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Airgas (NYSE:ARG)

Q4 2012 Earnings Call

May 03, 2012 10:00 am ET

Executives

J. Barrett Strzelec - Director of Investor Relations

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

Michael L. Molinini - Chief Operating officer and Executive Vice President

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

Analysts

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

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

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

Vincent Andrews - Morgan Stanley, Research Division

John E. Roberts - The Buckingham Research Group Incorporated

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

Mark R. Gulley - Ticonderoga Securities LLC, Research Division

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Laurence Alexander - Jefferies & Company, Inc., Research Division

Brian Maguire - Goldman Sachs Group Inc., Research Division

Thomas L. Hayes - Piper Jaffray Companies, Research Division

Operator

Good morning, and welcome to the Airgas Fourth Quarter 2012 Earnings Conference Call. Today's call is being recorded at the request of Airgas. [Operator Instructions] For opening remarks and introductions, I will now turn the call over to the Director of Investor Relations, Barry Strzelec. Please go ahead.

J. Barrett Strzelec

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

Our earnings press release was made public this morning and is available on our website, as are the teleconference slides. To follow along, please go to airgas.com, click on the Investors shortcut at the top of the screen and 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, as time permits. And we plan to end the teleconference today by 11:15 Eastern Time. Now I'll turn the call over to Peter to begin our review.

Peter McCausland

Thanks, Barry. Good morning, and thank you all for joining us. Please turn to Slide 2 to begin our discussion of our quarterly and full year results.

However, before reviewing our earnings, I'd like to take a few minutes to discuss with you the leadership transition announced this morning in conjunction with our financial results. Following our 2012 annual meeting of stockholders, which will be held in mid-August, I will assume the role of Executive Chairman of the Board of Directors. At that time, I'm pleased that Mike Molinini, Executive Vice President and Chief Operating Officer of Airgas since 2005, will succeed me as President and Chief Executive Officer.

As part of this leadership transition, our Board has unanimously elected Mike to serve as a Director of the company effective immediately and he will stand for reelection to the Board at the 2012 annual meeting. This transition is a product of extensive leadership succession planning by our Board and is part of an evolutionary process. Consistent with its fiduciary responsibilities, the Board has been very involved in the development of our management team over the course of many years and has kept a close eye on the career path, leadership capabilities and performance of many outstanding individuals. They have watched and encourage, not only Mike's development, but the development of a deep and talented bench that is driving -- that is the driving force behind the growing strength of our business.

Most of you know Mike and are familiar with his outstanding record of accomplishment. Mike joined Airgas in 1997, as Group Vice President of Airgas Direct Industrial, and he led the build out of our hardgoods supply chain including development of the Radnor private label program. He then served as a Senior Vice President of Airgas' hardgoods business with company-wide responsibility for directing sales and marketing, procurement and distribution of center logistics. Most recently, since 2005, Mike has served as Executive Vice President and Chief Operating Officer, responsible for the day-to-day operations of our company. Over the last couple of years, one of his most notable accomplishments has been leading the successful development and rollout of our new SAP systems and he's done that while maintaining a sharp operating focus on the business and delivering robust same-store sales and double-digit earnings growth.

The board and I believe that Mike's talents, strategic insight and keen grasp of our business will benefit Airgas as we build on the momentum of our numerous growth initiatives. He is clearly an outstanding fit for the job and we are confident that he will continue to build on our 30-year track record of operational excellence and shareholder value creation.

In my new role as executive chairman, I will continue to oversee some key areas of the business, about which I am very passionate, business strategy development, acquisitions, risk management and governance. In addition, I will continue to serve as chairman of the company's management committee. Mike and I, together with Bob McLaughlin and other key executives will continue to be actively engaged with our shareholders in the investment community at large. Our vision and strategy remain unchanged and we have never been stronger. As I always say, the best time at Airgas is now.

The benefits of our customer-centric culture and our new sales alignment are just starting to develop and we'll yield even greater value for the customers, more than 1 million strong, who make Airgas their supplier of choice. Furthermore, the combination of favorable business trends, sharp operating focus and SAP benefits, offers Airgas shareholders very attractive future prospects. Accordingly, we believe this is an opportune time for Mike to take on increased responsibility.

I want to stress that this leadership transition is a natural result of the Board's long-term focus on developing a deep management team and it represents the next step in the evolution of Airgas. As Airgas' founder and largest shareholder, I am committed to making sure that this plan is successful and I am looking forward to working with Mike and the entire management team in the years ahead.

Fiscal 2012 was another outstanding year for Airgas and its shareholders, thanks, to the effort of our more than 15,000 associates. Our record sales and earnings performance this year is a testament to our strong operating culture and customer-centric approach to doing business.

We delivered record adjusted earnings per share of $4.11, representing 23% growth on sales of $4.7 billion and operating margin before SAP costs of 13.1%. And we generated strong free cash flow of $262 million on adjusted cash flow from operations of $593 million. Making these results even more impressive is that we delivered them in the midst of a complex ERP implementation at nearly half of our regional distribution businesses which, thus far, has been very successful.

Complementing our 10% same-store sales growth in fiscal 2012 for the acquisitions of 8 businesses with aggregate annual revenues of more than $106 million, including our recent purchase of the Nordan Smith, with 17 locations across Mississippi, Arkansas and Alabama, our acquisition pipeline continues to improve and I'm optimistic we'll achieve our annual target of $150 million in acquired sales during fiscal 2013.

Our fourth quarter adjusted earnings were also a record, $1.11 per share which included $0.09 of SAP headwinds. That represents a 26% increase over the prior year on sales of $1.2 billion and operating margin before the SAP costs of 13.1%. Same-store sales increased 11% in the fourth quarter comprised of 15% in hardgoods and 9% in gas and rent.

Compared to the fourth quarter of last year, demand was strong this quarter across most of our core business with particular strength in manufacturing, petrochemical and energy customers, and noticeable improvement in our construction customer base despite the lack of large, new construction projects.

Our product line adjacency businesses also performed well relative to our expectations, highlighted by strong pre-season demand in our refrigerants business that contributed nicely to our earnings this quarter.

The strength of our hardgoods same-store sales growth relative to gas and rent, and a sales mix shift within hardgoods to welding and automation equipment reflect the continued, modest expansion and reinvestment we're seeing by larger customers in the manufacturing-intensive regions of the U.S. While the mix shift has a dilutive effect on our gross margin, we've continued to leverage our national footprint and industry-leading platform to increase our underlying operating margin and expand our return on capital to 12.5% this quarter, 60 basis points over the prior year.

As far as sales trends are concerned, we saw a very robust January and February which we really didn't expect because they tend to be muted. And then we saw a flattening of the growth in March. So, maybe that was a seasonal effect of the warm weather, pushing sales to, or pulling sales, to the front of the quarter. March continues steady, April continues steady. We surveyed all of our business leaders in the last couple of weeks and the outlook is for continued steady growth, slow but steady growth, across the economy and customer base.

As I love to remind people, the best in time at Airgas is now. Now let me hand it off to Mike to review some of our key initiatives.

Michael L. Molinini

Thank you, Peter. Before I discuss our results, I'd like to thank Peter and the board for the confidence they placed in me. I'm honored and energized by this opportunity and look forward to enhancing Airgas' position as one of the premier industrial gas companies in the world.

Under Peter's stewardship, Airgas has achieved remarkable success over the last 30 years. Most recently, the company weathered the financial crisis and emerged stronger than ever. I'm excited about the challenge of leading Airgas and about building upon the solid foundation Peter has established. As CEO, I will continue to lead the company's operations and information technology initiatives, while also assuming responsibility for finance and human resources. Peter and I have worked successfully together for many years and I'm pleased that he will stay actively involved in Airgas, continuing to contribute the vision and leadership that have helped make the company what it is today. I plan to continue his tradition of strong, active leadership and nurturing Airgas' entrepreneurial culture in pursuit of the tremendous opportunities ahead.

Airgas is the leading packaged gas company in the U.S. and a significant expansion of our bulk gas production and distribution capabilities in recent years, combined with our broad offering of hardgoods and value weighted services, have created a value proposition for our diverse customer base that is virtually unrivaled in the industry. Our performance over the years and, in particular, through the recession really demonstrates the resilience of our business model. Our success also demonstrate the loyalty of our customers and the tremendous work ethic and commitment to excellence of all Airgas associates, all resulting in an extremely compelling track record of creating shareholder value. Our more than 15,000 associates are the best in the business and, together, we will continue to focus on operating safely, serving our loyal customers and growing the business for years to come. I intend to hit the ground running on day 1 to continue the success of this great company, and I look forward to working with Peter and all of the other members of our team.

And now I'd like to continue the discussion of our fourth quarter results. Please turn to Slide 3. Our sales and marketing strategy focused on segment alignment continues to gain momentum. Strategic Accounts presents us with tremendous cross-sell opportunities both in terms of product lines and locations and represent more than 20% of total sales. In the fourth quarter, Strategic Accounts business was up 11% from the prior year, driven by new account signing across all customer segments and by increased activity on our existing metal fabrication, oil and gas and chemicals customer bases.

As Peter mentioned, our construction customer base is showing noticeable improvement on the strength of our Red-D-Arc rental welder business which has resulted from some capacity expansion projects and turnarounds in the Oil and Gas and Chemicals segment, as well as strong turnarounds in the refineries and power sectors.

I encourage you to review our strategic products slide in the appendix in detail after our call. In the fourth quarter, strategic products which make up about 40% of our revenue increased 10% over the prior year. Safety products once again deliver the highest growth at 17%, driven by business with new and existing large customers.

Our Radnor private label products were up 14% 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 product are 1.5x greater than those of comparable OEM products.

We are progressing well through our planned phase rollout of SAP whereby our business units implement the new system in succession. At this point, we are more than half -- we have more than half of our business running smoothly on SAP and we still expect to have 11 of 12 regions converted by December 2012, with the remaining region converted in the first quarter of calendar 2013.

On Monday, we successfully converted another region to SAP and migrated its back office support functions into one of our 4 Business Support Centers. The next region will convert in less than 4 weeks from now.

We remain committed to minimizing implementation risk and converting the rest of our business units to SAP, but much risk has been abated and we are shifting our focus to attaining benefits. Based on our experience to date, we're confident by the end of the calendar 2013, the benefits we've detail 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. The areas of benefits we have announced do not represent the full earnings power of our SAP conversion, however, and we expect additional economic benefits after the implementation is completed and we tap into the potential of the new system. Thank you.

And now Bob will now give you our financial review for the quarter and provide an update for guidance next year.

Robert M. McLaughlin

Thank you, Mike, and good morning, everyone. Please turn to Slide 4 for a review of our consolidated results for the fourth quarter. Please note that prior period amounts have been adjusted for the retrospective application of a change in the method of accounting for a portion of our hardgoods inventory from LIFO to the average-cost method.

In conjunction with the rollout of SAP and our operating realignment into 4 divisions, we are merging our distribution businesses into a single LLC which necessitated standardizing our inventory valuation method. Prior to this change in accounting, only 10% of our inventory was accounted for in the LIFO method. The impact of this change was immaterial to all periods presented.

Sales increased 13% year-over-year to $1.24 billion reflecting acquisitions growth at 2% and total same-store sales growth of 11%, comprised of a 9% increase in gas and rent and a 15% increase in hardgoods. Total volume was up 7% and price was up 4%. Sequentially, total sales increased 8% from the third quarter on 2 additional selling days and the follow-up of the third quarter holiday impact. On a daily sales basis, sales increased 4% over the third quarter. Gas and rent represented approximately 62% of our sales mix in the quarter, down from approximately 63% in the prior year and in the third quarter. Gross margin for the quarter was 53.9%, a decline of 40 basis points from the prior year, reflecting continued outperformance of hardgoods sales and a mixed shift within hardgoods to lower margin welding and automation equipment. On a sequential basis, gross margin declined by 100 basis points as the strong -- as strong performance in our lower margin refrigerants business and hardgoods mixed shift more than offset the favorable impact of our third quarter pricing actions.

Adjusted operating income for the quarter was $152 million which was up 13% from last year and which included $5 million of incremental SAP costs and depreciation expense. Not included in adjusted operating income were pretax charges of approximately $4 million related to the previously announced Business Support Center restructuring and a $2 million impairment charge related to one of our smaller, less efficient air separation units.

Our underlying operating performance was strong, particularly in light of year-over-year headwinds from incremental SAP costs and depreciation expense. Adjusted operating margin of 12.2% for the quarter included 90 basis points of impact from SAP implementation costs and depreciation expense. The prior year's adjusted operating margin of 12.2% included only 50 basis points of SAP-related costs. Excluding these incremental SAP costs, adjusted operating margin expanded 40 basis points year-over-year, driven by operating leverage on strong organic sales growth. Excluding $0.06 in tax benefits related to the LLC reorganization and the true up of foreign tax liabilities, net of $0.05 of BSC restructuring and impairment charges, adjusted earnings per share were $1.11, an increase of 26% from $0.88 in the prior year. Adjusted EPS of $1.11 includes a year-over-year increase of $0.05 in SAP implementation costs and depreciation expense, which were offset by the accretion from our share repurchase programs. Our adjusted tax -- our adjusted effective tax rate, which excludes the $0.06 per diluted share income tax benefit resulting from the LLC reorganization, was 36.2% for the fourth quarter and 37.3% for the full year. The LLC reorganization enables us to realize certain state tax benefits that previously required evaluation allowance.

There were approximately $78.4 million weighted average diluted shares outstanding for the quarter, down 7% year-over-year, driven by share repurchase programs that were completed in the first quarter of this year and the fourth quarter of last year. Return on capital, which is a trailing 4 quarters calculation, was 12.5%, an improvement of 60 basis points over last year on the strength of our improving operating income. Adjusted cash from operations for the full year was $593 million and free cash flow was $262 million. The decrease in free cash flow from the prior year is $387 million, reflects an increase in capital expenditures and working capital that supports strong sales growth, as well as some major capital projects which I will comment on later.

Total debt increased approximately $308 million year-over-year to $2.16 billion at March 31, reflecting strong operating cash, offset by $300 million spent on the share repurchase program and $160 million spent on acquisitions. Our fixed float debt ratio at the end of December was approximately 52% fixed and our debt-to-EBITDA ratio was 2.5, comfortably within our target range of 2 to 3. We are well positioned to continue to effectively manage our balance sheet leverage within our targeted range while capitalizing on an improving acquisition environment and investing in growth CapEx.

Turning now to Slide 5, we'll look at our segment results. SAP implementation costs which are included in our consolidated adjusted operating results have not been allocated to our business segments nor 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 $1.11 billion. Same-store sales for distribution segments were up 10%. Gas and rent same-store sales were up 7%, and hardgoods were up 15%, with pricing up 4% and volume up 6%. Distribution gross margin was 54.5%, a decrease of 70 basis points from the prior year, primarily driven by the sales mix shift to hardgoods, and within hardgoods to lower margin welding and automation equipment.

Sequentially, distribution gross margins decreased by 60 basis points from the third quarter, primarily driven by the sales mix shift to lower margin hardgoods. Underlying gross margins excluding the mix impacts on both gases and hardgoods, each improved sequentially from the third quarter.

Gas and rent represented 57.2% of distribution sales in the fourth quarter, down from 59% in the prior year and 58.7% in the third quarter.

Operating income in distribution segment increased 12% year-over-year to $146 million and operating income improved to 13.1% comparable to the prior year despite the dilutive effect of the mixed shift to hardgoods and a 20-basis-point impact of higher SAP depreciation expense.

All other operations reflects our CO2, dry ice, refrigerants, ammonia and nitrous oxide businesses. Sales for all other operations were up 24% from the prior year with same-store sales up 18%. The same-store sales increased was largely driven by an increase in both refrigerants and ammonia sales, each on strong volume and pricing. Sequentially, sales in all other operations segment increased 16% in total and 12% on a daily basis driven by the strength in refrigerants, partially offset by normal seasonality in our dry ice business. Gross margin for all other operations was 45.5%, an increase of 270 basis points from the prior year, primarily driven by margin expansion in our refrigerants and CO2 businesses. Sequentially, the, 340 basis-point decrease in gross margins from the third quarter was primarily driven by the mix shift towards lower margin refrigerants and normal seasonality within our dry ice business.

Operating income for all other operations was $15 million, an increase of $6 million over the prior year and operating margin of 10.9% was up 330 basis points year-over-year, driven by a margin expansion in our refrigerants, CO2 and ammonia businesses.

Please turn to Slide 6, capital expenditures. Fiscal 2012 CapEx represented 7.5% of sales. Construction in process was the asset category with the highest year-over-year growth in spending, driven by the construction of our new ASU in Clarksville, Tennessee, the expansion of our hardgoods distribution centers in Duluth, Georgia and Bristol, Pennsylvania, the buildout of our Business Support Centers, and projects to expand or consolidate plants and branches across the country as we continue to focus on improving the efficiency of our operations. The cylinder and bulk tanks category also were a contributor to the year-over-year increase as improved gas and rent same-store sales reflect improvements in demand for our core revenue generating assets. Rental welders increased by $22 million on the improvement of our Red-D-Arc rental welder business that Mike mentioned earlier. Excluding major projects, CapEx as a percent of sales was approximately 5%.

Slide 7 presents our fiscal 2013 first quarter and full year guidance. For the first quarter, we expect same-store sales growth in the mid to upper single-digits, with adjusted earnings in the range of $1.12 to $1.16 per diluted share, an increase of 12% to 15% over the prior year, which includes $0.08 of SAP implementation costs and depreciation expense in both periods.

For the full year, we expect same-store sales growth in the mid to upper single-digits, with adjusted earnings in the range of $4.70 to $4.85 per diluted share, up 14% to 18% over fiscal 2012, which includes approximately $0.12 to $0.16 of SAP implementation costs and depreciation expense, net of expected benefits.

Fiscal 2012 adjusted earnings per diluted share included $0.34 of SAP implementation costs and depreciation expense. We expect same-store sales growth to land in the mid to upper digits for the full fiscal year and adjusted operating margin to be in the range of 12.8% to 13.3%, including the net dilutive impact of SAP costs, partially offset by the expected benefits. This represents a significant expansion in our adjusted operating margin, from 12.2% in fiscal 2012. CapEx is expected to be around 6.5% of sales for the new fiscal year.

Our fiscal 2013 adjusted EPS guidance assumes continuation of recent business trends including continued outperformance of hardgoods relative to gas and rent on the strength of U.S. manufacturing, particularly, metal fabrication which uses a proportionately greater amount of hardgoods in their processes, in addition to broad-based modest improvement across the rest of the base business. The guidance excludes the impact of Business Support Center restructuring and related charges.

Slide 8 presents a walk from the primarily elements of our first quarter and full year guidance using fourth quarter adjusted EPS of $1.11 and fiscal 2012 adjusted EPS of $4.11, respectively, as the starting point. In the first quarter, we expect headwinds of approximately $0.06 related to our stock-based compensation as the largest portion of our full year stock-based compensation expense follows in the first quarter and $0.02 due to a higher effective tax rate relative to the fourth quarter.

We expect seasonality in our CO2, dry ice and refrigerants businesses tempered by the fourth quarter strong performance of refrigerants to provide a net tailwind of approximately $0.06 and we expect our core business to expand sequentially contributing $0.03 to $0.07 on continued modest improvement in the manufacturing economy. For fiscal 2013, the impact of 2 fewer selling days is expected to be a headwind of approximately $0.05 and $0.06 and a slightly higher tax rate relative to fiscal 2012 is expected to be a headwind of approximately $0.03.

SAP implementation costs and depreciation expense net of the ramp-up of benefits are expected to provide a tailwind of $0.18 to $0.22 relative to the $0.34 of net expense in fiscal 2012 with base business growth of $0.50 to $0.60 or 12% to 15% over the prior year adjusted EPS.

And now, I'll turn it back to Barry to begin our question-and-answer session.

J. Barrett Strzelec

Thanks, 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. The operator will now give instructions for asking questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Ryan Merkel with William Blair.

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

So my first question is on 2013 guidance. I'm just wondering, are you factoring in any gross margin expansion or contraction? Or is it just mostly SG&A leverage?

Robert M. McLaughlin

We are factoring some expansion relative to modest expansion relative to our margins, and we're also expecting leverage relative to some of our fixed base cost elements. A combination of both, Ryan.

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

And then some of the expansion of gross margin, what's driving that primarily?

Robert M. McLaughlin

Well, portion of it will be driven by the SAP benefit programs that we're doing. And we did have some expansion, as I've mentioned in my prepared comments, relative to our most recent price increase on gases. So we do expect a modest expansion relative to pricing actions and from the SAP benefits.

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

Great. And then my second question, in the press release it said there was noticeable improvement in your construction customer base. And this is despite starts being down I think double-digits in the first quarter. So does this reflect specific end markets that you are targeting? Or maybe success at initiatives? Maybe talk about that a little bit.

Peter McCausland

Well, we're targeting -- this is Peter. We're targeting the top 400 ENR companies and all the strong regional companies in the construction -- non-residential construction business, steel fabricators, metal -- mechanical contractors and also turnaround construction companies. And our construction sales were up 12% for the quarter and basically that was really good because there were a lot -- there were a few big projects, but they were winding down. And there hasn't been many of them. And it's mostly on the strength of these turnarounds in the power industry and oil and gas business and petrochemical industries, and through penetration of the customer segment, we've done a good job penetrating the customer segment. So, I think we're in great shape when the bigger projects do start up. I think we're going to see them with these pet-chem projects that have been announced, and the LNG projects that have been announced, and a lot of the power projects. And then hopefully, maybe some infrastructure projects. So I think, bottom line, we're very well positioned to grow in the construction business.

Operator

And we'll take the next question from Mike Harrison with First Analysis.

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

As you guys look at your bulk sales up 8% year-over-year, that's faster than some of your competitors are growing right now. Can you discuss a little bit what's driving that strong performance? Maybe kind of a market-to-market look and maybe where you're gaining the most share?

Robert M. McLaughlin

Well, I think it's a result of the having a very strong pipeline. It's a combination of growth and existing customers, as well as adding new customers. And the -- as we've said, many, many times, having 1,500 sales people out and about, mining opportunities at 1 million customers is a tremendous lead generator. And obviously, we're riding that horse as hard as we can ride that horse. And so I think we've seen nice expansion at our existing customers, but the ones that we already have, that would be the manufacturing sector. But we're continuing to making inroads in other industries.

Peter McCausland

It was also impacted by our rolling up of our new plant, that Hemlock Semiconductor in Tennessee, in western Tennessee, Clarksville. And I would just add to what Mike had to say, we grew up in the packaged gas business, we have over 1 million customers. Many of those customers use bulk products that we could never serve before we became a producer. And with our production covering 50% of our geographies and having a good contracts that provide reasonably cost product in the other geographies and 1,500 sales people, we think we're well positioned to continue growing in the bulk business.

Michael L. Molinini

And one last comment on top of that. We didn't say it explicitly but our new plant in -- that we've been building in Clarksville, Tennessee, our new ASU is operational, and tanks are being loaded, as we speak, with product, in-spec products. So that project has gone really, really well.

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

All right. And then you talked a little bit, Peter, in the past about this recovery being driven by larger customers, while some of your smaller customers have been a little bit weaker. Have you seen any improvement in your smaller customer base?

Peter McCausland

Very slight. It's slow with the small customers, but we read all these reports that are coming in from every single region every month and I'd attack the pickup in some of the smaller customers. But it's not -- it's far from gangbusters. It's still slow and steady. A lot of small businesses went out of business during that recession and certainly their ranks haven't been restored as of yet. And hopefully, this recovery will pick up in the weeks and months to come and the small customers will be coming back. But it's mostly been about the big customers in this recovery so far.

Operator

And we'll go next to Mike Sison with KeyBanc.

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

Mike, in terms of -- when you take a look at maybe one or 2 of the regional businesses that have already converted to SAP, can you maybe describe or quantify what you're seeing there in terms of improvements? Are they seeing any sales synergies? How much better are those areas running than the regional businesses not on SAP?

Michael L. Molinini

Well, I think the thing we have learned is that the system is complicated. And just because you've converted to it, it takes time for you to become as efficient and as proficient as you were on the older systems. So we're finding that you have to -- not only do you have to convert, but you have to give these companies a period of time to just get comfortable, and in some cases, it's 3, 4 months of just don't rock the boat, let them get stable and let everybody get as comfortable on a daily dated -- daily, work daily kind of mode than they had before. Now, with that said, we have also learned and we've been experimenting with some things as to when can you actually start doing some other things. And we've been experimenting with some of the benefit opportunities at a few of the companies that went early in the cycle. And so far, that seems to be gaining some pretty good traction.

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

Okay, great. And then when you think about the 75 to 125 you talked about, what do you think you need to do to stay on track to get the higher end of the savings longer-term?

Michael L. Molinini

We need to stay on track with exactly what we're already on track to do. We have a piece of our benefit was related to a massive repositioning of our back-office administration function from many, many locations to 4, basically. And in order to do that, not only did we relocated some people but we had to hire hundreds and hundreds of new people which have been hired and who are at work and who are training, who are replacing hundreds and hundreds of field-based people. And that transition but because it's so many -- it's all about people, it takes time. And we're on track with that and it looks like everything we've said was going to happen is going to happen. But you can't rush it. It's just one month at a time. Now, with respect to the other big ones on our telesales operation, we're on that very actively. We've got a significant number of telesales people now working in the welding and gas segment. And that is so far shown to be very encouraging. Now, again, you can't -- we can't expand it until you're on SAP and until you're stable. So again it takes time. You have to follow the SAP migration around the country as do you have -- the same thing occurs with some of the strategic pricing activities. So they're well underway but we can't get the cart too far in front of the horse here or we'll cause some problems.

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

Got it. And last question. Peter, your outlook for same-store sales in '13 tempered a little bit from what you've seen the last couple of quarters. Is that just more of a function of hardgoods starting to slow a little bit based off the very strong recoveries you saw this past year?

Peter McCausland

Maybe. Maybe a little flowing on the equipment side of that and a pickup in gases. But our overall same-store sales is kind of where we think we'll be in a slow -- in a continued slow and steady recovery. This recovery has been very, very slow. And the thing that's difficult for us is that there's pockets of strength and then there's pockets of weakness. And nothing -- no time have we had all the segments, customer segments hitting on all cylinders. It's just food and health care might be down for 9 months and metal fab and energy are going strong. And then you see a little slowing in energy and a pickup in metal fab and then the health care comes back, it's like -- it's an uneven recovery and it's very slow but it's steady. And we'll take it -- we think we can do very well in this environment. But I'd be lying if I didn't say that I was hopeful for a much stronger recovery and a realization of this industrial renaissance that I think is beginning to take root. And I hope that hits this year, we'll see.

Operator

And we'll take the next question from Vincent Andrews with Morgan Stanley.

Vincent Andrews - Morgan Stanley, Research Division

I want to dig in a little bit more on SAP in just 2 things. In -- for fiscal '13, can you break out how much SAP cost you think you're going to have versus how much of the benefits you think you'll realize this year?

Robert M. McLaughlin

I think from the expense side, we'll probably be in the neighborhood of $6 million to $7 million lower on the expense side. So the balance is going to come from benefits. And the benefits will be back-end loaded.

Vincent Andrews - Morgan Stanley, Research Division

Okay, that's helpful. And then on -- when you think beyond the 3 buckets of benefit opportunities that you've talked about, can you help us understand what other things you think you might eventually be going after?

Robert M. McLaughlin

There's a wide array. I'll just mention 2. One is there's significant distribution logistics opportunities for us in how we distribute and manage the gases and hardgoods supply chain when we have access to the data and we have access on one platform that we can mine the data. How our hardgoods moved from manufacturer to distribution center to branch to customer, there's significant gold to mine in an area like that. The other area that is -- will be very significant for us -- again, over time is -- we have known for a number of years that our eBusiness platform needed significant upgrading and enhancement so that we could stay on par with some of the leaders in e-commerce. And we've been working on that, or we've been actively working on what do we need, how are we going to do it, who can help us and all those things, the problem is we really can't implement it until we complete SAP and have one single platform that we can tie that to. So us stepping up to being a leader, one of the leaders in eBusiness for our segment, particularly the leader in our segment, we think has significant long-term benefits.

Operator

And we'll take the next question from John Roberts with Buckingham Research.

John E. Roberts - The Buckingham Research Group Incorporated

Is there an understanding with the Board that Mike will serve through age 65 as CEO?

Peter McCausland

Mike?

Michael L. Molinini

Well, we really haven't talked about that. I have no -- we don't have a timeline. I mean, this is a job -- this is a dream job. So, for me, I'm expecting to do it for quite a while.

John E. Roberts - The Buckingham Research Group Incorporated

Okay. But there's no limitation at age 65?

Michael L. Molinini

No, no.

John E. Roberts - The Buckingham Research Group Incorporated

Okay. Great. Thanks. And then how does SAP progress through the next few quarters? So, it's an $0.08 net cost in the first quarter, it's a $0.04 to $0.08 for the rest of the year, so it's a net cost in the second quarter? Is it sort of neutral in the third enters and then turns to a positive in the fourth?

Peter McCausland

That's a good way to think about it, John.

Operator

And we'll take the next question from David Manthey with Robert W. Baird.

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

First off, of course, SAP last quarter was a big source of handwringing. And I'm just wondering, were there any issues at all this quarter, delays, hiccups, anything? And as a part of that, I'm wondering with Nordan Smith coming into a region already on SAP, how does that immigration go? Is it harder, is it easier, are there any other issues you need to worry about?

Michael L. Molinini

Let me go to the first piece. I think what we're finding is that every business unit that we add now is going significantly smoother, faster and easier than the first 4. I think that we are clearly in the rinse and repeat cycle here, at this point. We -- the last 2 that we've got done, including the one that we did Monday, were very, very smooth. Now, given that said, the employees still need enough time to become as proficient and operate as quickly as they did in the legacy system. But as far as issues, delays, problems, things like that, we have been having very, very few. We're in a cycle now where -- which we weren't in before, where we're actually doing one of these a month. And we'll do one the first week of June, we'll do one the first week of July and then we'll take a month off for some rest and then we're going to be in that one-a-month cycle throughout the fall. So we think we've got that down, pretty well down. With respect the Nordan Smith, Nordan Smith will be converted to SAP. It happens to be -- in the big scheme of things, it's a nice-sized company, but it's not that big. Our Airgas South group which was the first one on SAP and has since integrated Airgas Mid America onto SAP and it's supporting them with the Business Support Center in Atlanta, will be the group to convert that. And they're working on data cleanup now so that we can get on with that. But it is has no impact on the overall schedule.

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

Okay. And the second, I'm just wondering, as you're looking at the lagging growth in the gas and rent area, especially relative to how strong the hardgoods side of the business has been, is it troublesome at all to you that you're lagging there? Or do you think it's just indicative of a moderate, steady growth industrial America? Or will it catch up at some point? I -- just wondering how you feel about the disparity we've seen and the lack of that gap closing maybe faster than it has in the past?

Peter McCausland

Well, I think gas growth is going to pick up in the months ahead and that's what our field people are telling us. But I think it's a function of a lot of small businesses having come back in this recession, that's one function, that's one factor. Another factor is we had some very, very large construction projects in this country that have wound down over the last 6 months that used massive quantities of gases. And there are some big ones on the horizon and not that far out, but we're kind of in a soft spot right now. And we've had helium shortage which has -- have hurt our gas volumes and acetylene shortage caused by an explosion in a plant, and that's now back. So there's been a few other bumps in the road but I think it's, more than anything else, it's been the nature of this recovery which has been very slow and steady. And also, the hardgoods equipment category reflects the fact that people are investing to take labor out. They're investing in automation and things like that. Mike, you might have some different...

Michael L. Molinini

Yes. The hardgoods number, the gap maybe -- may look maybe not as big as it looks, if you adjust for some of the very large investment that some companies have made in equipment.

Operator

And we'll take the next question from Mark Gulley with.

Mark R. Gulley - Ticonderoga Securities LLC, Research Division

Peter, your track record and that of some competitors, like Grainger, has certainly attracted the attention of the folks up in Seattle. And earlier, Mike you alluded to eBusiness enhancements that need to be to be made on SAP is rolled out. How concerned are you and how much of your business exposed to potential entries by Amazon.com.?

Peter McCausland

Well, I'll take a stab at it, then Mike can give you his view. Basically, we're a specialty distributor, meaning we have a very, very deep product line and our products are very technical, gases and welding equipment, welding to technical activity. So our customers rely on us for a lot of technical support and most of our customers, metal fabrication, or gas used in a furnace, or in a tire plant or something like that, our products are integral to their operations and they need our technical support. So we think that a vast majority of our business could never be touched by an Amazon. There's a certain part of our business, small, retail, walk-in, small-order business, that's been under assault for years. The Kmarts, the Wal-Marts, the Home Depots, Grainger, all kinds of -- Fastenal. And I think, over the years that has probably chipped away some of the casual small business that we -- small orders that we would otherwise enjoy. But we're addressing that with our eBusiness initiative on the retail side. And, of course, most of our eBusiness initiative is going to be directed towards the larger customers who use a lot of our products and to make it seamless and to reduce transaction costs and supply chain costs. But as I -- I don't discount Amazon. I mean, they've done a great job with CDs and books and things like that. And they called us up and asked us to sell to them and we just really didn't have an interest in that. Their logistics aren't any better than ours. We've been just intermediated so many times in an effort -- I don't see it as a major threat, but we still are going after that small customer market, both with eBusiness and with our Total Access program and because we want the entire market. Mike?

Michael L. Molinini

Yes. I think, obviously, we want to improve our eBusiness. We're going to improve our eBusiness capabilities. We've been watching everybody else for a number of years. We think we know what we want to do. The major thrust of the eBusiness for us is our larger, more sophisticated customers that need a deep offering, they need technical support, the need training and things like that. If you look at our smaller customers, the customers that have been really more likely to be wooed by -- they don't get a lot of attention from us, they're not big enough for a salesman to cover, they are the ones that are more likely to be buying from any number of channels. And if you look at some of our data, for that class of customer, about 90% of what they buy from us today is gases. So, I mean, the hardgoods spend for that class of customer is already very small and, I think, many of those customers are the ones that are already buying their hardgoods from Grainger tractor supply, I mean, you can list the names of all the people in the last 15 to 20 years have added welding. However, the ability for those kinds of guys to make traction on somebody that needs a deep product line, as well as somebody that'll teach you how to use it has been very, very, very low. And so, I think, a lot of the business that we're at risk of losing, we probably have already lost. And I think there will be a real fight among the MRO folks for these vanilla, generic relatively simple items, much more so than it would be for the sophisticated welding and cutting user. But we're still committed to being best-in-class so that we get our fair share of even the small customers.

Mark R. Gulley - Ticonderoga Securities LLC, Research Division

Okay if I follow up? And we're near the end of the hour, one of the management changes you've made some time ago was, according to Jay Worley, the head up at Strategic Pricing area, are you at the point now with you SAP implementation where that promotion can begin to gain some traction with respect to margin enhancement having to do with SAP?

Peter McCausland

We,, I mean, that's -- if you look at what we've just been talking about here, which is SAP benefits basically overtaking SAP expense, during this year, towards the back half of this year, without a strong contribution from what Jay has been working on, we wouldn't be saying that.

Operator

And we'll take the next question from Kevin McCarthy with Bank of America Merrill Lynch.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Peter, in your prepared remarks, you had made some comments on the monthly sales patterns, I think you indicated January and February were robust, with March sales having flattened and April steady. I hesitate to get too caught up in the monthly minutiae here but I'll enter a couple of questions. One, I guess, how would that monthly pattern compare with a typical seasonal experience? And two, do you think that there were meaningful timing issues whereby Jan and Feb would have borrowed from March and April? And if we think about fiscal 1Q versus fiscal fourth quarter, any meaningful timing issues there?

Peter McCausland

Well, a normal year would see kind of a crummy January, February and a gangbusters' March. I can't tell you how many years. We're sweating out in the last couple of weeks of March are gangbusters and then we end up beating and that's the trials and tribulations of a daily sales business. And usually in a normal year, April is pretty bad, too. And then it builds in May and it's very strong in June. So this year, kind of April turned out to be like a typical year for us, kind of flat to March and nothing to get excited about. And then regarding the first quarter, I do think the -- some of the margin sales probably got pulled up into January and February. Plus there was some lumpy stuff about construction and things like that, that may have impacted it. We've done the survey, we have every reason to believe, based on the results of those survey, the survey that our business will continue to enjoy the benefits of a slow and steady economic recovery.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Great. And then as a follow-up, if I may. What was the magnitude of any constraint you would have had in helium? And what would your outlook be there for the next couple of quarters?

Peter McCausland

Well, we've been on allocation, like everybody in the country, and the allocation actually increased another 5%, I think, or decreased another 5%. Meaning we could get even 5% less on April 1. It's really hard to say because there's so many different kinds of helium sales, different customers and we've aggressively raised price because of the shortage and because of the extra expense that we've incurred. Transferring helium supplies, where they are available to places where we have demand by -- from critical customers, in the petrochemical industries or the health care or things like that. So I think, net-net, maybe a $0.01 negative impact in the quarter on helium. And that's just -- it's kind of like a wild -- it's not a wild guess, but it definitely was slightly negative we think. We did get the higher price but our sales suffered and we had extra expense moving helium around. We think this problem is going to stay with us for at least until the fall, could be even longer. And there's one plant that hasn't started up out west because of the helium comes from natural gas processing and the gas prices is so low. At least that's what we think the reason is. And there's been summer shutdowns around the world that is having increased demand for exports. Unfortunately, a lot of the helium that's refined in this country, much of which is owned by the U.S. taxpayers is being exported and it's hurting U.S. jobs. And it's a real shame and we're trying to get the word out that, that's not right. The U.S. economy has enough problems without allowing for -- not giving the U.S. businesses an access to this helium. And so we'll see what happens. We don't expect this to be over soon. We've had to shed some customers but in the long run, you'll see when there's a shortage, price does offset volume and losses and expenses. And we still have the biggest and best supply chain in the United States for delivering helium to customers. So we don't see permanent damage for our helium business from this but it is a hassle to move all of this helium around for critical customers.

Operator

And we'll take the next question from Laurence Alexander with Jefferies.

Laurence Alexander - Jefferies & Company, Inc., Research Division

Just quickly. Can you give an update on the M&A environment particularly what you might see in terms of -- as demand levels have improved, so more willingness from Virte [ph] to have discussions?

Peter McCausland

Yes. We noted in our -- in the transcript that we're seeing a tick-up in activity more on this independent distributors. And there's, I think, 800 of them that -- or 900 of them, that represent 50% of the $13 billion packaged gas market in the U.S. And so we are seeing an increase in interest on behalf of sellers. We ended the year with a nice acquisition and we've got within the range that we told you we would. And we're hopeful that this is going to be a good year. We continue to believe there's pent-up sellers demand.

Operator

And we'll take the next question from Bob Koort with Goldman Sachs.

Brian Maguire - Goldman Sachs Group Inc., Research Division

This is Brian Maguire on for Bob. Just curious if you could size any impact that the leap day might have had on your same-store sales or on your year-over-year EPS growth in the quarter?

Peter McCausland

We would -- basically as we -- the day, we talked about the 2 extra days, we tried to quantify that relative to our guidance walk to this quarter, so it's somewhere around $0.02 a day to $0.03 a day, we estimate $0.025.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Got it. Mike, can you also just remind me what the either the cost or sales benefit will be from the new ASU in Tennessee? Is it replacing some existing supply from a third-party? Or is it more to support increased sales going forward?

Michael L. Molinini

It's primarily to support increased sales. We have a large pipeline customer on that plant and we'll also load ship volume around which we'll make our product available in some of our other plants.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Okay, great. And then, just one for Peter, if I might. I think in the past you've mentioned pretty publicly that the kind of lack of welders in the country has been hurting some of these projects. Just curious if you're seeing any change that area or if you still think that there is that there is a kind of shortage of skilled labor out there that's maybe delaying or extending some of the benefits of this industrial Renaissance?

Peter McCausland

There's definitely a shortage of skilled labor out there and welding is only one of the trades where that exists. The industry is gearing up. There's been a number of welding schools opened. All the tech schools have been very active in recruiting people to learn how to weld. The American Welding Society is working with the welding equipment producers and with us and others to promote welding. I think there's a crunch, there's no question about it. The scary thing to me is what's going to happen when all this pet-chem projects and power plant projects and ammonia projects, all this new plants coming in, driven by low-cost natural gas feedstocks. When these things ramp-up, then I think we can have a serious problem. And I don't know how bad it's going to be but hopefully some of it -- I mean, we have -- we're trying to help out. We have our Red-D-Arc business has a trailers that they bring on to construction sites to help customers certify welders right on the site. And, of course, we're behind AWS initiatives and we'll just have to see what happens. I don't know how fast this construction is going to ramp up but it has huge potential which will be great for our business. But if there are not enough welders here, it could -- the growth could be somewhat tempered.

Operator

And we'll go to the next question from Tom Hays with Thompson Research Group.

Thomas L. Hayes - Piper Jaffray Companies, Research Division

Just wondering with the new Tennessee ASU coming online, how much gas are you guys buying now versus producing yourselves?

Peter McCausland

65%.

Michael L. Molinini

Yes. I think we've produced 65%, more or less. Then we buy about 35%. But depending on the individual product, it could be -- it could be significantly different when it got to individual products.

Thomas L. Hayes - Piper Jaffray Companies, Research Division

Okay. And then on the last couple earnings releases, you guys have -- you have commented about the strong pickup in welding equipment demand. I'm just wondering if that has any impact on the equipment rental business.

Michael L. Molinini

Well it's 2 different channels here because the -- when we talk about the equipment sales for us, we're talking about generally a manufacturing type or a contractor type that would want to own the product. Okay? Now, our rental -- I'm led to believe that rental companies who don't buy from us, they typically buy directly from the manufacturer, have stepped up their purchase of equipment that they would then rent. But that would not be a market that we'd really play in. Now our rent to welder number -- purchases are up dramatically as you -- which we showed in the data here to support the rental component primarily for contractors.

Peter McCausland

Yes. Let me just add that I think most of the automation in welding equipment we sell is going to be used inside facilities that fabricate things. We do sell some to contractors, but contractors are much more likely to rent equipment because they move from place to place and they don't want to move the equipment around. And that's the Red-D-Arc sweet spot. And that -- and the contractors doing turnarounds have been very, very strong and the Red-D-Arc has done very well as a result, which is I think wonderful for us because there aren't many big projects out there. There's a lot on the horizon and so I think our potential growth is good at Red-D-Arc and the distribution group.

Operator

And does that conclude today's question-and-answer session. Mr. Strzelec, this time I will turn the call back to you for any closing remarks.

J. Barrett Strzelec

Well again, we thank everyone for joining us today. And I will be available for follow up questions all day, today. Take care.

Operator

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

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