel as the vehicle to reach customers that we haven't been able to reach. So the data is very compelling. Now the problem has always been that they have always been on a separate computer platform than the rest of our distribution companies where on. So the ability to utilize their capabilities and utilize our hardgoods distribution centers and utilize our branches for making deliveries of gases or allowing customers to pick things up at stores, et cetera, we couldn't do it. We were system limited, because the platforms really didn't communicate with each other. So we're now in the process of ramping up that telesales group and I think, our first 20 new telesales people have just completed welding school. And come this summer, there will be a new channel, competing in the U.S. market for customers that have many cases, really never heard from a sales person before. And we expect it to be pretty exciting. And that's that story.

David Manthey - Robert W. Baird & Co. Incorporated

Okay. Just to clarify on the share count quickly. Well, you're talking about the $0.12 to $0.13 share repurchase benefits offset by share creep into the $0.08, is that just the already completed share repurchase, does it include the new one?

Robert McLaughlin

Correct.

David Manthey - Robert W. Baird & Co. Incorporated

Okay, and in that release, I think, it said that share count was 79.8 million as of yesterday, is that a basic number?

Robert McLaughlin

Yes.

Operator

Our next question comes from Ryan Merkel with William Blair.

Ryan Merkel - William Blair & Company L.L.C.

So looking at the benefits you laid out for SAP, kind of $1.25 at high end, that's about $170 million in total benefits. So, it looks to me like your getting a little more optimistic on SAP, am I reading that right?

Peter McCausland

The middle of the range.

Ryan Merkel - William Blair & Company L.L.C.

Okay. And then my second question is on the bulk gas business, 10% year-over-year growth, that's a great number. Can you talk about how you're taking market share? And then do you think this performance is going to continue?

Peter McCausland

Well, we grew up in the packaged gas business. We've got over a million customers. A lot of our customers buy everything, all their packaged gas is from us: their welding, their safety or some subset of those product lines. But not the bulk gas business, because until we entered the bulk gas market with the acquisition of Linde's Bulk business, we weren't competitive. When those contracts renew, we're being given opportunities to roll it into our master agreements. So that's one of the things that's causing us to grow quickly and I also think that we're growing quickly because the market's doing well and what else? Mike you...

Michael Molinini

No, I think, it's effective we have capacity. We're very customer centric and we're very big on developing, bringing value and helping customers with their applications. So we continue to ramp up our application support. And you combine the fact that we're a producer, we have a sticky relationship with over 1 million customers that many of whom by bulk and we provide all kinds of applications, supply chain management support and we're in a good position. Who can sustain growth.

Peter McCausland

Imagine a company, would take one of our regional companies that's only participated in the small bulk market and has competitors deliver the product to the customer, then all of a sudden, they have all these capabilities, national, logistics, a low-cost source of supply, plants nearby and so they have a lot more to offer their customers than they used to. And I think that we're going to see a very favorable impact from that circumstances for several more years.

R. Worley

Ryan, this is Jay. I just wanted to clarify one thing earlier on the SAP benefits comment, which I hope I came across clearly that everything we've laid out has just been the midpoint of our range of benefits of the $75 million to $125 million of annual operating income benefits, that came across clearly right?

Operator

Our next question comes from Mark Gulley with Soleil Securities.

Mark Gulley - Soleil Securities Group, Inc.

A couple of things. Peter, in your varied additional remarks, you talked about the tireless efforts of your associates over the past year. I would imagine there'd been a bit of an adrenaline rush with respect to the bid. So what are you doing to kind of maintain that adrenaline rush with the bid going?

Peter McCausland

Well, the adrenaline rush was all up here in Radnor. We asked our Associates to take care of the things that they could control and they delivered. And so with regard to those associates, I would say that they're a bunch of psyched-up people. The fact that not only did Air Products go away, but the fact that our stock price went right up to the bid price, validating our position that there was little or no premium in the bid. They're psyched up. And it's going to be a great motivator for a long time in Airgas that this is the way it happened. And in terms of those of us who had suffered through all the lawyers and everything up here, we're just trying to get a little rest, Mark.

Mark Gulley - Soleil Securities Group, Inc.

Okay. Second question has to do with the other business, more prosaic housekeeping question. And that is, what is the price effect on sales growth and other having to do with the run up, particularly in the Ammonia side? So then how much is really like volume growth in the other category?

Peter McCausland

In ammonia, we've had a lot of volume growth. We've got some really good things going for us. We will have the only national network for less than truckload quantities. A lot of customers want to get large quantities of ammonia off their property. So they want to go to smaller delivery, invest in open cylinders and tanks. And we're on into the last 9 months, our costs have been increasing and when that happens, you scurry like hell to keep up with them and pass along. And then when the cost, ammonia prices fall, you're left with all this additional volume and you benefit from declining cost of goods sold. So I think we've done a very good job growing our business under difficult circumstances that is constantly rising ammonia prices over the last 12 months. And hopefully, these prices will settle down a little bit and our operating margins will normalize.

Mark Gulley - Soleil Securities Group, Inc.

And thirdly, I want to refer to Page 4. The free cash flow slide now. Congratulations on the additional share repurchase today, but if I sort of take a look at that slide and look at the free cash flow, let's say 10, 11 maybe it's 12 given the fact that'll take a lot of ramp up, your share -- your acquisition efforts. If I kind of add up the $400 million roughly for 3 years that's $1.2 billion. So sure sounds like you're ability to recap the balance sheet to increase the returns on capital therefore, is maybe even more than the $300 million when you announced today and then you said you're going to give it a rest after that. So, maybe you could reconcile what's available to you to what you've sort of committed to thus far?

Peter McCausland

Yes. Well, we had a lot more available but it's taken a long-time to get to the point where we could issue commercial papers. So, we don't want to give that up easily. But I'm not committing one way or the other, it's a Board decision. And as we've said on many calls, we look at share repurchases and dividends every single quarter. The Board does. And there is a possibility that we'll go back into the market with additional share repurchases. But we're also committed to growing by acquisitions and activity is picking up and we're committed to growing our dividend as our earnings increase. And we praise that 33% this year. So, I feel good about getting back to an outstanding shares number that we had in 2004, 2005 when we completed the share repurchase. And so every quarter is a fresh look.

Operator

Next we have from John Roberts of Buckingham Research.

John E. Roberts - Buckingham Research Group

How much higher could your sales be before your capital spending has to start to accelerate up? and look at, have you any measures of cylinder utilization or truck loading or can you give us how much slack there is in your system?

Peter McCausland

Well, as I've said, we invested very heavily $2.5 million in CapEx since 2007. And that was their separation plants, it was CO2 plants, it was cylinders, it was cylinder filling facilities that invested some major ones. And we're not back to peak sales yet, and we do have unused capacity in a lot of our asset classes. And so, I can't really, I don't know whether that's 7% higher sales or what, but I would imagine that somewhere in that range 7% to 10% growth in sales before we're really starting to stretch again. And my answer is not scientific, it's based on the fact that we're in the low 80s on our ASUs than we have capacity and some of our CO2 plants and a lot of our cylinder plants, the big ones that we built over the last 3 or 4 years have unused capacity. It's certain cylinder sizes, we're tight but in a lot of them we still have capacity -- additional cylinders. So that's just kind of a back-of-the-envelope gas 7% to 10% range before we would start ramping up growth assets. And after this year but we've already had a strong high single digit this year that estimated 6% to the numbers Peter's talking about would be kind of after that.

Operator

Next question comes from Edward Yang with Oppenheimer & Co.

Edward Yang - Oppenheimer & Co. Inc.

Just on margins. Margins were flat sequentially although same-store sales have accelerated and that's been the pattern for 2011 operating margins have been around 12% or so. And I know you mentioned mix, but is there anything else going on there? X SAP, what kind of incremental margins can you see in this business?

Robert McLaughlin

You're talking about the operating margin?

Edward Yang - Oppenheimer & Co. Inc.

Yes.

Robert McLaughlin

Well, if you look at our guidance, we have 12.3 to 12.8 in operating margin. And the incremental impact of SAP is 50 basis points, so you have 50 basis points to the low and the top end of that range. Starting to get a sense of the significant kind of leverage in improvement we see.

Peter McCausland

We have to get up. Kept our operating margins down.

Robert McLaughlin

That's what he's saying.

Edward Yang - Oppenheimer & Co. Inc.

So, I think in the past, you've said that for every dollar of revenue you could get incremental margins a bit higher than what would be indicated on looking at just kind of 13% x SAP type of margins. But you're pretty satisfied with the level of margin progression you're seeing?

Peter McCausland

Yes.

Edward Yang - Oppenheimer & Co. Inc.

Okay. And my final question is just on the economy, seems like the market has soured a bit on the outlook on the economy. I don't know how real it is or if it's just a mood's list, [ph] but it sounds like you're much more positive in the outlook for your business. Can you make some qualitative comments about the economy?

Peter McCausland

Well, we're seeing a lot of our customers hire people. And we're seeing a lot of our customers spend capital. We're seeing a broad-based recovery, it started in the center part of the country and now the coasts are starting to pick up nicely. So we're a good mirror on the economy and we're seeing a broad-based recovery led by hardgoods and we've had some strengthening and gas pricing over the last 6 months and expect that to continue, so...

Edward Yang - Oppenheimer & Co. Inc.

You're not concerned by the first quarter GDP number is lower or you're not really seeing -- you're seeing your business pickup?

Peter McCausland

Well, look, I've been told by everybody including Air Products that the U.S. economy was headed south in a big wave for a year and a half and the exact opposite has happened. And we're dealing with real customers every day who are hiring people and we see a good outlook, we see a lot of our customers investing in the U.S. and I think the political winds are blowing in the direction of continued U.S. strength in Manufacturing. We see a good energy market and we're pretty optimistic.

Robert McLaughlin

Ed, this is Bob. A follow-up to your question. I answered your question looking forward on the consolidated operating income. If you are also asking sequential, I'd direct you to the segment results and strip that as a segment as the implementation cost related to SAP and from the third to the fourth quarter, our core distribution business had a 70 basis point expansion in operating margins from 12.4 to 13.1. And the normal seasonality within the All Other Operations combined with where we're at and the kind of commodity cost curve that Peter described in Ammonia, is what really, is the only thing that kind of kept that flat sequentially. So, if you look underneath the hood, we're having some tremendous expansion relative to our core business on a sequential basis and we see that going forward.

Operator

Next we have from Bob Koort with Goldman Sachs.

Brian Maguire

It's Brian Maguire on for Bob this morning. I was just hoping to get some comments on inter-quarter trends. Last quarter on the call you mentioned some bad weather early in the fourth quarter pushing some sales out, did you experience some pent-up demand later on the quarter? And maybe benefiting from that early in the first quarter of '12?

Peter McCausland

The bad weather, we were -- I think, we're talking about was actually in this quarter.

Robert McLaughlin

Yes. It was in January and February. And exit it with a very strong margin.

Peter McCausland

I mean, we have this all the time with these natural disasters.

Brian Maguire

Do you think anything of it was pushed out far enough to spill over from the fourth quarter into the first quarter of '12?

Peter McCausland

No.

Unknown Analyst -

Okay. And then just -- I was curious in the comments you had on the welding market in particular. We've seen some other companies that supply the welding industry have pretty good numbers and results, are you seeing a big pick up there? Any strength there in particular?

Peter McCausland

There's a lot of strength there. That's the Manufacturing sector that we've been talking about. And that's where the recovery started and continues to expand the strongest.

Robert McLaughlin

To supplement that, I would say that argon, which is for aluminum and stainless steel welding has picked up significantly over the last quarter or 6 months. And Manufacturing is a big category. And within Manufacturing, we have Metal Fab, which is making things out of metal, like trailers and tanks and things like that. And general manufacturing came back first, but Metal Fabrication, the Metal Fabrication subset started to takeoff about 4 quarters ago. In fact, I think it was 4 months ago. And it was various at the beginning of the year, when we were talking to some of our suppliers about this huge upticks. And the rollings, a lot of these things are made by Metal Fab customers have wheels. And they're trailers and tankers and things like that, and the rolling stock is wearing out. And so there's a lot of pent-up demand and it's reflected in our sales of welding wire and reflected in our sales of gas especially argon.

Operator

That does conclude our question-and-answer session. I'll turn the conference over to Mr. Jay Worley for additional closing comments.

R. Worley

Well, again, we thank you all for joining us today. Barry Strzelec and I will be available all day for follow-up questions. Have a nice day.

Operator

This does concludes today's conference call. Thank you for your participation and have a nice day.

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