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Airgas (NYSE:ARG)

Q1 2012 Earnings Call

July 28, 2011 10:00 am ET

Executives

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

Unknown Executive -

R. Worley - Vice President of Communications & Investor Relations

Robert McLaughlin - Chief Financial Officer and Senior Vice President

Analysts

Lucy Watson - Jefferies & Company, Inc.

Michael Sison - KeyBanc Capital Markets Inc.

Michael Harrison - First Analysis Securities Corporation

Robert Koort - Goldman Sachs Group Inc.

Mark Gulley - Ticonderoga Securities LLC

Edward Yang - Oppenheimer & Co. Inc.

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

Kevin McCarthy

David Manthey - Robert W. Baird & Co. Incorporated

Thomas Hayes - Piper Jaffray Companies

Operator

Good morning, everyone, and welcome to the Airgas First Quarter 2012 Earnings Conference. Just as a reminder, today's call is being recorded at the request of Airgas. [Operator Instructions] For opening remarks and introductions, I will now turn the call over to the Vice President of Communications and Investor Relations, Mr. Jay Worley. Please go ahead, sir.

R. Worley

Good morning, and thank you for attending our first quarter earnings teleconference. Joining me today are Peter McCausland, CEO; 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, and 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, and we plan to end the teleconference by 11 a.m. 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. Before we begin our earnings discussion this morning, the Airgas family extends our sincere condolences and sympathies to the family and friends of Alan Miller, who passed away earlier this week. Alan was Co-Chairman and cofounder of Innisfree M&A, our proxy solicitor over the past 2 years. We are all very grateful for all of his efforts on behalf of Airgas shareholders, and we recognize his distinguished career with honor and warm memories.

Please turn to Slide 2 to begin our discussion. We started fiscal '12 in an impressive fashion, delivering record adjusted earnings per share of $0.99, a 19% increase over last year on sales growth of 11%, but had volumes that are still well below prerecession levels. Although more than a year old, the economic recovery has been slow, and the strength recently displayed in manufacturing-intensive regions of the country and in our hardgoods business is indicative of the early stages of our recovery. First quarter sales were $1.2 billion, marked by a strong same-store sales increase of 9%. Gas and rent same-store sales increased 7% and hardgoods increased 13%. Acquisitions contributed sales growth of 2%.

Adjusted operating margin for the quarter was 12.4%, a 10 basis point improvement over the prior year despite a 60 basis point headwind from incremental SAP implementation costs and depreciation expense. Even with the burden of SAP implementation costs, the strength of our business and our modest economic expansion is evident. Our return on capital increased by 160 basis points over last year to 12.1% as we continue to leverage our national footprint and industry-leading platform as sales volumes recover.

Since the beginning of our fiscal year in April, we've acquired 4 businesses with nearly $70 million in aggregate annual revenues. Among them were Pain Enterprises, a carbon dioxide and dry ice producer and distributor with 20 locations in the Midwest and 140 employees, and ABCO, an industrial gas and welding distributor with 12 locations and more than 100 employees in New England.

Our acquisition pipeline is far more active than it was last year, reflecting the improved business climate. During the first quarter, we announced and completed an additional $300 million share repurchase program, which we expect will provide attractive earnings accretion for our shareholders. On the strength of underlying business trend and our recently completed share repurchases, we have raised our earnings guidance for fiscal '12 to a range of $3.90 to $4.05, representing 17% to 21% growth over fiscal '11.

Our solid performance this past quarter, as well as our future outlook, stems from fundamental demand that seems reasonably balanced across the country. Manufacturing continues to be the strongest performing segment in our customer base, followed by medical, petrochemical and utilities. Consistent with recent trends, growth has been strongest in our Great Lakes and North Central regions, both of which have a high degree of manufacturing intensity. Energy and manufacturing activity are also driving strong results in our Southwest, Midsouth and our Intermountain region.

Our Japanese automotive customers suffered headwinds last quarter from the supply chain disruptions caused by the catastrophic earthquake and tsunami in Japan. While some pressures still linger, we believe production will return to a more normalized level soon. Other customer segments offering good near-term growth opportunities for us are food and beverage, analytical and life sciences and repair and maintenance.

Our construction business, focused primarily on energy and infrastructure construction, is now growing modestly in spite of lackluster conditions in the sector. Based on current customer comments and design activity in the industry, there could be hope for a strengthening construction segment in calendar '12.

In total, while the overall recovery has been slow, our July sales relative to June are trending slightly better than historic norms. We have further reason to expect the consistent growth trajectory as sales of welding machines and equipment in the first quarter posted the strongest growth we've seen since the downturn, well above the total hardgoods same-store sales growth rate. When customers tool up for production by purchasing machines, it bodes well for future consumption of gases and consumable hardgoods.

In addition, almost 150,000 jobs have been created by U.S. manufacturers in calendar '12 -- calendar '11 thus far, which is more than 1% growth in manufacturing payrolls. Coupled with the encouraging signs on our welding equipment sales, we believe manufacturing should continue on a path of moderate expansion.

Please turn to Slide 3 to review some of our key initiatives. Our sales and marketing strategy focused on segment alignment continues to gain momentum. For the first quarter, Strategic Accounts business was up 10% from the prior year, driven by new account signings across all customer segments and by increased activity in our existing metal fabrication, power and materials and oil, gas and chemicals customer basis. Strategic Accounts present us with tremendous cross-sell opportunities both in terms of product lines and location and represent more than 20% of sales.

I encourage you to review our Strategic Accounts slide in the appendix in detail after our call, but in the interest of time -- I mean, our Strategic Products slide, but in the interest of time, I'll provide you with an overview for the first quarter.

Strategic Products now make up 40% of our revenue -- over 40%, and they increased 7% over the prior year and 5% sequentially from the fourth quarter. Each of our Strategic Products categories experienced good year-over-year growth this quarter. Safety was the strongest performer at 11%, and then bulk gas at 7%, both of which reflect a favorable manufacturing environment. Sequentially, CO2 and dry ice posted the strongest growth of our Strategic Products on normal seasonal improvement in the business. Our Radnor private label products were up 11% for the quarter. The 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.

I'd like to provide you with a brief update on the acetylene disruption issues that we mentioned last quarter. Through a combination of alternative sourcing, product surcharges to cover disruption costs and substitute products, we were able to mitigate the impact of the disruption, which resulted in an approximately $0.01 hit to our first quarter earnings. Acetylene remains in very tight supply, but we anticipate that the supply chain pressure should continue to ease in the coming quarters.

I'd like to conclude my remarks by providing an update on the status of our SAP conversion. Please turn to Slide 4. 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 3 key areas, accelerated sales growth through expansion of the telesales platform, price management and administrative and operating efficiencies. Upon full implementation, we expect these 3 areas alone to yield an aggregate $75 billion 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.

Most of these benefits are in our distribution growth, and we have approximately -- I don't know what our sales in gas ops now. $1 billion?

Unknown Executive

About $0.5 billion.

Peter McCausland

About $0.5 billion in sales in our gas operations, and very few of these benefits relate to those operations. This system will further optimize the power of the Airgas platform, and we're excited about its game-changing implications. Our hardgoods infrastructure business, including Airgas safety and our national buying centers and distribution centers, have been running successfully on SAP since going live in July 2010, a year ago. All fulfillment metrics are at or above pre-conversion levels. Our first regional distribution company, Airgas South, successfully went live on SAP on April 4. All major processes have been functioning well, and there has been no system downtime. We're on schedule for the conversion of our second regional company, Airgas Great Lakes, to go live at the beginning of September. Our implementation schedule accelerates thereafter, and we expect our distribution business, where we realized substantially all of the benefits we've announced thus far to be fully converted to SAP by summer 2012.

Based on our experience to date, we're confident that by the end of calendar 2013, the benefits we've detailed will be achieved and will constitute a minimum of $75 million in annual run rate operating income with the likelihood that these benefits will ultimately reach or exceed $125 million. We still expect fiscal '12 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 this fiscal year. In fiscal '12, SAP implementation costs and depreciation expense will likely be an $0.18 headwind over fiscal '11. However, as we complete the implementation by the end of calendar '12, the net impact of the fall-off of the implementation costs, and the accrual of benefits will provide an approximately $0.20 year-over-year EPS tailwind in fiscal 2013, reflecting only the beginning of what we expect will be significantly enhanced earnings power in fiscal 2014 and beyond from our new SAP platform.

The conversion of the operating systems of our 12 regional distribution companies to a single platform, which will take place as part of the SAP implementation, enables consolidation of many administrative functions across the company. As we announced in May, this is the ideal time of the evolution of Airgas to restructure our regional company support functions and the four divisional business support centers in order to better utilize our resources across regional boundaries. Charges associated with this restructuring includes severance, relocation and other transition costs, and we expect this restructuring to be completed in fiscal 2013. 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. Our leverage to economic expansion is very attractive, and there's tremendous opportunity for Airgas shareholders to benefit from the future value we can create through 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 offerings. The benefits of our customer-centric culture and new sales alignment are just starting to develop and will yield even greater value for the customers, more than 1 million strong, who make Airgas their supplier of choice.

Completing our SAP implementation over the next couple of years will only enhance our value proposition. We are very well positioned as the U.S. economy revives with the emergence of a stronger manufacturing base, and further opportunity beckons if spending to rebuild America's infrastructure begins to materialize. As I love to remind people, the best time at Airgas is now.

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

Robert McLaughlin

Thank you, Peter, and good morning, everyone. I'd like to start today by reviewing our consolidated results. Please turn to Slide 5.

Sales increased to $1.2 billion, reflecting acquisitions growth of 2% and total same-store sales growth of 9%, comprised of a 7% increase in gas and rent and a 13% increase in hardgoods. Total volume was up 4%, and price was up 5%. Sequentially, sales increased 6% from the fourth quarter on the same number of selling days with acquired sales accounting for 1% of that increase.

Sales of both hardgoods and gas and rent improved sequentially. 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% and consistent with the fourth quarter. Gross margin was 54.4%, a decline of 50 basis points in the prior year, reflecting the sales mix shift towards lower margin hardgoods. Excluding pretax charges of approximately $900,000 related to withdrawal from multiemployer pension plans and approximately $13 million related to the previously announced business support center restructuring, as well as a nearly $7 million benefit from the lower-than-previously-estimated net costs related to Air Products' unsolicited takeover attempt in fiscal 2011, adjusted operating income for the quarter was $145 million, up 11% from last year. Our underlying operating performance was strong, particularly in light of the year-over-year headwinds from incremental SAP costs of approximately $7 million.

Adjusted operating margin for the quarter was 12.4%, a 10 basis point improvement over the prior year, despite incremental SAP costs of 60 basis points. The margin expansion, excluding the incremental SAP cost, was 70 basis points, driven by strong operating leverage on organic sales growth.

Excluding $0.06 of special items consisting of the previously announced business support center restructuring charge of $0.10, multiemployer pension withdrawal charges of $0.01 and a $0.05 benefit from lower-than-previously-estimated net costs related to the unsolicited takeover, adjusted earnings per diluted share were a record $0.99, an increase of 19% from $0.83 in the prior year. The adjusted EPS of $0.99 includes a year-over-year increase of $0.05 in SAP implementation and depreciation costs, which were substantially offset by the accretion from our share repurchase programs. There were approximately 80.1 million weighted average diluted shares outstanding for the quarter, down 6% year-over-year and down 5% sequentially, driven by the share repurchase programs that were completed in this quarter and the fourth quarter of last year.

Return on capital, which is a trailing 4 quarters calculation, was 12.1%, an improvement of 160 basis points over last year and 20 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 we continue to leverage our national footprint and industry-leading platform as sales volumes recover. Our working capital metrics, including DSO and hardgood inventory turns, held largely consistent with recent trends. For the first quarter, we generated strong free cash flow of $71 million, driven by adjusted cash from operations of $139 million. The decrease in free cash flow from prior year's $114 million reflects an increase in capital expenditures and working capital to support organic sales growth, as well as an increase in the first quarter payout of accrued annual incentive compensation.

As of June 30, we had completed the additional $300 million share repurchase program announced on May 5, 2011, repurchasing 4.46 million shares on the open market at an average price of $67.19. Our prior $300 million share repurchase program announced in February 2011 and completed in March resulted in 4.78 million shares repurchased at an average price of $62.76.

Total debt increased approximately $500 million year-over-year to $2.2 billion at June 30, reflecting $600 million spent on the share repurchase programs and $112 million spent on acquisitions, partially offset by net debt paydown of $212 million. Our fixed low debt ratio at the end of June was 51% fixed, and our debt-to-EBITDA ratio was 2.8, within our target range of 2 to 3. On July 19, we extended the maturity of our $750 million revolving credit facility by almost 2 years from September 2014 to July of 2016 and reduced the borrowing rate from LIBOR plus 212 basis points to LIBOR plus 125 basis points.

We are well positioned to continue to effectively manage our balance sheet leverage within our target range while capitalizing on an improving acquisition environment and investing in growth CapEx.

Turning now to Slide 6, we'll look at our segment results. SAP implementation costs, which are included in our consolidated adjusted operating results, have not been allocated to our business segments nor have the special items that have been excluded from consolidated adjusted operating results. Distribution sales in the quarter were up 11% versus the prior year to $1 billion with same-store sales up 10%. Gas and rent same-store sales were up 7% and hardgoods were up 13%, with pricing up 4% and volumes up 6%. On a sequential basis, sales in the distribution segment increased by 3%, with hardgoods outpacing gas and rent. Distribution gross margin was 55.2%, a decrease of 30 basis points from the prior year, primarily reflecting the expected sales mix shift towards lower margin hardgoods. Sequentially, distribution gross margin increased by 10 basis points from the fourth quarter. Gas and rent represented 59% of distribution sales in the first quarter, down slightly from the prior year and consistent with the fourth quarter.

Operating income in the distribution segment increased 21% year-over-year to $133 million, and operating margin improved 110 basis points to 12.9%, driven by strong operating leverage on organic sales growth. As volumes continue to recover, we expect to sustain our trend of strong profit leverage as we have significant capacity in our platform and infrastructure to support incremental volume growth.

All Other Operations reflects our CO2, dry ice, refrigerants, ammonia and nitrous oxide businesses. Sales for All Other Operations were up 11% from the prior year, with same-store sales up 7% as higher pricing in ammonia more than offset the effect of the prior year's out-performance in refrigerants.

Sequentially, sales in All Other Operations segment increased by 27% from the fourth quarter, driven by normal seasonality in the CO2 and dry ice businesses and the acquisition of Pain Enterprises in May. Gross margin for All Other Operations was down 160 basis points from the prior year, primarily driven by margin compression in the ammonia business as pricing displayed its typical lag behind rising costs and due to margin compression in the refrigerant business as margins ran at more normal levels after last year's market anomalies. Sequentially, the 250 basis point increase in gross margin from the fourth quarter was primarily attributable to the seasonal sales mix shift to CO2 and dry ice.

Operating income from All Other Operations was $20 million, and operating margin of $13.9 million was down 400 basis points year-over-year, driven by the ammonia and refrigerants gross margin compression. Sequentially, the 630 basis point improvement in operating margin is attributable to the effect of seasonality on sales across most of the businesses in the All Other Operations segment.

Please turn to Slide 7, capital expenditures. Capital expenditures as a percent of sales increased 90 basis points to 6.7 in the first quarter. Cylinders and bulk tanks are the asset categories with the highest year-over-year growth in spending as improved gas and rent same-store sales reflect improvement in demand for our core revenue-generating assets. Construction in process was also a contributor to the year-over-year increase, reflecting the capital outlay for the construction of our new air separation unit in Clarksville, Tennessee.

Slide 8 presents our fiscal 2012 second quarter and updated full year guidance. For the second quarter, we expect same-store sales growth in the high single digits, with adjusted earnings per share in the range of $0.99 to $1.03, an increase of 19% to 24% over the prior year, which includes $0.08 of SAP implementation costs and depreciation expense, $0.03 of which is incremental over the second quarter of fiscal 2011.

For the full year, we are arranging our adjusted earnings expectations to be in the range of $3.90 to $4.05 per diluted share, up 17% to 21% over fiscal 2011, which includes $0.32 of SAP implementation costs and depreciation expense, $0.18 of which are incremental over last year. We expect same-store sales growth to land in the high single digits for the full fiscal year and adjusted operating margin to be in the range of 12.3% to 12.8%, including the dilutive impact of increased SAP costs. CapEx is expected to be around 6.5% of sales for the year. Our adjusted fiscal -- our fiscal 2012 adjusted EPS guidance assumes continued modest economic recovery and includes the benefit of the 2 recently completed share repurchase programs, which offsets incremental year-over-year SAP costs.

Our guidance excludes the impact of restructuring charges, which were $0.10 in the first quarter, and related costs of $0.07 expected to be incurred over the balance of the year. As previously announced, these restructuring charges and related costs arise from the consolidation of accounting and of certain administrative functions of 12 regional distribution companies into 4 business support centers. Our guidance also excludes any net impact related to the 2011 unsolicited takeover attempt and any multiemployer pension plan withdrawal charges. It is noteworthy that with our fiscal 2012 adjusted EPS guidance, the range straddles the $4 mark. We are well within sight of our calendar 2012 target of $4.20 per share and, with continued modest economic improvement, will likely surpass that goal ahead of schedule even without the benefit of our recent share repurchases.

Slide 9 presents a walk-through to primary elements of our second quarter and full year guidance using first quarter adjusted EPS of $0.99 and fiscal 2011 adjusted EPS of $3.34, respectively, as starting points.

Sequentially, we expect the normal seasonal effects of our refrigerants and rental welder business to be a $0.03 headwind in the second quarter. We expect accretion from our second share repurchase program, net of stock plan issuances, to be approximately $0.02, and we expect our core business to expand modestly 1% of 5%. For the full year, our underlying incremental SAP implementation cost of $0.14 and related depreciation of $0.04 remain unchanged. We expect an additional $0.11 of accretion from share repurchases, primarily driven by the completion of our second $300 million program in the first quarter, bringing the expected total accretion from both share repurchase programs, net of stock plan issuances, to $0.19 in fiscal 2012.

We have raised our base business growth expectations modestly to 16% to 21% or $0.55 to $0.70 per share. I'll now turn it back to Jay to begin our question-and-answer session.

R. Worley

That concludes our prepared remarks. [Operator Instructions] Sarah will now give instructions for asking questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Laurence Alexander of Jefferies.

Lucy Watson - Jefferies & Company, Inc.

This is Lucy Watson on for Lawrence today. On M&A, you mentioned that the environment is far more active this year than it was at the same time last year. Would you mind elaborating a little bit on the types of prospects that you're evaluating and if there are any international opportunities?

Robert McLaughlin

The vast majority of the things we're looking at are in our core business here in the United States. They represent independent distributors that are part of that 15% of the $13 billion packaged gas and hardgoods market. We are looking at a couple of international things as well, but our primary focus is our core business.

Lucy Watson - Jefferies & Company, Inc.

Okay. And following a couple of recent announcements in the last few months on your Diesel Exhaust Fluid business, I was wondering if you might be able to provide us some input on roughly maybe how large this business is now and what you think would be a reasonable growth expectation going forward.

Robert McLaughlin

Well, on a run rate basis, it's less than a $5 million business right now, but the growth rate has been really very, very good the last couple of quarters. And it's early in the game. The distribution channels for this stuff, there's not total clarity yet on those channels. We're very optimistic. We do have a national infrastructure for our ammonia business that supports the DEF business. So we think we're very well positioned regardless of how it turns out, but I really don't want to speculate on any kind of growth numbers. We're very pleased with it so far, though.

Operator

Up next, we have Tom Hayes of Piper Jaffray.

Thomas Hayes - Piper Jaffray Companies

As it relates to the SAP benefits as they begin to be realized, would you expect to see the benefits from the pricing management coming in sooner than maybe the benefits associated with the sales growth?

Peter McCausland

Well, the Airgas total access program, which is our telesales initiative, has already started at Airgas South. And also, Airgas South is beginning to look at various pricing -- the power of SAP as it can impact pricing. So I don't really -- I don't know which...

Thomas Hayes - Piper Jaffray Companies

It sounds like they go kind of hand-in-hand.

Peter McCausland

They do. Both initiatives have begun. The administrative costs are the ones that are going to lag because it's going to take longer for us to set up the business support centers, but these business support centers are going to be at the first 4 SAP implementation regional companies. So that will begin to accelerate after those 4 come on stream. But I don't really -- I can't really say.

Robert McLaughlin

They're both being attacked as the businesses get stabilized after converting to SAP.

Thomas Hayes - Piper Jaffray Companies

Okay. Shifting gears to CapEx, the last 3 quarters has been running as a percentage of sales over 6% and then over the last 2 quarters closer to 7%. Just wondering what type of run rate should we think about for the balance of the year? And does this reflect kind of a catch-up in spending that was maybe delayed last year or just a more positive view on the outlook for growth?

Peter McCausland

Well, we're investing mostly in cylinders and bulk tanks, and then we have the one air separation unit under construction. So these represent growth opportunities for us where we have to deploy assets and reflective of the improved economic climate. And I think we expect our CapEx to stay at this level for the balance.

Robert McLaughlin

Yes, we started the year with the range of 6% to 6.5%, and I think we're going to be closer to the high end, and the dovetail with Peter, that's really driven by the positive news of the organic sales growth and investing in revenue-generating assets.

Thomas Hayes - Piper Jaffray Companies

Okay. Then just a quick follow-up question on the M&A, do you still feel that the $150 million of annual acquired revenue that you've called out at your last analyst meeting, is it still a meaningful or achievable target?

Peter McCausland

Yes.

Operator

Robert W. Baird's David Manthey has the next question.

David Manthey - Robert W. Baird & Co. Incorporated

First off, in terms of price, you're up 4% overall. I didn't see it in the materials. I apologize if it's there. But could you break out between gas and hardgoods, specifically?

Robert McLaughlin

They were pretty consistent between the 2, and they were pretty consistent between the 2 categories.

David Manthey - Robert W. Baird & Co. Incorporated

Okay. And then when you talk about price as it relates to hardgoods, are you looking at a constant basket of products? Or if you had a higher mix of, say, some bigger ticket equipment in there, would that skew the figure higher?

Peter McCausland

No, it's on a product-by-product basis.

David Manthey - Robert W. Baird & Co. Incorporated

Okay. And then last question, in the past, you've given us a percentage of customers that buy gas and hardgoods from you to give us an idea of that cross-sell opportunity. Do you happen to have that for this quarter?

Peter McCausland

No. What we've given you in the past is the percentage of our customers who buy safety equipment from us who could also -- who buy safety equipment as a percent of the ones who could. So 15% of our customers -- of all the customers that could buy safety equipment, which was our big cross-selling effort in the hardgoods area over the last few years, only 15% do right now. And that pretty much stays the same. We probably made a little progress on that, but there's huge opportunity in there.

David Manthey - Robert W. Baird & Co. Incorporated

Okay. Could you answer the question, though? Do you know what percent of your customers buy both gas and hardgoods from you or who buy each individually?

Peter McCausland

Well, if you're talking about welding gas and hardgoods, I'd say the vast majority of our customers buy both from us. But in some of the larger customers, we may only have the hardgoods business, or we might only have the gas business. But in the vast majority of cases, the customers buy both their welding hardgoods and gases from us.

David Manthey - Robert W. Baird & Co. Incorporated

Makes sense, all right.

Peter McCausland

And on the medical business, they buy medical gases and medical hardgoods like regulators and things like that, and so the vast majority would buy both there as well.

Operator

We'll hear next from Mike Harrison of First Analysis.

Michael Harrison - First Analysis Securities Corporation

I was wondering if I could ask a couple of questions about the All Other business and the margin decline you talked about there. You suggested that, that 400 basis point operating margin decline year-on-year was related to the gross margin impacts of the ammonia and refrigerants businesses. And I understand those dynamics, but that really only seems to explain 160 basis points of the decline. If I look at SG&A costs, those rose way faster than your sales did. And I was just wondering is that SG&A number related to some kind of onetime integration cost related to that Pain acquisition or is the $39 million SG&A cost that you had this quarter -- what the ongoing quarterly run rate is going to look like.

Peter McCausland

Well, there wasn't any significant onetime operating expense. The margin compression was a large driver. I mean, there was also a significant decline relative to the refrigerants business that, as we called out last quarter, had a -- last year's first quarter, had a significant impact on the profitability. There's just a lot of moving pieces in those very different businesses. That might be better for an offline detail grill for that.

Robert McLaughlin

We didn't have any extraordinary expense bills. Basically, it was a gross margin phenomenon both in refrigerants, where we had extraordinary markets in some product lines, shortages and high prices last quarter that we didn't have this quarter, and in ammonia, we had huge increases in costs, and it takes time for prices to catch up. At the prior year, we had the benefit of that because we got our prices up finally and then the cost dropped dramatically. So there's no structural problems expense-wise in any of those business. They're performing quite well.

Michael Harrison - First Analysis Securities Corporation

All right. Then Peter, I was also hoping to get some thoughts on the U.S. merchant gases business. I'm sure you heard the commentary from Air Products on some of the operational issues they're facing. Are you seeing an opportunity for share gains in that business, and can you comment on what your LOX/LIN volumes look like year-over-year in the quarter?

Peter McCausland

Well, first of all, we have a great bulk offering. We cover maybe 60% of the U.S. geography with our own air separation units, and we have good buying power for gases in markets where we don't have our own production, number one. Number two, I would say that both gases are great opportunity for us for a number of reasons. First of all, they're a great cross-sell. We grew up in a packaged gas business, and with many of our customers, we have all their cylinder gas business and their hardgoods business, but we weren't historically competitive with bulk. And now we have an opportunity to add that bulk. And I'd say another reason is that we have a huge sales force out there that's been trained to spot bulk opportunities, and then we have a number of bulk specialists who can go in and help them land the business. So we like our bulk prospects. Right now we're in the low -- our capacity utilization has been running between 81% and 85%, up and down, call it average, 82%, over the last 6 months or so. So we still have molecules to sell, and we like the market.

Michael Harrison - First Analysis Securities Corporation

And also, I'm hoping to get --

Peter McCausland

And volume was up 4% year-over-year.

Michael Harrison - First Analysis Securities Corporation

4%, okay. I was also hoping to get maybe a little bit more detail on the improved rate of hardgoods equipment and welding machine sales that you referred to and maybe if you could talk a little bit more about what that says about the demand environment and kind of what it means for your business going forward.

Peter McCausland

Okay. Well, within the hardgoods segment, you have different subsegments, if you will. You have filler metals, which are like electrodes and welding wire and things like that. And then you have -- and then we have safety equipment, and then you have personal protective equipment on the welding side, and then you also have torches and things like that. But then finally, you have what we call machines, and these machines are welding machines and cutting machines and some automation stuff like robotics and things like that. Now they tend to be the highest dollar but the lowest gross profit category within the hardgoods segment. But they tend to do very, very well in the early stages of our recovery because customers buy new machines when they're gearing up for production. And then once they start with a higher production, the gases and the consumables, like the filler metals and the tips and the torches and whatnot, tend to follow. This quarter, we had the highest sales of machines since the recession hit, which would be indicative -- or which is indicative of the early stages of the recovery in manufacturing. So we expect to see higher sales of gases and consumable hardgoods in the months to come as a result of this machine sales that have been strong all year but very strong in the last quarter. The customers basically are gearing up to produce more.

Operator

Up next, we'll go to Ryan Merkel of William Blair.

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

First question is on non-res construction starting to grow. I'm wondering in which segment of the construction market you're beginning to see recovery.

Peter McCausland

Well, energy, for sure, and -- mostly energy, I would say. But we've been taking share through concerted effort to touch all segments of the construction market. A lot of maintenance and turnaround business, that was kind of gone away during the recession, and now that the recovery is a year old, the companies are feeling better about it, and they're taking these planned shutdowns. And so we do well supplying the contractors with both products and services during these planned shutdowns. So basically, that's what we've been seeing, energy and the maintenance shutdowns, basically.

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

Okay. And then second question, I wanted to clarify the July sales comment you made in the prepared remarks. I think you said that sequential sales in July were better than historical patterns would suggest. You didn't say that July same-store sales growth was higher than June.

Peter McCausland

No, because we don't have that number yet. We don't have the final number for July. I didn't say that. Everyone always wants to know how will the next quarter look, and so we offered that up. And basically, what we're saying is we didn't see the July doldrums that we normally see, and we think that bodes well for our next quarter, but one month does not a quarter make. And we were very pleased to see sales hold up so nicely, especially when you consider the heat wave that was going around the country, and so we're pretty pleased.

Operator

From Bank of America Merrill Lynch, we'll hear from Kevin McCarthy.

Kevin McCarthy

Bob, I was wondering if you had a share count for us at the end of the quarter. And with regard to your future repurchase activity, would it be fair to say you're probably on hold for the balance of the fiscal year, or do you see an opportunity to reinvigorate there?

Robert McLaughlin

We are -- as we stated in the past, we are taking a pause relative to the share repurchase. We've kind of got to our objective, so we don't foresee. We always take a look at dividends and repurchases, but we're taking a pause for now on the repurchase front. And relative to share count going forward on a fully diluted basis, the fully diluted basis would probably be 77.5 million, but the actual outstanding somewhere around 76 million.

Kevin McCarthy

Okay, that's helpful. And then Peter, just to come back to M&A, you've indicated your pipeline is more active. One of your primary competitors had similar comments earlier this week. In your case, you obviously had your hands full with Air Products, perhaps, last year. But I was wondering if you could comment on what you're seeing in the external environment. Is the activity accelerating because there might be a few chunkier properties that are available, or are sellers just perhaps more willing to talk at this juncture in the cycle?

Peter McCausland

Well, I think business has improved, although it hasn't improved that much, but it has improved for a lot of the smaller companies. And it is more of a willingness. When people -- when companies decide to sell, they usually have a 2- or 3-year window, and as we said many times, if the economy is down, they'll wait and sell off to higher numbers. So it might be a little bit of a pent-up demand that we're seeing, and I hope it materializes. Acquisitions are very hard to predict, and someone told me that PDI made -- or that Praxair that comment, and we're trying to figure out who they're talking to you.

Kevin McCarthy

Okay. And then last question, if I may. I thought your commentary on the machine orders was quite interesting. Do you happen to know offhand how much the machine sales would have been up, let's say, relative to the hardgoods same-store sales of plus 13% in the quarter or roughly what that delta would look like?

Peter McCausland

I think equipment was up 14% in volume.

Kevin McCarthy

In volume alone, okay.

Peter McCausland

Volume alone.

Kevin McCarthy

And then presumably, price positive there as well.

Peter McCausland

Yes.

Operator

We'll hear next from Edward Yang of Oppenheimer.

Edward Yang - Oppenheimer & Co. Inc.

Maybe a question for Bob, but what's your expectations for interest expense for the year?

Robert McLaughlin

Interest expense for the year, we have not provided guidance as it relates to that. Our average interest rate has been -- our blended average interest rate has been around 3.5%, so that's probably a reasonable bogey going forward. We'll have some benefits from the refinancing and then a little bit of pressure on the forward curve. So if you think about that as an effective rate, that will get you in the ballpark.

Edward Yang - Oppenheimer & Co. Inc.

Okay. And Peter, you mentioned your optimism about a strengthening construction trend in '12. Are you talking about calendar year '12 or fiscal year '12?

Peter McCausland

Calendar. Calendar. In construction, I think -- I guess -- what were we up for the quarter? Is that number out?

Robert McLaughlin

It was about 7%.

Peter McCausland

7%. And we're up 10% last quarter in a market that was down. And so we're doing quite well, and I just want to -- my point was that we're very well positioned when the infrastructure build does come, and we don't expect it to start immediately by any means, more like a slow start in calendar '12 and then picking up momentum. And the country needs the infrastructure very, very badly, but for the credit crunch, I think that infrastructure build would be upon us. And I think it's just a question of when not if, and we're well positioned with our construction, in our national construction offering now. So that was my point.

Edward Yang - Oppenheimer & Co. Inc.

When I look at the Architecture Billings Index, that's been mostly down year-to-date and it was down again in June. And I think that's supposed to be a kind of a 9- or 12-month leading indicator. Are there other leading indicators that you look at in your business like the activity in the equipment side? Or are you, again, seeing more on the manufacturing infrastructure side, on the construction versus commercial construction.

Peter McCausland

Right. You're talking about commercial construction. I agree that that's a good indicator for that, but we don't participate much in commercial construction. It's mostly infrastructure, and a lot of it is energy, and then there's airports and stadiums and things like that. And then there's chemical plants, where there's a lot of mechanical work and contracting report. It's mostly mechanical contractors and steel erectors, and so what we look at is more -- we look more into the chemical industry and the energy industry for -- to see the future. And we're basing -- and of course, we've talked to -- we focus on the ENR 400, and these are the national contractors who are engaged in this kind of infrastructure work. And we get feedback from them as well. So it's a combination of a lot of things that lead us to believe that calendar '12 will see the beginnings of a rebound in that kind of new construction.

Operator

Robert Koort of Goldman Sachs.

Robert Koort - Goldman Sachs Group Inc.

I'm going to try to figure a little more on the SAP. I mean, it sounds like the switch is going to go from pain to gain as you get into '13. When that expense burden disappears, is that contractors or consultants you have that go away? Do you have to redeploy a bunch of folks that you've tapped from the Airgas payrolls into other areas? And if so, what are they going to do? Give me just a little more comfort in how you get such a dynamic reversal there.

Peter McCausland

Well, we have a huge amount of money that we pay our consultants in connection with these implementations. So a lot of it is Delloitte, and then a lot of it is the extra expense of having what we call the buddy system, and that is we import maybe 30 or 40 people to a regional company that's about to convert so that there's an SAP trained person in every store and in the receivables department, in the payables department and so on. It also has -- and there's a lot of travel expense associated with it. Bob, what else?

Robert McLaughlin

Yes, I think those are the main categories. And in addition to that will be -- when we're ultimately shut down, we'll eliminate the cost of our current Legacy systems, including maintenance and licensing fees, support center fees, et cetera. So it's a combination of all 4 of those elements. Plus the benefit starts to kick in at the same time, so that's creating the delta as well.

Robert Koort - Goldman Sachs Group Inc.

Sure. In the appendix on Slide 12, you gave a nice trend analysis. Peter, if you go back, and I know those cycles are the same, but if you look over your history, how long coming out of the recessions or declines are you normally able to sustain those mid to upper single-digit same-store sales trend? What would be typical on that in an up cycle?

Peter McCausland

It depends on the length of the recovery. We think that this one is going to be longer because the recession was deeper and longer. So this one's going to be slower and longer, but in the last cycle -- Bob, what was on the same-store sales?

Robert McLaughlin

Probably another point which Peter made earlier, too, Bob, was that even now -- even though we're at record sales levels from a dollar standpoint, we're still close to 10% behind in volume from our prerecession high point. So that's going to enable -- that slow recovery of our volumes, combined with what has up until now been a supportive pricing environment, and I think it bodes well for pretty decent same-store sales growth at least for the horizon. The last recovery was 5 years, and as I recall, we had double-digit growth probably in the first half of it, and then it started to level out.

Operator

Ticonderoga Securities' Mark Gulley has the next question.

Mark Gulley - Ticonderoga Securities LLC

Two questions. First of all, I want to return to the subject of acquisitions. Getting back to the 150 level sounds like a bit of a stretch from here, giving you're at 70. Is one way to get there maybe a little bit more emphasis on the larger acquisitions, the so-called super regionals?

Peter McCausland

Well, I disagree it's a stretch. We've just completed our first quarter. We're only a month into the second quarter, and we're halfway there, and we have a pretty good pipeline. So I think we have a reasonably good chance of making that 150 this year or exceeding it. We do talk to the super regionals, as they're known as, but you can't push the string. If somebody isn't ready to sell, they're not ready to sell. When they are ready, we generally get an opportunity, not always but in the vast majority of cases. So we would hope to have conversations with several of those super regionals this year, and we'll see what happens.

Mark Gulley - Ticonderoga Securities LLC

And switching gears, congratulations on the return on capital gains that you've put up there. I think it's an important driver evaluation. Do you have any kind of internal target goal you might share with us with respect to that very important metric?

Robert McLaughlin

We had a goal out relative to getting into the 15% range by 14.5% to 15.5% by fiscal year '13/'14 the last analyst conference that we had. But I think when I gave the full year guidance, we had experienced a significant increase over last year and thought that we would be looking at easily 100 basis point improvement over where we ended the year last year on for this year, so quite a bit of room to continue to improve that.

Operator

We'll move on to Michael Sison of KeyBanc.

Michael Sison - KeyBanc Capital Markets Inc.

In terms of pricing, pretty strong in the quarter. Is that a good level to think about for the rest of the year? And how much of that is incremental relative sort of above the increase in costs?

Robert McLaughlin

Our raw material cost. We certainly have had some margin expansion where we always try to get ahead of the cost curve. I think it's a reasonable level. We do have the benefit of the June price increase from the year before, benefiting the quarter we just completed, which will fall off next quarter, but we always have additional follow-on from contracts and some things that haven't been realized from the most recent price increase. So it's probably in the neighborhood of what you might think of going forward.

Robert McLaughlin

This is the first quarter we had full quarter of our March price increase, and when you do announce a price increase effective March, you don't get 100% compliance because of the way purchase orders and contracts fall. So it probably takes you 9 months to get your full yield on the price increase, although you probably get 75% of it in the first 60 days. And so we'll have the fall-off of the price increase from the prior June, but we'll also have offsetting that follow-through on the March price increase. So I would agree with Bob's assessment.

Michael Sison - KeyBanc Capital Markets Inc.

Got it. And then just a quick question there, I guess. South, you've got SAP rolling there. Any particular tidbits of positives or negatives that you've seen? I know it's early, but just curious on maybe some of the anecdotal benefits you've seen thus far.

Peter McCausland

Well, we're still running. No, seriously, we've had no downtimes. We had some programming problems that weren't big problems, but we rushed in and fixed them, and the good news is the next regional company isn't going to have that problem. Some of them related to the supply chain and the plants and things like that, and we came up with good fixes, and we're excited about that. We did see a period of time where sales dipped because of the distraction, but we're over that, and now sales have popped back up, which is very encouraging. And we're really excited. And the fact that we did so well, knock on wood, has really gotten all the troops enthusiastic about the next conversions. And because everyone understands that operating on 22 different computer systems is not the way to go. And they've been strapped with all these Legacy systems for years, or hamstrung is a better word, for years. And they're really looking forward to being on one system, an Enterprise system, and so the success itself has done great things for the morale of the troops going into these conversions, which, I think, is an important factor.

Operator

And it appears we have no further questions at this time. I would like to turn the conference back over to Mr. Jay Worley for closing remarks.

R. Worley

We want to 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

Thank you, and that does conclude today's conference. Again, we thank you all for joining us.

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