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Airgas, Inc. (NYSE:ARG)

Q3 FY07 Earnings Call

January 29, 2008, 11:00 AM ET

Executives

Jay Worley - Director of IR

Peter McCausland - Chairman and CEO

Robert M. McLaughlin - Sr. VP and CFO

Analysts

Kevin McCarthy - Banc Of America Securities

Mike Sison - KeyBanc

Michael Harrison - First Analysis

Robert Koort - Goldman Sachs

David Begleiter - Deutsche Bank

Laurence Alexander - Jefferies & Co.

Mark Gulley - Soleil Securities

Holden Lewis - BB&T

Operator

Good morning and welcome to the Airgas Third Quarter 2008 Earnings Conference Call. Today's call is being recorded at the request of Airgas. All participants will be in a listen-only mode until the question-and-answer session of the call. For opening remarks and introductions, I will now turn the call over to Director of Investor Relations, Jay Worley. Please go ahead, sir.

Jay Worley - Director of Investor Relations

Good morning and thank you for attending our Third Quarter Earnings Teleconference. Joining me today are Peter McCausland, Chairman and CEO; and Bob McLaughlin, Senior Vice President and CFO.

Our earnings press release was made public last evening and is available on our website as are the slides that accompany this teleconference. To follow along, please go to airgas.com, click on the Investors shortcut at the top of the screen and go to the Conference Calls & Webcasts page.

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 noon Eastern Time.

Now, I will turn the call over to Peter to begin our review.

Peter McCausland - Chairman and Chief Executive Officer

Thank you, Jay. Good morning and thank you all for joining us. Today we are pleased to report another strong quarter for Airgas and I want to make sure the bloom on Wall Street doesn't overshadow the clear results that our 14,000-plus associates continue to achieve for our customers and our shareholders. You see Airgas was on Main Street, not on Wall Street and some good things are happening on Main Street. US manufactures have become very competitive after the culling out they experienced during the recessionary environment in 1998-2004, which was exacerbated by an overvalued dollar.

There was a time when US goods were the best in the world, made great primarily by American labor and ingenuity. As the dollar returns to reasonable levels, automation advances and transportation costs are higher, our manufactures find themselves on a more level playing field, better able to compete for global demand. In fact, export orders reached a record high in the third calendar quarter, this year. Today's durable goods report it’s further confirmation of this trend.

Manufacturers are also seeing strong US demand from energy and infrastructure construction, which includes projects such as power plants, refineries, pipelines, water treatment plants, bridges, air ports, and stadium. Even though as US manufacturers that have slowed in the past year are investing in new equipment and automation to take advantage of future opportunities, we are optimistic that some of the peered weakness in the US industrial economy will be offset by the combination of rising exports and booming energy and infrastructure construction. Additionally, we don't think the current debt crisis will prevent creditworthy companies from getting the funds they need to grow.

We are also benefiting from much of the end-market diversification that we have pursued in recent years as key customer segments such as healthcare, food and beverage, life sciences, research, and environmental continue to grow at impressive rates. Further, capacity utilization in the US industrial gas markets remains high and some gases are in short supply still. When combined with rising energy prices, this dynamic makes for a decent pricing environment.

These factors contribute to a legitimately positive outlook for Airgas, even in the face of slowing economy.

To sum it up, we're a company that's focused on long-term value creation for our broad customer base and we deliver by offering the right products with quality, service, and expertise each and every day. We aren't looking for a quick day trade or some nice window dressing for one quarter's financials, but rather, we are building relationships that will last well into the future.

As you know, we are completing our 25th anniversary year. What began with a small group of regional companies in our core business is now a robust and formidable platform that serves more than one million customers nationwide.

Turning to the quarterly details, net earnings were $56.8 million or $0.67 per share compared to $32.5 million or $0.40 per diluted share in the prior year. We improved operating margins by 100 basis points over last year to 11.8%, through a combination of continued revenue growth and our focus on driving efficiencies across our national platform. We demonstrated our sustained ability to grow earnings and cash flow by maintaining focus in our day-to-day operations pursuing proven strategies for organic growth and continuing to execute on our core competency in acquisitions.

We had another $1 billion sales quarter up 28%. We completed several acquisitions and we expect to complete more by the end of our fiscal year. Total same-store sales increased 7% despite fewer sales days and inclement weather in key markets. Hardgoods were up 6% and gas and rent were up 8%. Hardgoods sales maintained their momentum from the second quarter, but were aided slightly by some generator machine sales associated with ice storms in December. Absent that impact, we saw slight slowing at the end of the quarter in hardgoods, partially in equipment but no clear trend exists.

Our read of January daily sales translates into an expectation for mid-single digit same-store sales in our fourth quarter with gas and rents a bit stronger than hardgoods. Growth was relatively uniform across the country this quarter, our strongest organic growth was in the Pacific Northwest, down through the Rockies into the Midwestern plains and down into Texas.

Interestingly, we also saw from rebound in the Michigan and Ohio area. We expect strength in the coming orders from customer segments, such as energy and infrastructure construction, pet chem, power and utilities, research and biotech, aerospace and medical.

Conversely, we don't expect much growth from vehicle manufacturing, such as autos, trucks and RVs and general manufacturing and metal fabrication. So while we expect a gradual slowing in the US manufacturing to continue, we also believe that we are in a great position to outperform the overall economy.

For example, the construction sectors that we focus on nationwide are performing well and are expected to grow in the coming year, despite market expectations for deceleration in some non-residential construction sectors. Our contractor customers are not involved in residential construction, nor are they heavily involved in building office buildings or shopping malls. The real growth drivers are energy and infrastructure projects that I discussed earlier, such as power plants, pipelines, refineries and bridges. In fact, these types of projects comprise over two-thirds of our contractor business.

Our construction business is also benefiting from business CapEx in many industries, including steel, refining, railcar construction, auto manufacturing and healthcare. Our results are impressive. Construction customer revenue growth was over 30% this quarter and same-store sales for our welder rental business Red-D-Arc were over 20%. We have been successful in helping our customers find solutions to their supply chain challenges and as a result we are growing faster than the market.

Turning now to our supply chain, gas supply is somewhat better, but helium and argon are still very tight nationally. Oxygen, nitrogen and CO2 are tight in some areas of the country. However, we taken some steps to ensure that we have product for our growth and are confident that we will be able to keep existing and new customers supplied by constantly evaluating and approving our product sourcing strategies. Increased raw material cost and higher energy prices are part of today's landscape. But we are doing a good job of keeping up with rising cost through our pricing actions. The price increases, which we announced in October, became effective in December and January. So, we have seen less than one month of effect in the third quarter's numbers.

Early results suggest that the contributions going forward will be consistent with previous pricing actions. We had a good quarter for internal growth, driven by strategic products and private label. We again had 11% organic growth in our strategic product categories of bulk, medicals, specialty gases, carbon dioxide and safety products. These products, which we added in the last decade to broaden our portfolio and diversify against cyclicality, now make up 40% of our total revenue. Many of these product categories are focused on non-cyclical and counter-cyclical sectors like medical, life sciences, food, and environmental.

Bulk same-store sales were up 14% driven by enhanced production capabilities and a strong sales force. Safety products also performed well, with same-store sales growth of 9%. These products represent a great cross selling opportunity for Airgas and near term performance should be aided by the lending package gas customers.

We are pleased with 10% same-store sales growth in specialty gases this quarter, as we continue to see the benefits from significant enhancements to our quality and efficiency, in recent years. Biotech, life sciences, research and environmental monitoring applications will continue to drive good growth in spec gases. Medical sales also had a strong quarter posting 9% organic growth of about two thirds of our medical businesses focused on hospitals and doctor dental practices, both of which have strong future growth prospects. CO2 was up 14% with surcharges due to plant outages accounting for about 2% of that growth. Food processing, food service, pharmaceutical and biotech industries continued to generate good growth in CO2.

Radnor private-label products continue to outperform the market posting 26% growth, a little over half of that growth was related to product line expansions and introducing the Radnor brand in the recently acquired Linde stores. We will be adding the Radnor lines to the National Welders stores in the coming months.

Our strategic accounts business grew 13% for the quarter. Our national infrastructure, technical expertise and broad product offering creates value for customers with multiple locations or job sites. We expect continued growth in this area as we strengthen our offering with strategies such as contractor supplies, welder certifications and our outlook brand of vendor managed cylinder inventories. At the same time, we are experiencing good results from internal growth. Our acquisition strategy is as effective as ever.

Our bulk gas business, Airgas Merchant Gases is performing well. With the integration of the former Linde bulk gas business now behind us, we are moving forward towards optimizing our network and proving our product sourcing and capturing growth opportunities. In addition, we are still on schedule for the completion of our two new ASUs in Carrollton, Kentucky and New Carlisle, Indiana in early 2009. The integration of our Linde packaged gas business is progressing well and on schedule, positioning us to deliver value to shareholders in the coming quarters.

We successfully completed computer conversions at the end of October and our regional companies expect most of the integration work to be completed by March 31, 2008, the end of our fiscal year. In the months that follow, they will focus on optimizing distribution and maximizing synergies. Large and small acquisitions alike give us great opportunities to cross-sell a wider range of products and services including our Randor private-label hardgoods safety products, rental welders, bulk and specialty gases and other offerings.

Since the second quarter, we have announced the addition of eight acquisitions in areas such as Texas, Iowa, Michigan, Arizona, California and British Columbia. Seven of these acquisitions are industrial gas distributors and one of them, Pacific Diazo Products is a California distributor of ammonia products. These transactions and those in the first half of the year have already made fiscal 2008 our second consecutive record year of acquired revenue with a total of 16 acquisitions and $450 million in acquired annual revenue to-date.

Moving forward, we intend to continue our acquisition strategy by pursuing core business acquisitions as well as product line enhancements. Our record over the years demonstrates our ability to expand our platform with product line acquisitions such as Pacific Diazo or the safety distributor, Dantack, which we acquired in the second quarter. In fact, of our 450 million in acquired revenue this year so far over 30 million has been these additional product lines. We do not have any immediate plans for international acquisitions. However, we are open to the possibility of extending our business beyond North America and are currently evaluating opportunities on a case-by-case basis.

On another exciting topic, we are making headway with the operating initiatives we presented to you at our Analyst Day. Between cylinder maintenance, freight, distribution logistics and purchasing initiatives we are targeting $10 million of annual run rate savings by the end of September 2009. By the end of this past December we had began work on almost two thirds of these initiative and we are on-track to deliver the targeted savings by next September.

Our success with acquisitions and internal growth has resulted in the near doubling of EPS and free cash flow in the past two years. As we begin to add efficiencies at a greater pace, we now have a platform with even more earnings growth potential. Given all of these positive trends in our business we are pleased to announce an increase to our dividend this morning. The 33% increase approximates our earnings growth run rate and it's just another way that we have confidently returned value to shareholders. That same type of confidence is what allowed us to raise our fourth-quarter earnings guidance.

As we compete our 25th anniversary year, I would like to return to a theme you've heard before the most exciting time in Airgas is always now. What excites us most is not where we had come from and all that we've accomplished; rather it is where we are going. The company is now a sophisticated platform of products and services creating unmatched offerings for our customers and tremendous value for our shareholders. We have the right products, the right locations and the right expertise to engineer the right solutions to our customers’ needs. In many ways this expertise is helping us connect with customers in new ways that create on lasting value.

Four years ago, Airgas launched a recommitment to our core customers, through our corporate-wide initiative called core strategy, which has helped us outperform the market and led to many of the improvements we've made in all branches in the past few years. Now with core strategy two, we're ready to take it to the next level. We want to focus on all aspects that takes to deliver outstanding customer service. The process has begun with measuring improving… and improving our fulfillment rates and other supply chain enhancements. Next we will pursue improvements in customer touch point, such as phone contact, counter and delivery service and invoicing. We're exited about the prospects of starting our next quarter's century on such a firm foundation.

Now, I'll turn it over to Bob to give us a review of the quarter's financial performance.

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

Thanks, Peter and good morning everyone. This was a great quarter for Airgas and our strong results continue to reinforce the effectiveness of our business strategy. To review our consolidated results for the third quarter, please turn to slide three. As I go through these results, please note that we have GAAP reconciliations for various metrics on slide 9 through 13.

Adjusting for the previous year debt charge, quarterly net earnings grew 41% year-over-year to $56.8 million, or $0.67 per diluted share. This includes $0.01 per diluted share of integration expense associated with the acquisition of Linde's U.S. packaged gas business and $0.01 per diluted share benefit resulting from a change in state tax law.

I should note that this penny benefit rises from a refined calculation in our Texas state tax provision and will have no impact on our future tax rate. Net sales were up 28% to $1 billion, and same-store sales increased 7%, with price up 3% and volume up 4%. Acquisitions contributed 21% to sales growth. Gas and rent represented 59% of our sales mix, versus 57% last year, with the increase primarily driven by the Linde bulk acquisition.

Gross margin for the quarter increased 40 basis points to 52.4%, reflecting the favorable gas and rent mix, and effective management of costs and pricing. Sequentially, gross margins are up 60 basis points from the second quarter. Acquisition integration expense, which is recorded in our income statement on the selling, distribution, and administrative expense line, was $2 million for the quarter, about two tenths of a percent of sales. Operating expense as a percent of sales was 35.9%, a decrease of 40 basis points from the prior-year. The impact of acquisition and integration expense added 20 basis points to this ratio.

Accordingly the expense ratio would have improved 60 basis points excluding these costs as we continue to leverage our infrastructure. Operating income for the quarter was up 39% to $118 million and operating margin improved 100 basis points to 11.8%. The strong underlying improvement in operating income and margin reflects continued operating profit leverage on sales growth, realization of benefits from operational efficiency programs and effective management of cost and expenses.

Sequentially, operating margins improved 30 basis points from the second quarter. Weighted average outstanding shares were approximately 84.6 million, a 2% increase over the prior year. Return on capital improved 10 basis points over the prior year to 13.1%. Prior to full integration and achieving our targeted synergies, the Linde acquisition negatively impact our return on capital. The decline from our first quarter where we reported return on capital of 13.4% reflects this dilution, partially offset by strong performance in our base business.

Subsequent to full integration, these acquisitions will contribute returns consistent with our base business. Our primary working capital metrics held consistent with recent trends with DS0 at 49 days and inventory turns at 4.3. We have generated $162 million of free cash flow year-to-date compared to $45 million last year. The improvement is driven by cash generated through earnings, effective working capital management and proportionately lower CapEx spending.

We continue to expect strong free cash generation for the remainder of the year. Adjusted debt at the end of the third quarter was $1.9 billion, up approximately $760 million from the prior year, primarily driven by the Linde acquisitions. During that time, we spent $925 million on acquisitions meaning that we have paid down $165 million of the acquisition related debt we incurred over the last 12 months. We continue to demonstrate our strong ability to pay down debt and effectively deleverage after making significant acquisitions and investments.

Our adjusted debt to EBITDA ratio is comfortably in our range of 2.5 to 3.5 on a pro forma basis adjusting for acquisitions. Please turn to slide number 4 and look at our segment results. Total distribution sales were up 27% to $843 million in the quarter with same store sales growth at 8%. Gas and rent increased 8% and hardgoods increased 7% year-over-year. Gas and rent represented 54.4% of our distribution sales mix versus 52.8% last year. Gross margin was 50%, 40 basis points lower than last year, reflecting the addition of the large bulk business from the Linde bulk acquisition, and related segment wholesale transfer pricing from Airgas Merchant Gases. Sequentially, distribution gross margin is up 30 basis points from the second quarter.

Distribution operating margin improved 120 basis points to 11.2%, reflecting strong earnings flow-through from sales growth and effective cost leverage across our infrastructure. The positive impact of the Linde bulk acquisition to distribution operating margins was offset by dilution from the Linde packaged gas acquisition, included… including related integration costs.

Total sales for all other operations were up 53% to $210 million. Same store sales increased 9% for the quarter, with particularly strong growth in our CO2 business. Acquisition contribution was led by the Linde bulk business. The majority of which constitutes inter-company sales to the distribution segment, where the end customers reside. Operating income for all other operations was up 28% in the quarter. Operating margins decreased 220 basis points, with half of the decrease driven by the layer on of Airgas Merchant Gases as the majority of the operating profits reside in the distribution segment. The other primary factor contributing to the decline was the layer on of the National Welders' portion of the Linde packaged gas acquisition and related integration expense.

Please turn to slide 5, capital expenditures. Year-to-date capital spending was 193 million, representing 6.6% of our sales. Prior year capital expenditures were 182 million, or 7.7% of sales. Spending has remained relatively stable across all categories. The decrease in rental welders reflects the prior year's incremental investment in our rental generator product line extension. The increase in the other category includes spending associated with large plant infrastructure investments such as the Carrollton and New Carlisle ASUs, and cylinder fill plant projects.

Please turn to slide 6 to discuss our free cash flow. This is a slide that we reviewed at our analyst meeting in September and it is worth revisiting. The dotted line represents our distribution same-store sales trends measured on the right axis, while the shaded area between the operating cash flow and CapEx lines represents our free cash flow measured on the left axis. We can use free cash to invest in acquisitions or growth CapEx, pay down debt, pay dividends or repurchase shares. One of the interesting observations of this graph is that during moderating or slower growth periods, we can dial back growth CapEx and working capital generating incremental free cash.

As you can see from the trailing 12 months, as of December 31, 2007, we've significantly grown our free cash flow as same-store sales growth rates have moderated from the high rates in fiscal '05, '06 and the early part of '07. A similar expansion of free cash flow was realized in fiscal '02 and '03 when sales growth rates had moderated as well.

Please turn to slide 7 to review our updated fiscal 2008 guidance. We are encouraged by the outlook for the remainder of the year and are pleased to be able to raise our full-year guidance. In the fourth quarter, we expect to earn $0.71 to $0.73 per diluted share including $0.01 per share of integration expense from Linde packaged gas acquisition. This range represents a 32 to 35% increase over the prior-year fourth quarter. We are taking our full-year guidance to $2.61 to $2.63 including the $0.03 charge from the National Welders exchange, integration costs from the Linde packaged gas acquisition and the one penny per share tax benefit. Our previously communicated range was $2.55 to $2.60 for the full year.

We expect the Linde packaged gas acquisition to contribute $0.02 to $0.03 in the fourth quarter consistent with our previous expectations. This estimate factors in all operating and financing results of the transaction including the ramp-up of synergies and the deceleration of integration expense. We expect fiscal '09 accretion numbers to be consistent with the exit run rates in the fourth quarter of '08 with minimal integration expense in FY '09.

Now please turn to slide eight to review over fiscal 2011 goals. We first presented these figures at our September Analyst Meeting and we believe we remain on target to successfully meet our goals. We are expecting almost $4 billion in revenues for fiscal 2008, with the goal of over $5 billion in sales for fiscal 2011. The path to reach that goal assumes about 3% annual growth from acquired revenue and about 5% annual same-store sales growth driven equally by price and volume. Our same-store sales growth rates is based on the assumption that our strategic products will grow between 7 and 10% per year and our core products will grow between 2 and 4% per year. These numbers assume that non-tech industrial production averages approximately 2% growth per year for fiscal '09 through fiscal 2011.

We are also targeting a 150 basis point increase over anticipated fiscal 2008 operating margins of 11.5 to 12%. Acquisition integration, cost saving initiatives and operating leverage on sales growth will all contribute equally to the margin expansion bringing fiscal 2011 operating margins to 13 to 13.5%. The acquisition integration and cost saving initiatives are largely independent of economic conditions and we're confident in our ability to effectively execute against these objectives.

Lastly, we expect revenue growth, operating margin expansion and CapEx between 5 and 6% of sales will drive our return on capital from approximately 13.5% in fiscal 2008 to 15 and 15.5% in fiscal 2011. We plan to give guidance for fiscal 2009 in conjunction with our year-end earnings release. I will now turn it back to Jay to begin the Q&A portion of our call.

Jay Worley - Director of Investor Relations

That concludes our prepared remarks. As we begin the Q&A portion of our call, we ask that you limit yourself to two questions and one follow-up and then get back in the queue if you further enquires. Operator will now give instructions for asking questions.

Question and Answer

Operator

Thank you, Mr. Worley. [Operator Instructions]. We will take our first question from Kevin McCarthy with Banc Of America Securities.

Kevin McCarthy - Banc Of America Securities

Yes, good morning. Peter, I appreciate your comments about the gloom on Wall Street. Along those lines, I think there has been some concern growing in recent months about sustainability of non-residential construction growth. You made the point that you are more exposed to infrastructure related projects versus others. Can you help us may be break down that category of your exposure in maybe two buckets, projects related to corporate endeavors versus municipal related projects that would be less sensitive to cyclical fluctuations presumably?

Peter McCausland - Chairman and Chief Executive Officer

That would be hard to do with any degree of exactitude, but you know I just -- I know that our large national customers, Shaw, Zachary, Fluor, people like that, have record backlogs. And a lot of the work they do is energy related, pipelines, power plants, refinery retrofits and things of that nature. But there are also lots of other infrastructure projects planned like the second half of the Oakland Bridge and a new bridge somewhere down south and the repair of the bridge in Minnesota that's ongoing now. So, there's a lot of bridge-highway work that is finally getting started. There is water treatment plants, there is stadia, and there are things like that. And then… and this is more from reading every report of from every region every month.

And there does seem to be... business CapEx, a business CapEx category that includes a couple of new steel plants, three or four new automobile manufacturing facilities, new railcar facility and then miscellaneous new plant expansions. So, we read every report and these are the things that are driving our construction business and of course the numbers are very impressive. There is also, we also include in that a lot of turnarounds and retrofits. And I think that not only is our infrastructure in this country insufficient, it's also been neglected for a long time. And I think that American industry has generated some significant profits over the last several years and many of those the companies are putting some of the profits back in to maintain their plant and equipment.

Kevin McCarthy - Banc Of America Securities

Very good. It sounds like you have plenty to keep you busy. On the same-store sales, Peter, strong numbers here plus 7. You alluded to a little slowness toward the end of the quarter in hardgoods, can you update us on what you're seeing in the initial weeks of your fourth fiscal quarter, and how are same-store sales tracking relative to the 7% that you saw in 3Q?

Peter McCausland - Chairman and Chief Executive Officer

I think overall they are a little bit better with hardgoods maybe a little weaker than they were in December, but we had some tough comparisons. We had... in December, we had a couple of million dollars of sales related to storms. And in last January, we had a lot of storm-related machine sales. So, if you take those two out and you look at some of the big automation and systems for cutting and welding that we think are going to hit this quarter, it's really hard to say. It looks like maybe a slight weakness, but it's really too early to say that. It's more like more of the same and hardgoods and gases are strong and stronger than they were in December, actually.

Kevin McCarthy - Banc Of America Securities

Thanks Peter. I'll get back in the queue.

Operator

And we will take our next question from Mike Sison with KeyBanc. Please go ahead.

Michael Sison - KeyBanc Capital Markets

Hi, guys. Great quarter.

Peter McCausland - Chairman and Chief Executive Officer

Thanks, Mike.

Michael Sison - KeyBanc Capital Markets

in terms of hardgoods, it is a... there have been pockets of slowing, commentary from others out there. Maybe, can you give us an understanding, the safety products is in hardgoods, how big is that? I think that is probably one of the areas that is keeping that business pretty good there. And you know may be the change of that business relative to what it was five, six years ago that gives it less, let's say cyclicality than what you've seen in the past?

Peter McCausland - Chairman and Chief Executive Officer

About a third of our hardgoods is safety, and safety growth rates actually have come down a little bit over the last year. They were 9% I think for the quarter, but you will recall we had strong double-digit rates for a couple of years before that. Now part of that is a fact that more and more of our regions are used to selling safety and the law of large numbers is catching up to the cross-sell opportunity. But you're right, especially with the small customers, safety is not that cyclical, and there is always new regulations, and American industry is getting more and more responsible and OSHA is getting more aggressive in their enforcement.

So the safety business, even though it does fluctuate at the very large plants with employment, it's not as cyclical as people would think because of those other things I mentioned. So that is probably having an impact on our hardgoods. And what is also having an impact I think, it is that we are... we continue to see a lot of interest in automation, big cutting systems and investments. And even with some of the customers whose business has slowed over the last 12 months we're seeing strong interest in automation equipment. And that usually precedes an increase in production. I don't know, if that's the case in this particular situation or whether or not they are just taking profits in the business and upgrading plant equipment.

Michael Sison - KeyBanc Capital Markets

Great. And shifting gears real quick for my second question, do you think that the Linde package gas business that you acquired, heading into the fiscal '09, it will be pretty much fully integrated. And when you think about the same-store sales growth for that business heading into '09, does this accelerate, I mean can... does it sort of go above that mid-single-digits as you start adding some of the Radnor brand and it start to gets incorporated there, I mean what would you think?

Peter McCausland - Chairman and Chief Executive Officer

Well, I'm not a fortuneteller and it's dependent on the economy. So I'm not going to make a prediction. However, I will say I'd be very disappointed if it didn't accelerate, because in the early months you are putting branches together and plans and re-routing trucks and planning out who, which... who's going to sit in which seats on the bus. And there is a hell of a lot of distraction during an integration process. And then once you finally get integrated and you start operating from the branches that we are going to keep and you'd straighten out the plants and the routes and everything else, then you really start in on earnest in growing same-store sales.

And fortunately with the Linde thing, we have a lot of [inaudible] for Linde customers. And Linde had a lot of capabilities that were in some areas like gas solutions that were more advanced than ours and we are offering them to Airgas customers. So, I would expect the next year of the areas impacted by Linde to do better than it did in the last year subject to adjustment for what the overall economy is doing.

Michael Sison - KeyBanc Capital Markets

Great. Thank you.

Peter McCausland - Chairman and Chief Executive Officer

Yes.

Operator

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

Michael Harrison - First Analysis

Hi. Good morning, gentlemen.

Peter McCausland - Chairman and Chief Executive Officer

Good morning.

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

Good morning.

Mike Harrison - First Analysis

In terms of the M&A front, are you seeing that the economic concerns that you sort of correctly confined to Wall Street more than Main Street, do you see those concerns leading to more opportunities for you to bring acquisitions into the fold and then the question becomes, if we are heading into an industrial recession here, could we maybe see you come in ahead of your targeted range of 100 million to 150 million in acquired sales per year?

Peter McCausland - Chairman and Chief Executive Officer

Yes. That's a hard question to answer. I think that there is a gloom on Wall Street and it doesn't have that much of an impact on the sellers of companies in our core business. I mean, these businesses are pretty much non-cyclical and are relatively non-cyclical and hold their value. I think there are other drivers of consolidation in our industry and I think Airgas and all it has to offer its customers is one of them increasing, regulation is another, the litigation and the availability of liability insurances and other things like that. So, I can't really say -- but we will continue to pursue these core acquisitions and there are a lot of them left. We do have competition that we haven’t had, for a few years we didn't have any, and the last two years we have that competition. And we're not going to get them all, and given some of the prices that these things go for, we don't want them all. And we will continue to make product line acquisitions, which are really exciting because our functional and product capabilities at Airgas are light years, more advanced than they were even two years ago. And so the value of our product line acquisition to Airgas today is much, much greater than it was, let's say, five years ago, and so that's exciting too.

We have a history of beating our target for acquisitions, but even with that I still refuse to make a prediction, because so many different things can impact the acquisition picture.

Michael Harrison - First Analysis

Okay. And if I could switch gears a little bit and ask about same-store sales of hardgoods, particularly capital hardgoods as opposed to consumables. How are volumes holding up there and what's that telling you about where we are in the cycle?

Peter McCausland - Chairman and Chief Executive Officer

The answer to that we gave to the hardgoods questions earlier is the exact same across the board and we can't tell… we had a slowing all during the year of the growth rate in hardgoods and kind of leveled out and December and January aren’t telling us that it is going north or south, it is slower than it was at year ago, but it's hard to say what's going to happen.

Michael Harrison - First Analysis

Now if I could just ask one follow-up, then on price versus volume in gas rent and hardgoods on the distribution side?

Peter McCausland - Chairman and Chief Executive Officer

On the distribution side, it was approximately equal, half price, half volume.

Michael Harrison - First Analysis

Was gas rent more pricing or --

Peter McCausland - Chairman and Chief Executive Officer

Gas rent was skewed towards pricing and hardgoods was more skewed towards volume.

Michael Harrison - First Analysis

Okay. Thanks very much.

Operator

We will take over next question from Bob Koort with Goldman Sachs.

Robert Koort - Goldman Sachs

Thank you. Good morning.

Peter McCausland - Chairman and Chief Executive Officer

Good morning, Bob.

Robert Koort - Goldman Sachs

Peter, I think you suggested your ability to execute on acquisitions has improved quite a bit. I'm wondering if you could look back -- if we thought that there is going to be some rough patches in the economy, like '92 or '02 when you guys saw some of that negative IP growth or non-tech IP growth. Is there something can you point to the couple of things that make Airgas able to withstand that a little bit better than you might have in prior business cycles?

Peter McCausland - Chairman and Chief Executive Officer

I can’t, but I always fuse it all. I'll sound like I’m sort of explaining what's different this time. But --

Robert Koort - Goldman Sachs

That's what I'm asking for.

Peter McCausland - Chairman and Chief Executive Officer

Let me put it in context. Bob, the worst year we ever had was down less than 2% on same-store sales and we have never had a down year here on gas and rent ever. So this is not your typical… and gas and rent generates most of our gross profit, so this is not your typical cyclical business. We're relatively non-cyclical. I think if you want to compare it to that '98 to 2004 period, I would say there are a few things different. I think Airgas is a very different company. In 1998, we launched our repositioning. We merged 33 area companies into 12 regional companies. There were two losing management teams for every winning management team. We changed all our part numbers. We converted computers, we went to a uniform chart of account, we rolled out our strategic product lines, we changed our comp programs. We changed everything a company could possibly change in 1998. So that was kind of crazy when you consider how bad 1998 turned out to be, that period starting in 1998. And so today, if you compare to today, we're very, very strong. Our functional and product capabilities are strong. Our management of our regions is much stronger than it was then and it's getting stronger all the time. I think our general management up in Radnor is going to get a better job. We're all learning on the job and getting better, so that's the major difference. The condition of Airgas and the quality of the management compared to ‘98 compared to now.

Another major difference, I would say, is the pricing environment. In 1998, there was a lot of excess capacity in the US industrial gas industry, and energy prices were starting their downward trend, which they hit bottom, I guess in 2002 with $12 oil. So customers weren’t sympathetic to price increases, because there was a lot of product and the cost of the product, energy and the cost of getting their energy was starting to trend down. And that was relatively difficult time getting price from customers and operating rates actually got down into the 60s, which was, I think an all-time low for this industry. Now, if this is the beginning of a bad time, you have operating rates that are very, very high, I think they're in the high-80s. And so, I don't see the same food fight for customers and I see pricing holding up better if this -- if it is a downturn.

The third major difference is, in 2002, non-residential construction hit an all-time low or at least a low in the last 30 years I think, and so did non-tech industrial production. So those two things at once turned out to be our worst year ever with a little less than 2% same-store sales decline overall and a slight up in gas and rent. This time, if it is -- if we are going into a slowing period, we have very, very strong non-residential construction, infrastructure construction of the types and kinds that I described. And it's our belief that although there will be some cancellations, a lot of the stuff isn't going to get cancelled. And so, we are going to have that as a buffer that we didn't have going into that slow period of ‘98 to 2004 and a really bad period, 2002 in the middle of it. So, there is… there are three, I think huge differences and I could probably think of some more of it, that's all I can think of it right now.

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

The other things that you hit on, Peter, would be the fact that 40% of our revenues now are in our strategic product categories that are directed towards non-cyclical or counter cyclical type end-market.

Peter McCausland - Chairman and Chief Executive Officer

Right. Yes, that's true.

Robert Koort - Goldman Sachs

Let me just follow up on an another issue. I'm not quite sure if there is a different way of comparing same-store sales, but it seems like you've been able to do a little bit better than what Praxair has been reporting. Do you have any sense of why you might… are you outperforming them. Do you know what the market is doing? Are you continuing to take market share? Any sense why you'd be doing quite a bit better than they have been reporting?

Peter McCausland - Chairman and Chief Executive Officer

Well, I haven't seen their report. So I don't know that we are doing better than them, but I never look at their reports, Bob. So -- just kidding. So I don't really know… I think… Jay tells me that they have reported 5% same-store sales and I don't know how much… was that after currency? So, I don't know, maybe this quarter we'd beat by them some margin. I don't really know. I haven't looked at it closely, so I don't want to say anything.

Robert Koort - Goldman Sachs

Got it. Thanks.

Operator

Then we will take our next question from David Begleiter with Deutsche Bank.

David Begleiter- Deutsche Bank

Thank you. Good morning.

Peter McCausland - Chairman and Chief Executive Officer

Good morning.

David Begleiter- Deutsche Bank

Peter, just on the pricing, you mentioned a decent price environment and even in response to last question. Could pricing be even better going forward given the better market structure, longer-term? You've been beating 2.5% less years. Could it be a consistent 3 to 4% driver of your top line through that 2011, 2012 timeframe?

Peter McCausland - Chairman and Chief Executive Officer

I don't know. I do know that the pricing in… we have tons of competitors in almost every market in which we compete. So, customers have lots of choices. We've seen cost increases in gases and cost increase in distribution expenses and other kinds of increases in operating expenses. So, I am sure that these competitors are seeing the same thing and they are trying to get… to pass on those cost increases. I don't know what the future is going to hold in terms of pricing, but a good distributor is able to get pricing every year expect in extreme circumstances to cover increasing costs and we are going to continue to do that. I am happy with our execution and our customers are understanding this. They are understanding that we are running all over the country to keep them supplied with gases. They are understanding that our diesel costs are going up dramatically and they've accepted in most parts of the country and indexing, we have… our delivery fee goes up and down with the cost of diesel every week I think or in some companies in every month at least. So that helps us, and overall, I think it's a good pricing environment and we'll see what happens.

David Begleiter- Deutsche Bank

And Peter, lastly on International, you mentioned acquisitions, what region and what size are you thinking about?

Peter McCausland - Chairman and Chief Executive Officer

Well, I'm sorry… it's hard to say. We are looking at a lot of different things and we are… I can't tell you right now. I don't know if any of them will come to fruition and… but they are not huge. Right now, I wouldn’t say that there are any needle movers on our plate. That's what I would say.

David Begleiter- Deutsche Bank

Thank you.

Operator

And we will take our next question from the line of Laurence Alexander with Jefferies.

Laurence Alexander - Jefferies & Co.

Good morning.

Peter McCausland - Chairman and Chief Executive Officer

Good morning.

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

Good morning.

Laurence Alexander - Jefferies & Co.

I guess the first question on specialty gases, are you happy with the margins you're getting in the specialty gas and welding gases product lines or are there product areas where there is room for improvement?

Peter McCausland - Chairman and Chief Executive Officer

Well, I'm generally grumpy when it comes to margins, and especially gas, because to be a really good specialty gas company, you need to spend a lot of capital, there is always the newest equipment and you have to spend a lot on QC and you have to really recruit very, very good people, because you're dealing with scientist types and engineering types and who can really put you through your paces. So I think the… that portion of our business carries a higher expense structure, and unfortunately, when it's part and parcel of a larger business where there is parts on it that have lower expense structure, it kind of finds the lowest common denominator, and so I've always pushed for higher pricing in spec gases and I do think that there is room for that.

And I think that we've taken the higher road in spec gases by investing in our quality and in our technology and in our customer service and in our people to take care of the customers, sell the products, produce the product and we're demanding higher prices and we are getting them, but we are delivering quality to the customer, and the customer is willing to pay for it so far. So in spec gases, I definitely think so. I do think in parts of… It depends, different customers are different, and they just want wire and standard mixes or oxygen or in our welding gases front… they don't want any special services, they don't want technical support and stuff like that. The margins are low, but very often, in our industry, customers want technical expertise delivered with the products they want us to help them with their supply chain and we're finding more and more of this sophisticating customers who want these things and are willing to pay for it. And I think that's helpful to overall pricing as well.

Laurence Alexander - Jefferies & Co.

And I guess just secondly on the process chemicals side, can you give us an update on both the M&A environment there and also your longer-term thoughts about which product lines you might want to focus on for the next few years?

Peter McCausland - Chairman and Chief Executive Officer

We just bought Pacific Diazo, an ammonia company on the West Coast. We like the ammonia business, it's a little volatile on the cost side, but there's a very, very high service element and technical expertise aspect of ammonia sales, and a lot of the stuff is environmentally driven, which… and I think we're in a good place right now in this country when it comes to environmental applications. So, we like that business and we want to continue to grow it. We like their refrigerants business, another environmentally driven business and we've introduced some interesting things in refrigerants, and we think that we're going to become an industry leader in that, that's our goal. And so I would say those two stand out. The other process, chemicals that we have are the HCL, SF6 and some of our key customers need those products seasonally or occasionally and we have a nationwide network of logistics to deliver them to the customers. By supplying those products to large customers, we take care of problems for those customers and make the customer sticky and appreciate us a hell of a lot more. So we see the process come… that part of the process, chemicals business, really has an edge on to our core business. Whereas the ammonia business and the refrigerant businesses are more… there are more standalone even though there are good synergies between them and our core platform.

Laurence Alexander - Jefferies & Co.

Thank you.

Peter McCausland - Chairman and Chief Executive Officer

Sure.

Operator

Then we will go next to Mark Gulley with Soleil Securities.

Mark Gulley - Soleil Securities

Hi, guys. I have two kind of top down economic questions. Peter, based on your experience with Airgas and particularly recently, if an economist asked you, are you coincident with the economy leading or lagging, what might be your answer?

Peter McCausland - Chairman and Chief Executive Officer

Which economy I'd ask him, you mean the industrial economy?

Mark Gulley - Soleil Securities

Let's focus on… yes, that part of the business, metal fab in particular, that's most closely tied to the industrial economy.

Peter McCausland - Chairman and Chief Executive Officer

I'll say we're less… a lot less closely tied than we were 10 years ago before we launched our strategic product categories, because they represent 40% of our sales now, and much of the sales in those product categories are to non-cyclical and counter cyclical businesses. So that would be my first thing out of the box. And I would say, with the exception of those products, the rest of the business is driven by non-tech industrial production and non-residential construction to a lesser degree, but it's definitely a factor. And so… and then if you take that part of the business and you break it down, I would say about 15% of it is probably a lagging indicator, although like… and that would be the bulk business, when you are at highest production levels at the end of a cycle. But, in our case, you look at our growth in bulk this quarter, it was outstanding. But it really, it was… that was the result of overlaying our bulk capabilities on our regional companies, it didn't have these capabilities before or had been at a much lower level. And so, it's harder to say that… it's like the dance floor is moving, so you're not going to be able to say that that's lagging an indicator because our bulk was so strong. But on the other end about 15% of our business is machines and more so… and more than ever we are seeing automation equipment, big cutting systems and stuff like that in that 15%, and that would be an early indicator. And then the rest, the 70% of our business would be coincident. So, I think both hands are a little cloudy right now because although machine sales might, and I say might, we need another couple of months to figure this out, might be slipping a little bit, we are seeing strong interest in automation and cutting systems and things like that. And then on the back end, the bulk business growth rate is… a lot of that is synergistic and I don't know how much, but I imagine a chunk of that is synergistic. So it might be looking a little better than it otherwise would. So, I don't know what to tell you, Mark, except that we are confident that there are enough exporters doing well with exports, enough manufacturers doing well with exports, and orders for manufactured items that go into US infrastructure projects like tanks and boilers and pipes and cooling towers, and there is enough non residential construction work and infrastructure and energy out there that we feel pretty good about it and we think that will possibly offset weakness in general manufacturing.

Mark Gulley - Soleil Securities

I have a financial question referring now to page six. I like that strong free cash flow graph. Now that your free cash flow is opening up again considerably and given the share creep that Airgas has had, any thought to increasing share repurchases? And of course, I recognize the big dividend increase, but still that share creep itself, any thoughts there?

Peter McCausland - Chairman and Chief Executive Officer

Well, we are constantly, Mark, evaluating both the debt and capital structure. As you've seen over the last 12 months, we've had significant opportunities from an acquisition standpoint and are optimistic of the pipeline. And they have been more accretive in terms of total return to the company and shareholders. So, we are looking at it, we constantly look at that, but up to date we've had more attractive alternative investments to make. And the dividend isn't really a driving factor and that decision is it's… it is a $10 million increase that we did relative to the strong cash flow.

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

I would add that the CapEx that we've made has also been more attractive than buying back shares in terms of accretion. I would say the last… and the dividend, we made a commitment to keep that in line as we grow our earnings and our cash flow and we see that as totally independent of the decision to buy back shares. But I would say that we are looking at it, we'll continue to look at it and that the craziness that's taken place in the financial markets in the last few months has probably caused us to pause for a minute and say, we really want to jump into the middle of this thing. And so, to the extent the markets calm down, we will…I think we'll have a much better chance of addressing that share creep.

Mark Gulley - Soleil Securities

Thanks, Peter.

Peter McCausland - Chairman and Chief Executive Officer

Sure.

Operator

And we'll take our next question from Steve Burn [ph] with Merrill Lynch.

Unidentified Analyst

Hi. Thank you for taking my call.

Peter McCausland - Chairman and Chief Executive Officer

Sure.

Steve Burn - Merrill Lynch

You have 350 or so fill locations in the U.S. Do you need that many and would it be more optimal to have a fewer number of filling locations by each larger, more automated, just bigger facilities?

Peter McCausland - Chairman and Chief Executive Officer

Well, that's a very interesting question. And I think the answer is, there is a real benefit to having mobile fill plants close to the customers, because when the distance between the customers and the plants has reduced, the responsiveness goes up. That's just a fact of life. However, we have built some state-of-the-art fill plants recently that it had some great efficiencies and we… with technology that we've developed internally as well as purchase on the outside, and we have some newer technology coming along. It's going to… they will enhance these larger plants even more. So, I do think that there will be additional plant consolidations as we invest in these state-of-the-art facilities and that we will be able to overcome the distance factor. But you want to go slow, it's a high service, high-touch business and you don't want to… you don't to lose any customers in the process. So, we're… I think that will happen but will happen somewhat slowly.

Unidentified Analyst

So this could be another round of productivity initiatives to follow the… what you are working on now?

Peter McCausland - Chairman and Chief Executive Officer

I think so. I think that in our fill plants and the number of our fill plants that the whole fill plant area will be a big area of productivity enhancements, including workflow projects that we're working on and new technology for filling and so I think it will be a big area over the next 10 years. Yes, I do think we will get significant benefits.

Unidentified Analyst

Thank you.

Peter McCausland - Chairman and Chief Executive Officer

Sure.

Operator

And we will go next to Holden Lewis with BB&T.

Holden Lewis- BB&T

Good afternoon. Thank you. In terms of your pricing, your commented you got about 300 basis points this quarter consistent with last quarter. I know that the price increases haven't fully moved through yet, but can you comment, A, on how quickly those price increases are sort of hitting the market? And then B, do you expect that that 300 basis points steps up to 400 or 500 basis points in upcoming quarters or is there something that falls out and sort of stabilizes at a 300 basis point level?

Peter McCausland - Chairman and Chief Executive Officer

I think relative to the pricing in Q4 as we look at, it's probably in the 400 basis point level, is what we would expect to flow through, Holden.

Holden Lewis- BB&T

And then kind of stick around there?

Peter McCausland - Chairman and Chief Executive Officer

Yes.

Holden Lewis- BB&T

Okay. And then can you also talk about your collections a bit? Are you seeing any sort of lengthening in your collections, or difficulties in collecting among your customer base that might suggest a little bit more stress in the system?

Peter McCausland - Chairman and Chief Executive Officer

No, we've been very pleased with that. As I mentioned, one of the drivers was good working capital management. And I am very pleased that we've really held our DSO consistent over the last four quarters and particularly in the recent quarter. So we're looking at it carefully and we have just done a very good job in terms of maintaining that.

Holden Lewis- BB&T

Okay. But you're not seeing just customer stress expanding it all and having an impact on that?

Peter McCausland - Chairman and Chief Executive Officer

Not to any meaningful degree that's made its way up to our visibility here.

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

We take American Express and we are dishing it off to American Express. Just kidding, just kidding, Holden.

Holden Lewis- BB&T

All right. And then lastly talk a little bit about your incremental margins. Through fiscal '07 you were sort of running in the high teens towards 20%, and last couple of quarters that's obviously come down to the mid- teens. The acquisitions would be a prime catalyst to that but as you get it into '09 and you get the integration of the acquisitions sort of work through, do you expect incremental margins to sort of return to that high-teens type of rate or is there something else that's taken place in the business model over the past 12 months that would suggest that the teens is more of a sustainable number?

Peter McCausland - Chairman and Chief Executive Officer

You're talking about operating margin?

Holden Lewis- BB&T

Incremental operating, yes.

Peter McCausland - Chairman and Chief Executive Officer

Operating margin?

Holden Lewis- BB&T

Well, I'm just saying the dollars of operating profits that you flow through for every dollar increase in revenue.

Peter McCausland - Chairman and Chief Executive Officer

Yes. We continue to expect some pretty strong flow-through. One of the things that we outlined relative to our fiscal '11 target, two of them relate to operational efficiency programs, which is about a… we are talking a 50 basis point improvement, and acquisition integration kind of synergies and the absence of the integration expense is going to be another driver of the 50 basis point margin improvement. And that's really, even on a stable revenue base, so we think we should have some nice incremental flow-through in the fiscal years ahead.

Holden Lewis- BB&T

Above and beyond sort of this acquisition?

Peter McCausland - Chairman and Chief Executive Officer

Correct. Yes.

Holden Lewis- BB&T

Okay. And then just I know that you had $0.02 or $0.03 of accretion from Linde bulk last quarter. We are talking about the same number this quarter and then I guess that the penny you referenced was the net effect of Linde package? What were the acquisition contributions from both those businesses?

Peter McCausland - Chairman and Chief Executive Officer

Well the Linde package, it was a penny relative to the integration expense and it’s fairly neutral from a EPS contribution in the third quarter and the bulk has been running consistent.

Holden Lewis- BB&T

Okay, great. Thank you.

Operator

And we will take our last question from Steve Schuman with New Vernon Associates [ph].

Unidentified Analyst

Good morning guys.

Peter McCausland - Chairman and Chief Executive Officer

Good morning.

Steve Schuman -

I just want to challenge you a little about some of these counter cyclical industries that you sell into. My experience have been there is really not a whole lot of truly counter cyclical industries, particularly in industrial environment unless you’re bankruptcy lawyers or a depression drug manufacturer. So could you go on into some of those and maybe a percentage of your total sales they would be?

Peter McCausland - Chairman and Chief Executive Officer

Well, healthcare, and I don't think that is cyclical and that is probably like 12%.

Unidentified Analyst

Yes.

Peter McCausland - Chairman and Chief Executive Officer

280 plus… 7%. I don't know what life sciences is, and spec gases, but life sciences and spec gases, life sciences is… that is more of a secular trend. I am not saying it doesn't go up and down with funding sources, but I don't think they are related to the business cycle. Our spec gas business is primarily driven by environmental regulation and that may go up down. When Ronald Reagan came in, maybe that wasn't good for spec gases, but I think now the cycle would be up because a lot of people are concerned about the quality of the air and the water and global warming and all that. So, that's certainly one of our businesses that's not cyclical. Food and beverage, all of our CO2 and dry ice just about all of it is sold to the food and beverage industries. Poultry, cattle, Coca-Cola, Budweisser for carbonation. And so that's certainly a non cyclical business. I would say that the infrastructure construction business is non cyclical, it's a secular trend that goes up and down, but you don't turn these projects on and off with a switch, they have very long lead times in development and then you turn the switch on, but then you can't turn it off right away, it's a 5 to 7 year cycle. And so, we think we are in one of those cycles, so I am not saying that cycle is not going to end some day, but I just don't think it's going to end in the next 24 months.

Unidentified Analyst

I think I'm pretty clear on the non-cyclical industries, but it's really the counter cyclical ones I was getting to, those are pretty rare actually to see something increase when everything else is going down.

Peter McCausland - Chairman and Chief Executive Officer

Would you say healthcare might be one of those increasing because of demographics?

Unidentified Analyst

Well, that's sort of it. I'd say it's more of a secular trend. I am looking… I guess I wanted to get into these counter cyclical somehow, you know, government payments may go up in bad times or something that would lead me to and understand why things will get better when everything else is getting worse. But let's go into the infrastructure in particular. Clearly very long lead times, good segway obviously, I am a user of the Oakland Bay Bridge, that's been re-designed twice now. And I'm sure you benefited greatly from the multiple re-vals they've done on it. But we are getting budget crisis in a number of states, of course, California being very dear to my heart here. Are you seeing government contractors and… excuse me, government payments, it starts to get a little shaky. People may be pulling back out some future projects, obviously existing work is going to continue. But, as long lead times as far as the bid packages are now, are you seeing those guys pull back some?

Peter McCausland - Chairman and Chief Executive Officer

We really haven't seen it. Yes I mean there's been a few power plants that have been cancelled or postponed because of environmental concerns that are coal-fired plants. But there is many, many coal-fired plants under construction and planned. We do hope that some of these… there is going to be 22 applications filed for nuclear plants over the next 18 months in this country.

Unidentified Analyst

Right.

Peter McCausland - Chairman and Chief Executive Officer

And we do hope they get approved because they are huge users of our products and we're very well aligned with the companies that will be doing a lot of the welding and other and using the gases for purging and things like that.

Unidentified Analyst

Of course.

Peter McCausland - Chairman and Chief Executive Officer

So, the country needs power and it's got to come from somewhere. So we think that whether it's nuclear or clean air coal or whatever, we're going to be positioned to serve that. The country needs to fix its bridges. Minnesota is a good example of what happens when you don't spend the money on infrastructure and we think we're positioned to benefit from that. The country needs more natural gas pipeline, pipelines capacity and we've been the beneficiary of that for the last two or three years, and there is more on the way and we think that'll be… that'll happen even, I mean, maybe if there was a depression or something it wouldn't happen, but we think that's going to happen. The airports, have you traveled on an airplane recently?

Unidentified Analyst

I think we all have, unfortunately.

Peter McCausland - Chairman and Chief Executive Officer

They are spending $15 billion at O'Hare and that's just one airport. The refining capacity is short in the United States and Marathon has got two big projects, one is at the Detroit one, and in Louisiana and they are going forward, they've already spent a ton of money. And so, I think that a fair amount of this stuff that they're talking about is going to happen.

Unidentified Analyst

Fair enough. Thank you.

Peter McCausland - Chairman and Chief Executive Officer

Sure.

Operator

And that does conclude today's question-and-answer session. I would like to turn the conference back over to Mr. Worley for any additional or closing remarks.

Jay Worley - Director of Investor Relations

Well, again, we thank you all for joining us today and I will be available all afternoon for follow-up questions.

Operator

And this does conclude today’s conference call. You may disconnect your lines at this time. Thank you.

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Source: Airgas, Inc. F3Q08 (Qtr. End 12/31/07) Earnings Call Transcript
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