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Executives

J. Barrett Strzelec - Director of Investor Relations

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

Michael L. Molinini - Chief Operating Officer, Executive Vice President, Director and Member of Management Committee

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

Analysts

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

Vincent Andrews - Morgan Stanley, Research Division

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

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

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

David L. Begleiter - Deutsche Bank AG, Research Division

Lucy Watson - Jefferies & Company, Inc., Research Division

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Thomas Hayes

Airgas (ARG) Q1 2013 Earnings Call July 25, 2012 10:00 AM ET

Operator

Good morning, and welcome to the Airgas First Quarter 2013 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, sir.

J. Barrett Strzelec

Thank you, Lisa. Good morning, and thank you for attending our first 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 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 otherwise specified, measures 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.

Please also note that fiscal 2012 first quarter amounts have been adjusted for the retrospective application of a change in method of accounting for a portion of our hardgoods inventory from LIFO to average cost method. We'll take questions after concluding our prepared remarks as time permits, and we plan to end the teleconference by 11 a.m. Eastern Time. Now I'll turn the call over to Peter to begin our review.

Peter Mccausland

Thanks, Barry. Good morning, and thank you all for joining us. Please turn to Slide 2. I'd like to start today by giving you my overall view of our quarterly results, the current business landscape and our outlook for the rest of the fiscal year.

On the whole, I think our first quarter record results demonstrate the resilience of our business model. Our adjusted earnings were a record $1.13 per share. And while they were within our guided range, albeit at the lower end of that range, they were weighed down by the impact of greater-than-anticipated disruption in our helium supply chain during the quarter. Lower helium sales volumes, driven by the inability of suppliers to meet their helium supply commitments to us during the quarter, reduced earnings by $0.04 per diluted share, only $0.01 or $0.02 of which was anticipated when we provided our guidance in early May. While we expect the global helium supply chain to improve in early calendar 2013, the year-over-year headwinds from reduced volumes will continue to be greater than we had originally anticipated for the remainder of the current fiscal year, and it will take some time for us to regain lost business.

Same-store sales growth in our core distribution business decelerated this quarter to 7%, but very strong performances by our All Other Operations businesses provided a nice boost to earnings in a moderating environment.

SAP implementation costs were higher than expected this quarter and will likely be higher than expected for the remainder of the year. However, the most important thing we can do to position ourselves to derive long-term value from this investment is to get the implementation right and to support our hardworking associates in doing so. The good news is that SAP and the total implementation overall is going very, very well. At this point, nearly 70% of our distribution business is running on SAP, and we think the full year expense, net of benefits, will be in the $0.12 to $0.16 net expense range that we projected earlier.

Strong cash flow continues to be a hallmark of our business model. Adjusted cash flow from operations increased 12% year-over-year to $155 million in the quarter, and free cash flow increased 7% year-over-year to $76 million in the quarter.

With regard to the current landscape, most of our customer segments appear to be stable or growing slowly. In fact, our metal fabrication customer segment remained a bright spot, even through June, when daily sales in most of our other segments slowed from May levels. Daily sales in July typically start slowly due to the holiday, then rebound as the month progresses. However, during -- however, after the normal slow start, daily sales have been somewhat sluggish to this point, so it's tough to predict how the end of the month will play out. Coupled with the deceleration in GDP growth, we believe the economic recovery has indeed hit a soft patch.

With regard to our outlook, we expect most of our customer segments to continue to post modest growth this year, but we are cautious about the near-term outlook. Energy and infrastructure construction could provide some upside later this year if many of the recently announced projects in energy, power and petrochemical industries put shovel to dirt as planned. We've proven in the past we can reduce costs if appropriate, and we'll continue to monitor business trends and make adjustments if needed.

We are revising our guidance range slightly downward from a range of $4.70 to $4.85 to a range of $4.65 to $4.75 to account for the impact of the unexpected further disruption in our helium supply chain over the course of the full year and some near-term caution on current business conditions. Should conditions deteriorate further, however, we will have to revisit the outlook. But as I said, I do believe this is just as soft spot in the recovery. We remain optimistic about the long-term prospects for U.S. manufacturing and energy industries and in particular, our ability to leverage our unique value proposition, which will only be enhanced by our conversion to SAP and our unrivaled platform to drive growth in these and other key customer segments.

Now I'll hand it off to Mike to review some of our key initiatives.

Michael L. Molinini

Thank you, Peter, and good morning, everyone. I'd like to start by addressing the helium supply issue. Helium supply chain problems are something we have been living with for almost a year. However, the extended duration and increased intensity have had a significant effect in our customers. Most people are unaware that we supply 22% of the helium to end users in the United States.

Through January 2012, we had been able to secure approximately 90% of our historical demand. Knowing additional cuts were on the way, we worked throughout Q4 to shed noncontract customers, including many of our most profitable ones, in order to preserve product to meet our obligation to those customers with whom we had contracts. We were also forced to begin allocating our contract customers for all but critical use applications.

By April, allocations from our major suppliers reduced our available helium to 70% of historical demand. As May progressed, it became evident that some of our suppliers were struggling to deliver the allocated volumes and in one case, were providing less than 60% of the committed volume. The shortfall was not uniform across the country, causing even more severe shortages in certain local markets. Our aggregate allocation levels remained below 70% for the balance of the first quarter, and effective July 1, one major supplier reduced our allocation to 50%, where they are projecting it will remain for several months. We are not expecting reductions beyond that, but nothing has been predictable in this situation.

Our current expectation is that Q2 will be the worst quarter, with some relief expected in the fall and significant relief expected in the fourth quarter of our fiscal year. Reclaiming lost customers will take more than just having available product once the supply chain is restored. It will take time.

Now I'd like to move on to review some of our strategic initiatives. Please turn to Slide 3. Our sales and marketing strategy, focused on tailoring our value proposition to the unique needs of each major customer segment, continues to gain momentum and will be a driving force behind the Airgas organic growth story going forward.

Our Strategic Accounts program, which leverages this segment-driven approach, presents us with tremendous cross-sell opportunities, both in terms of product lines, services and locations, and represents more than 20% of our sales. In the first quarter, our Strategic Accounts business was up 8% from the prior year, driven by new account signings and increased activity in most of our customer segments, most notably in our metal fabrication and oil, gas and chemicals customer bases.

The retail segment is the primary outlier, with double-digit sales declines due to the substantial reduction in helium supply this year compared to last year. Excluding retail, Strategic Accounts were up 11% from the prior year.

Our construction customer base continues to show noticeable improvement on the strength of our Red-D-Arc rental welder business, which benefited from the continuation of a strong spring outage season in the oil, gas, chemicals and refineries and power plants segments. It posted first quarter sales growth in excess of 20% over the prior year.

Strategic Products continued to be an important part of our value proposition to customers and from a product standpoint, have a strong growth profile due to their use in favorable customer segments, application development, increasing environmental regulation, strong cross-sell opportunities or a combination of these factors.

In the first quarter, sales of Strategic Products increased 7% over the prior year. Safety products once again delivered the highest growth at 11%, driven by business with new and existing large customers. Bulk gases and rent grew 8% as a result of new customer signings and the strength in the manufacturing and food segments. CO2 and dry ice were flat year-over-year as new customer wins were offset by the loss of a major dry ice customer servicing the airline industry in the summer of 2011, which negatively impacted the comp.

Our Radnor private label sales were up 10% 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 of Radnor products are 1.5x or greater than those on comparable OEM products.

As Peter mentioned, SAP implementation costs were higher than we had anticipated in the first quarter and will likely be higher than anticipated for the remainder of the year, primarily driven by additional post-conversion support cost, including overtime, travel and training.

Operator

Please stand by while we reconnect the speaker line.

[Technical Difficulty]

Michael L. Molinini

Okay. I'm going to pick up, I think, where I left...

Operator

And sir, you are back in conference.

Michael L. Molinini

Okay. All right. I'm going to go back.

Peter Mccausland

Mike, explain that -- we're on a cellphone because the system in our offices went down for some reason. And we'll do the best we can. So we're going to try to pick up where we think Mike left off.

Michael L. Molinini

Well, I think where I left off is with the comment that Peter had mentioned SAP implementations costs were higher than anticipated in the first quarter and are likely to be higher than anticipated for the remainder of the year, primarily driven by additional post-conversion support costs, including overtime, travel and training.

The SAP software is very powerful but also very complex. One of the key factors for a successful SAP conversion is to process transactions correctly the first time and not fall behind in the daily processing of these transactions. We call it doing daily work daily. We are finding that our -- that post-conversion, our associates are processing most transactions correctly and they are doing their daily work daily, but in many cases due to the newness and the complexity of the software, they're struggling to do it within normally scheduled hours, which is creating overtime and added expense.

Although we anticipated this, the length of time to work as efficiently as they did prior to conversion is taking longer than we had anticipated. This expense eases over time, but we are anticipating this to continue at most companies for 3 to 6 months post-conversion. Given the magnitude and scope of this project and the significant value-enhancing opportunities it will enable for Airgas and our full-service offering to customers for years to come, priority #1 has been and will always be to get it done right and to support our associates in doing so, and we are doing exactly those things.

To give you some perspective, in the past 5 months, we have successfully converted 4 regional companies and trained more than 2,000 users, which is a significant accomplishment for which our associates are to be commended. The implementation is on schedule and over $2.9 billion in annualized sales, nearly 70% of the distribution business, are now running through SAP.

We remain committed to minimizing implementation risk in converting the rest of our business units to SAP, but much risk has been abated, and we are continuing to shift our focus to attaining benefits. We remain confident that we will realize the economic benefits as planned and that this investment will further enhance the value of our full service offering to customers. The 3 areas of opportunities for value enhancement that we have announced do not represent the full benefit of our investment in SAP, and we expect to explore additional areas of opportunity after the implementation is complete.

Thank you, and now Bob will give you our financial review of the quarter and provide updated guidance for the year.

Robert M. McLaughlin

Thank you, Mike, and good morning, everyone. Please turn to Slide 4 for a review of our consolidated results.

Sales increased 8% year-over-year to $1.26 billion, reflecting acquisitions growth of 1% and total same-store sales growth of 7%, comprised of a 5% increase in gas and rent and a 9% increase in hardgoods. Total volume was up 3%, and price was up 4%. Sequentially, sales increased 1% from the fourth quarter. Gas and rent represented approximately 62% of our sales mix in the quarter, down from approximately 63% in the prior year and up slightly from the fourth quarter.

Gross margin for the quarter was 54.8%, an increase of 40 basis points from the prior year, as the impact of continued outperformance of lower margin hardgoods relative to gas and rent was more than offset by margin expansion on industrial gases, refrigerant gases and ammonia. On a sequential basis, gross margins improved by 90 basis points due to a favorable mix shift towards gas and rent, a seasonal decline in lower margin fuel gases and underlying margin expansion in several gas categories.

Adjusted operating income for the quarter was $157 million, up 9% from last year, which included $2 million of incremental SAP implementation costs. Not included in adjusted operating income were pretax charges of approximately $4 million related to the previously announced Business Support Center restructuring and a $1.7-million asset impairment charge.

Adjusted operating margin of 12.5% for the quarter included 100 basis points of impact from SAP implementation costs and depreciation expense. The prior year's adjusted operating margin of 12.4% included 90 basis points of SAP-related cost.

Excluding a $0.07 gain from the sale of 5 Canadian branches, $0.03 of BSC restructuring charges and a $0.02 impairment charge related to a small hospital piping construction business, adjusted earnings per diluted share were $1.13, an increase of 13% over the prior year. The adjusted EPS of $1.13 includes $0.10 of SAP implementation costs and depreciation expense, $0.02 higher than the prior year.

In addition, lower helium sales volumes, driven by helium supply constraints we have discussed, reduced year-over-year earnings by $0.04 per diluted share, some of which was anticipated. There were approximately 79 million weighted average diluted shares outstanding for the quarter, down 2% year-over-year, driven by share repurchase programs that were completed in the first quarter of last year.

Return on capital, which is a trailing 4-quarters calculation, was 12.6%, an improvement of 50 basis points over last year. We generated strong free cash flow of $76 million in the first quarter, up from $71 million in the prior year, driven by adjusted cash from operations of $155 million, which increased 12% over the prior year.

Total debt decreased by approximately $126 million year-over-year to $2.1 billion at June 30. Our fixed/float debt ratio at the end of December was approximately 53% fixed, and our debt-to-EBITDA ratio was 2.4, comfortably within our target range of 2 to 3. We are well positioned to continue -- to effectively manage our balance sheet leverage within our target range while capitalizing on an improving acquisition environment and investing in growth CapEx.

Turning now to Slide 5, we'll look at our segment results. SAP implementation costs, which are included in our consolidated adjusting 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 8% versus the prior year to $1.1 billion. Same-store sales for the distribution segment were up 7%, with pricing up 4% and volume up 3%. Gas and rent same-store sales were up 5%, and hardgoods were up 9%. Distribution gross margin was 55%, a decrease of 20 basis points from the prior year, as underlying margin expansion in several gas categories was more than offset by the outperformance of hardgoods relative to gas and rent. Sequentially, distribution gross margins increased by 50 basis points from the fourth quarter, driven primarily by a mix shift towards gas and rent, the seasonal decline in lower-margin fuel gases and underlying margin expansion in several gas categories. Gas and rent represented 57.4% of distribution sales in the first quarter, down from 58.7% in the prior year and up from 57.2% in the fourth quarter.

Operating income in the distribution segment increased 4% year-over-year to $139 million, while operating margin declined 40 basis points to 12.5%. The decline in operating margin was largely driven by the significant decline in helium sales due to supply constraints, which also negatively impacted the year-over-year increase in operating income. The sequential decline in operating income is attributable to a $7-million increase in stock-based compensation expense, which is front-end loaded in our fiscal year due to retirement eligibility, accelerated vesting, and due to approximately $2-million negative impact from the decline in helium sales due to supply constraints.

All Other Operations reflects our CO2, dry ice, refrigerants, ammonia and nitrous oxide business units. Sales for All Other Operations were up 8% from the prior year, with same-store sales up 6%. The same-store sales increase was largely driven by an increase in both refrigerants and ammonia sales, each on higher volume and pricing. Refrigerant gas sales have continued to benefit from increased demand ahead of a potential EPA ruling which would accelerate the phaseout of new production of R-22, the most commonly used refrigerant gas in HVAC systems. Airgas is well positioned in the refrigerants market to reclaim, recycle and distribute R-22 nationwide to satisfy ongoing market demand in a tighter supply environment. Sequentially, sales in All Other Operations segment increased by 10%, primarily driven by the normal seasonality of the businesses within that segment.

Gross margin for All Other Operations was 49.7%, an increase of 440 basis points from the prior year, primarily driven by margin expansion in our refrigerants, CO2 and ammonia businesses. Sequentially, the 420-basis-point increase in gross margins from the fourth quarter primarily -- was primarily driven by a margin expansion in our refrigerants and ammonia businesses.

Operating income for All Other Operations was $29 million, an increase of $9 million over the prior year, and operating margin of 18.6% was up 470 basis points year-over-year, driven primarily by the margin expansion and sales volume growth in our refrigerants and ammonia business.

Please turn to Slide 6, Capital Expenditures. First quarter CapEx represented 6.5% of sales, down slightly from 6.7% of sales in the prior year. Construction-in-process spend was driven by the final stage of construction of our new ASU in Clarksville, Tennessee; the construction of a new hardgoods distribution center in Bristol, Pennsylvania; the build out of our Business Support Centers; and projects to expand or consolidate plants, branches across the country as we continue to focus on improving the efficiency of our operations.

Rental welders increased by $13 million on the improvement in our Red-D-Arc rental welder business, as Mike discussed earlier. Excluding major projects, CapEx as a percent of sales was approximately 4%.

Now I'd like to discuss our guidance for the second quarter and full fiscal year. Please note that our fiscal 2013 guidance excludes restructuring and other special charges, which were $0.05 in the first quarter, and are expected to be approximately $0.03 in the second quarter and $0.11 for the full year, as well as a $0.07 gain from the sale of businesses in the first quarter. Special gains and charges in fiscal '12 were a net total charge of $0.11.

Slide 7 presents a walk through the primary elements of our second quarter guidance, using first quarter adjusted EPS of $1.13 and fiscal 2012 second quarter adjusted EPS of $1.03, respectively, as starting points. In the sequential walk in the left-hand column, we expect headwinds of $0.03 for the impact of one less selling day. Helium supply constraints are estimated to reduce sequential earnings growth by $0.01, and normal seasonal declines in our refrigerants and welder rental business create additional headwinds of $0.03 to $0.05. On a sequential basis, our base business growth is expected to contribute additional earnings of $0.01 to $0.03.

The right-hand column on the slide shows the year-over-year walk. Similar to the sequential walk, there are headwinds with respect to one less selling day and the negative impact from helium supply constraints. We estimate the year-over-year negative impact to be approximately $0.03 for one less selling day and $0.02 related to helium. We're expecting an incremental year-over-year increase in SAP implementation cost of $0.03, noting that the second quarter of last year was the lowest quarter of SAP cost in fiscal 2012. On a year-over-year basis, our base business growth is expected to contribute an incremental $0.10 to $0.14, representing a strong 10% to 14% growth rate.

In aggregate, when factoring in the headwinds, we are estimating EPS for our second quarter to be in the range of $1.05 to $1.09. Our second quarter guidance assumes same-store sales growth in the mid-single-digits versus our previous expectations of mid- to upper-single digits, as well as continued outperformance of hardgoods relative to gas and rent.

Turning to Slide 8, it walks through the primary elements of our revised full year guidance using 2012 adjusted EPS of $4.11 as the starting point. The impact of 2 less selling days is expected to be a $0.05 to $0.06 headwind, helium supply constraints are estimated to reduce year-over-year earnings by $0.10, and a slightly higher tax rate relative to fiscal 2012 is expected to be a headwind of approximately $0.03. SAP implementation cost, net of the ramp up of benefits, are expected to provide year-over-year improvement in earnings of $0.18 to $0.22 relative to the $0.34 of net expense in fiscal 2012. Base business growth is expected to contribute $0.55 to $0.60 or 13% to 15% over prior year's 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. [Operator Instructions]

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mike Sison with KeyBanc.

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

Peter, in terms of your outlook, you noted that hardgoods would still be relatively better than gases and rent. That tends to signal that things should continue to improve. Can you maybe walk us through what -- maybe if that business has slowed a little bit and why you think that will continue to do well?

Peter Mccausland

Right. Well, as you pointed out, hardgoods still is stronger than gas. And the big capital equipment purchases have remained strong, the automation stuff. So our customers are still investing, and that's kind of indicative of the early stages of a recovery. It doesn't feel like the end of an expansion because hardgoods is still stronger than gas, and price isn't dominating the same-store sales. It's been pretty evenly split between volume and price. And -- like in 2008, I think it was mostly price and a little bit of volume. I'm always asked where I think the recovery is, and I think the last time I said at the bottom of the fourth inning or something. There's -- I can't really speculate on what's going to happen in Europe and how that could impact us, but it feels like we're still in the early stages of a recovery. And this is going to be a very, I think, long and slow recovery and we said that right from the beginning. But other than that, I don't have much to offer.

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

Okay. And then, Mike, you talked about SMP [ph] cost being a little bit higher. Net of benefits, it's the same. Where are you seeing some of the benefits on the SAP side to offset the other costs?

Michael L. Molinini

Well, we, in the past, have articulated ranges in 3 areas. And I guess my comment would be, in all 3 areas, we're beginning to -- we're getting more and more comfortable as we go down the road that we're going to realize those benefits. All of them are in play in the planning and beginning of execution, and we're getting more comfortable by the day on our ability to deliver the results.

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

Okay. And last question on pricing. Any thoughts there? Some of the majors have raised prices recently. Are you looking to do another round at some point?

Michael L. Molinini

Well, we always look at that, and strategic pricing is one of the SAP benefits. So I mean, it's all in the blender.

Peter Mccausland

Our business plan assumes that we'll have some sort of pricing action, and we haven't announced anything yet and -- but it's possible that, that could happen in the not-too-distant future.

Operator

We'll take our next question from Vincent Andrews with Morgan Stanley.

Vincent Andrews - Morgan Stanley, Research Division

Just a couple of questions actually, also on SAP. First, can you just confirm that the issues you're having in helium have absolutely nothing to do with the SAP implementation?

Peter Mccausland

Absolutely, guaranteed. Confirmed. They're not even -- they're no way connected.

Vincent Andrews - Morgan Stanley, Research Division

Okay, that's what I thought. Second is just on the -- to follow up on the benefit. I just want to clarify, are you getting more benefits than you expected? Or are you just getting the benefits you expected sooner than you thought?

Peter Mccausland

Well, we gave a range, and we gave an estimate of timing and actually, the timing we had predicted was really at the run rate from a year from the end of this calendar year. So I think we're seeing some benefits sooner and we're probably seeing indications that would lead us more towards the higher end than the lower end.

Vincent Andrews - Morgan Stanley, Research Division

Okay. And then lastly just on the outlook, Peter, you sort of said June got worse from May and July so far, and understanding there's sort of a seasonality to the month with the Fourth of July and so forth. But it doesn't feel like you're expecting the back of the month to come in much better than the front of the month. And I just want to make sure I understand that your guidance for the balance of the year, it sounds like it just sort of assumes things are sort of sequentially the same, because you made the comment that if things get worse, you'd have to revisit the guidance, and obviously there's a range, so it could get slightly better. But am I thinking about that the right way?

Peter Mccausland

Yes, I mean we're -- the economy has certainly flattened out, and we're going to have headwinds from the helium situation and from some SAP expense that -- and we're not sparing any expense. We're going to get this right, and that's the story behind that. So we're not -- we surveyed all our customers and they -- in different segments, and they're all expecting to -- modest growth. Some of them even better-than-modest growth but overall, modest growth on average. And of course, we're going to be hurt by helium in the retail business. So yes, I mean, if the world goes into a big recession or something like that, then we're going to have to revisit the guidance, but that's not what we're expecting.

Operator

We'll take our next question from Ryan Merkel with William Blair.

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

I wanted to start with the helium issue. I thought that was a small percentage of sales. So why is the impact so large? And then secondly, what gives you confidence or what needs to happen to turn things around in 2013?

Peter Mccausland

Mike?

Michael L. Molinini

Well, there's been a -- if you look at the customers that we shed and the difference in pricing and margin of the customers we had to shed and the cylinders we had to take back versus the larger contract customer pricing and margins, even though we raised prices, there is no way we could offset the shift of who could get the few molecules that we actually had. And that's why helium in total dollars is not that big a percentage of the total, but from a profitability and from the portion of the customers that we had to shed, it had a very significant impact. And -- but keep in mind, we knew this was coming, okay? So we were -- we had planned for this. The thing we didn't understand was that we were not -- that the cuts and the ability for us to get the projected amounts, that we couldn't get them and then across the country, some of the individual local shortages were even greater than the average. We -- that caught us by a surprise. We were not prepared for that. Now the key to this is we got to have the molecules, obviously. And helium is a whole story unto itself about the number of places around the world and the issues in other countries and with production plants and when they're going to come back on and to what level, et cetera, et cetera. And a lot of our information is supplied to us by our suppliers. And I think we've had obviously many, many, many discussions on this subject with our suppliers, and it feels reasonable to expect that come the fall, we will start to see the trickle of additional molecules start to come in. But really the relief -- significant relief probably doesn't get here until January.

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

Okay, that's helpful. And then my second question. Given the reduction to fiscal second quarter guidance, it appears that guidance for the year is heavily back-end loaded. So just so we understand this, is this primarily because SAP costs fall off and that's primarily weighted to the fourth quarter?

Robert M. McLaughlin

That's a combination, Ryan, of a reduction in cost in the back half versus the first half, but it's also evidence of some of the benefits starting to really kick in.

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

Okay. So it's primarily SAP, which is why the back half is stronger on a year-over-year basis than the first half.

Robert M. McLaughlin

That's correct.

Operator

We'll take our next question from Mike Harrison with First Analysis.

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

I have just a couple of questions, maybe a little bit more broadly on the helium industry. I guess it's my understanding that there were some suppliers that took some downtime during the June quarter, including the government, which I know was a key supplier. Why are they taking downtime if helium's in such sort supply?

Peter Mccausland

Well, there are sources all over the world that impact the world market, and there's been some sources overseas that have been down for some time. That was the genesis of this problem. The Bureau of Land Management said -- where I think about 70% of the helium in the U.S. comes from, has had its mechanical issues with the pipeline compressors and things like that as well, and that's simply compounded the problem. There's plenty of helium in the U.S. to supply the U.S. customers. However, there -- a law was passed in 1996 that provides that only 3 companies get to buy that helium from the government and obviously, they export a lot of it or else our customers would have the helium, and they're global companies and they've turned this into a global supply chain and market to the detriment of a lot of U.S. businesses and researchers. And that's one of the remedies that we're seeking, is that law is under -- it's expiring, and Congress is considering some sort of extension of that law or a different law. And of course, we're very much involved in that because we think that, as the largest supplier of helium to customers in the U.S., we should have access to taxpayer-owned helium. But that's just one thing we're doing. We're also looking at other sources. We're talking to other suppliers. We've obtained a small amount of relief by trading helium with other suppliers. And -- but I think the real relief is going to come when these sources over in the Middle East get back on stream and the BLM maintenance period is over.

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

And do you have a sense for when that's supposed to happen?

Peter Mccausland

Well, Mike said we're going to get some relief in our third quarter and that our suppliers are telling us they're going to be back up to full supply in the -- in our last quarter, I guess, right? First quarter calendar next year.

Michael L. Molinini

Now also to throw it in there, there are additional new reserves and sources that are being commercialized around the world. And some of those come on in late 2013.

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

And then also, I was wondering, just as we think about critical applications, like MRI magnet cooling and whatnot, are there opportunities to recapture the helium that's used in those applications? Is that something that you do already or something you're looking into?

Peter Mccausland

Only in the very largest usage is recapture feasible. But conservation is definitely feasible, and we've been working with our customers on conservation now for, well, a year.

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

All right. And I was also hoping to sneak one in on the refrigerants business. I'm a little confused as to why we normally see a seasonal decline when the weather seems to be getting hottest. And maybe, can you talk a little bit about what you're seeing in terms of pricing there? And is it moving even higher quarter-on-quarter, given the extreme weather that we've seen, at least here in the Midwest?

Michael L. Molinini

For a -- it's common in the industry that the refrigerant or the HVAC contractors, in order to be ready to fix your air conditioner in July, buy the product and increase their inventories in April, May, June, March, I mean, and depending on who you are and how many hands it goes through till it gets to the actual contractor. Typically, by this time, we're -- they're in the phase right now where they already have the inventory and they're working their inventories down in preparation of the fall.

Operator

We'll move on to our next question from Kevin McCarthy with Bank of America Merrill Lynch.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Do you foresee potential for any incremental price increases in helium to back out demand and mitigate some of the associated earnings pressure?

Michael L. Molinini

Well, we did have an aggressive increase in January that the -- that is certainly a possibility that we'll have to look at the next time we increase prices. However, as we get back to normal demand, we're going to have to weigh that with how much, because we're going to be trying to recapture thousands of customers that we had to shed. So that balance is going to be a sticky one.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Understood. And then shifting gears to argon. Are you currently unconstrained on argon? And if so, would you expect to remain that way in coming quarters?

Michael L. Molinini

We have adequate argon supplies, and we are expecting to have adequate argon supplies. But however, if a plant was to go down or some other unplanned event was to occur, it could create a local -- we've been dealing with individual argon plants going down of our suppliers and having short-term outages, but we've had enough capacity system-wide to be able to cover it, and we would expect that to be able to continue.

Peter Mccausland

One of the factors that impacts argon on the demand side is construction. And when construction is blowing and going, the demand for argon is -- for aluminum welding, for the most part I guess, and stainless steel to some extent, is very strong. And a lot of big projects were winding down through the first quarter of this calendar year, and argon was a little tight then. And since then, it's -- the demand has shrunk a little bit with the completion of the projects. We expect it to get tight again when construction picks up. And if these new pet-chem and power plants and energy pipelines and things like that really start to take off, argon demand will pick up again. And -- but we've also made some moves to secure additional argon, and we're feeling pretty good about the situation now.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Okay, and then final question, if I may. It looks like your net-debt-to-EBITDA ratio is slightly below the midpoint of your target range. Related to that, do you see any potential for resumption of share repurchases?

Robert M. McLaughlin

Okay. And that's something that we look at on an ongoing basis and balance that with looking at acquisition or growth CapEx expenditures, as well as our dividend policies. So we don't have any imminent plans, but it's something that we look at on a regular basis each quarter.

Operator

We'll take our next question from David Begleiter with Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

Peter, just on some of the slowing you've seen, can you provide a little more color on the actual regions and some of the end markets you've seen?

Peter Mccausland

Well, you know the retail story. And but for helium, retail would be pretty good, actually coming back a little bit. It's good on mini-bulk CO2 and things like that. But Mike pointed out that metal fab is still strong. Petrochemical is pretty strong. Energy has been -- it's not across-the-board strong like it was 6 to 9 months ago, but there's still some very, very strong energy markets that are still going very well. So overall, it's still growing. And I said now, fab is still pretty good and projecting growth, but that's mixed. There's some -- some of the metal fab customers we surveyed have seen somewhat of a slowing, but overall it's growing. I think most of our customer segments are growing but fairly slowly, and medical's come back nicely from the recession. Food and beverage has been slower to come back. That got really hammered in the Great Recession, but we're starting to see signs of life there too. So I'd say across the board, most of our customer segments are growing slowly. I don't see any particular one that's weak, with the one exception was -- and it's not -- we're doing well in construction, but it's because we've expanded our products and service offering, and we've added new business. But the overall construction market for nonresidential construction did go down with the completion of a lot of big jobs that were completed in the first calendar quarter or thereabout, and they have yet to be replaced by new jobs even though there's been a lot of announcements. So that's the one segment that I would say overall is weak, even though it's not weak for us.

David L. Begleiter - Deutsche Bank AG, Research Division

That's helpful. And, Mike, just in all other, given the refrigerants and ammonia, taking into account normal seasonality, how sustainable are these new higher levels of earnings are going forward?

Michael L. Molinini

Well, our refrigerant story for years, since we acquired the refrigerants business, has been that the commonly used refrigerants are all ozone-unfriendly, and they're going to be regulated and production is going to be reduced. And that the key to supplying the demand for the next 10 to 15 to 20 years in this country is reclamation, recovery, reprocessing and things like that. And it's only now when supply and demand is getting to the point where it's even in balance. The recession really put it out of balance to where there was way more supply than demand, and the pricing was very soft. Now as production is being curtailed and demand and supply are in balance, pricing is starting to improve. And in the future, when production and demand are upside down, it should improve very nicely and continue to improve with more and more of it being supplied by reclamation and recovery, of which we have installed significant additional capacity already to be positioned to handle that. So we were pretty excited about our opportunity going forward in the refrigerants business.

Operator

We'll take our next question from Laurence Alexander with Jefferies & Company.

Lucy Watson - Jefferies & Company, Inc., Research Division

This is Lucy Watson on for Laurence today. First question, just going back to SAP for a second. It sounds like employee productivity was the biggest bottleneck during Q1 or is the biggest bottleneck at this point. Has the cultural shift towards cross-selling and strategic pricing begun to sink in?

Michael L. Molinini

Well, yes, but the SAP processing or productivity is really on day-to-day processing of invoices and receipts and day-to-day processing transactions. From a cross-selling standpoint, we're not using SAP really yet to try to cross-sell additional products. We're trying to get -- that's a benefit down the road. We're in the mode of daily work daily that provides products to the customers they want when they want them and maintaining high levels of fulfillment on the supply chains.

Lucy Watson - Jefferies & Company, Inc., Research Division

Okay. And then just revisiting cash priorities for 2013 other than CapEx. I apologize if I missed this, but have you seen any changes in the M&A environment? And I guess, what are your other plans for uses of cash this year?

Peter Mccausland

Well, we have a decent pipeline in our -- for acquisitions. We have a number of smaller companies under letter of intent and we're in serious discussions with some larger ones, some significant ones. So we expect -- we always put out there $150 million a year as a plug number, that's sales acquired. And right now, I think the prospects are pretty good for that happening. But you never know with acquisitions because they're dependent on so many different things. But cap gains taxes look like they're going up no matter what so that's certainly going to standout for sellers this year. The business end of it is that most companies aren't even back to even yet from -- they are back to their 2008 peaks in volumes of gases and hardgoods. So it's kind of a mixed overall picture. But I would say our pipeline is pretty good. And our capital projects, we have carts filled, but that's our air separation plant, but that's started up. So we're not going to have that this year. And I think our guidance would be at the low end of our normal 5.5% to 7% CapEx range based on our outlook right now. Bob, do you have more color on that?

Robert M. McLaughlin

I think that's right on, Peter.

Peter Mccausland

And then we always look at dividends and share repurchases, which is the other use of cash, and we look at them every quarter. The board gets a report, and we've had a good track record in that department.

Operator

And we'll move on to our next question from Edward Yang with Oppenheimer.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

On helium again, it sounds like the shortage is really market-related, but you did lose some share. So why are your -- why do your competitors have better access to supply?

Peter Mccausland

Well, there is a law called the Helium Privatization Act that was passed in 1996, which had to do with the government selling off taxpayer-owned helium, helium that was purchased by the government after World War I as the strategic resource with taxpayer dollars. And this law got passed, God knows how. We objected to it at the time, but it got passed, and it said that the government would sell off these reserves over time to companies that had refineries on the government's helium pipeline. And so they've been doing that, and the proceeds of these sales, the net profits were meant to pay off the debt that the government incurred to buy the helium. And so that debt is almost paid off, and the question is what happens now? And the act needs to be extended, there's no question, because it represents like 50% of the world's helium supply right now. But we wanted to extend it on a basis of open access to all companies, especially companies like us who's 99% of our customer base are U.S. customers: welders, medical researchers, things like that. So that's why only 3 companies have access to this taxpayer-owned helium. Now there's some other helium that's produced by private companies in the U.S., and that helium is -- those happen to be controlled by many of the same companies, although there are few other companies that have contracts with these private sources, but that represents a small portion of the total U.S. production.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Okay. So it's those 3 companies that are allocating the supply, you're saying.

Peter Mccausland

Three companies.

Michael L. Molinini

And that's who we -- that's who -- those are the suppliers to us.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Right. Okay, got it. And on the refrigerants side, it sounds like you're pretty confident that the pricing and margin expansion is going to continue, but do you see any sort of...

Michael L. Molinini

I'm sorry. Let me just clarify something on there. The EPA is in the process of reviewing the phaseout timeline as to how production will phase out in the U.S. The EPA has been reviewing this since January. There is a timeline that's already been published. They are reviewing the potential of accelerating the timeline to reduce production faster in the U.S. They have not issued a final ruling yet. And depending on the ruling and depending on how aggressive they are in accelerating the production of R-22 in the U.S. will have a material effect on what happens to the pricing.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Okay, so you could potentially see some giveback if the phaseout is longer than some people are fearing.

Michael L. Molinini

It's possible, but not as much likely on the giveback than what it -- where it could go in the other direction.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Okay, and do you have any sense of inventory in the channel that people will pre-buy just ahead of price increases or because of these...

Michael L. Molinini

Back in the day, back in -- before the Great Recession, it was common for big HVAC suppliers and wholesalers to carry large amounts of inventory, maybe a year's worth. But we believe most of that has been flushed out of the channel to now to the point where they're really buying their needs on a much shorter timeline, more like a season and even in some cases, less than a full season.

Peter Mccausland

And then I would add here about our Airgas Refrigerants, it's a great company. It's got the leading market share. It's got the leading technology in reclamation. It's -- we've been able to develop a tremendous cooperation between Airgas refrigerants and our field-based sales force folks at the regional company level and in Strategic Accounts. And I am personally very optimistic about the future of not only the refrigerants business, but more importantly, Airgas Refrigerants.

Operator

We'll take our final question from Tom Hayes with Thompson Research Group.

Thomas Hayes

Peter, I'm just wondering, we've talked about the relative strength of the large customer versus the small customer over the last couple of quarters. Just wondering, with the slowing that you're seeing, is the smaller customer getting slower? Or are you kind of seeing some slowness across both those groups?

Peter Mccausland

It's still the same. With the flatlining, we haven't seen -- the small customer had started to come back in the spring, and with the flatlining, that kind of stalled. And most of the growth is still coming from the big customers as a result. And at some point, I think a lot of these small customers, I guess, make things for residential construction. That's about our only eye to that. And they're also subcontractors for nonresidential construction, and construction across the board has been pretty bad. So I would imagine some of that will pick up when construction comes back. The rest will pick up when capacity utilization moves up a few more notches because the big customers, when they start bumping up against capacity, they start outsourcing. So that will -- and the -- it seems like the economy, although it's better than it was a few years ago, it's not -- it hasn't reached lift-off speed here. It hasn't really lifted off like it has in other recoveries. So I think overall, I'm pretty happy with how we did in the quarter. Our EPS was up 13%, and that included 10% of SAP expenses. And we made our range and although we missed the Street's by $0.02, we made our range and we set a pretty high bar, unlike a lot of other companies who were recording 3% and 5% earnings growth. And the amazing thing is that we did this in the midst of this SAP implementation. And as we said, that's going very well, but that's not to say it's not a monumental undertaking. And the reason we're going back and spending extra money to get it right is because it does require changes in business processes that you can't -- we knew about a lot of them, but it's hard to comprehend until you're right in the middle of it. And it's our fifth straight quarter of double-digit earnings growth. And we just delivered guidance that's going to give us earnings growth of 13% to 16% for the full year, and we're pretty confident in that right now, unless -- with the one caveat if the economy turns down. So I think -- I'm pretty pleased, where we are right now.

Operator

And that concludes the question-and-answer session. I would like to turn the conference back over to Mr. Strzelec for any additional or closing comments.

J. Barrett Strzelec

Thanks, Lisa. Again, we thank you all for joining us today. And I'll be available all day for follow-up questions. Thank you.

Operator

And that concludes today's teleconference. Thank you for your participation.

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