Airgas (ARG)

Q3 2012 Earnings Call

January 26, 2012 10:00 am ET

Executives

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

Barry Strzelec -

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

Analysts

David L. Begleiter - Deutsche Bank AG, Research Division

Robert Koort - Goldman Sachs Group Inc., Research Division

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

John E. Roberts

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

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

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

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

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

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Presentation

Operator

Compare to:
Previous Statements by ARG
» Airgas Inc. Presents at BofA Merrill Lynch Global Industries Conference, Dec-06-2011 03:15 PM
» Airgas Inc. Presents at Morgan Stanley Global Chemicals Conference, Nov-17-2011 02:40 PM
» Airgas' CEO Discusses Q2 2012 Results - Earnings Call Transcript

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

Barry Strzelec

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 this morning and is available on our website as are the teleconference slides. To follow along, please go to airgas.com, click on the Investors shortcut at the top of the screen, and go to the Earnings Calls and Events page. During the course of our presentation, we will make reference to certain non-GAAP financial measures, and unless specified otherwise, metrics referred to in today's discussion will be adjusted for the unusual items identified in our earnings materials. Reconciliations to the most comparable GAAP measures can be found in our earnings release, in the slide presentation and on our website. This teleconference will contain forward-looking statements based on current expectations regarding important risk factors, which are identified in the earnings release and in our slide presentation. Actual results may differ materially from these statements, so we ask that you please note our Safe Harbor language. We'll take questions after concluding our prepared remarks as time permits. 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 to begin our discussion. We have once again delivered a strong quarter, adjusted earnings per share were $0.97, a 21% increase over last year on sales growth of 12%. But at volumes that are still below prerecession levels. We continue to see evidence of steady economic growth in U.S. manufacturing, as well as in our Petrochemical and Energy customers. Strong growth in welding and automation equipment revenue is outpacing the remainder of our hardgoods portfolio, which is an encouraging indicator of future demand. Third quarter sales were $1.15 billion, marked by a strong same-store sales increase of 9%. Gas and rent same-store sales increased 7% and hardgoods increased 14%. Acquisitions contributed sales growth of 3%. During the quarter, we initiated a successful pricing action on both hardgoods and gas and rent. Gross margin improved by 140 basis points sequentially from the second quarter to 54.9% in the third, reflecting the benefit from the price increases and a favorable sales mix within gas to rent -- and rent. The third quarter marked our heaviest quarter of SAP implementation costs to date. Because we conferred -- converted 2 business units in the quarter, only 30 days apart, adjusting -- and as a result adjusted operating margin of 11.7% included a 110 basis points of SAP implementation and depreciation expense, making for a difficult comps in the prior year's 12.2%, adjusted operating margins. And that included only 30 basis points of impact related to SAP. Even with the burden of SAP implementation costs, our business continues to demonstrate its strength during a period of modest economic growth. Our return on capital increased to 100 basis over last year to 12.3% as we continue to leverage our national footprint and our industry-leading platform on rising sales volume. Since the beginning of our fiscal year in April, we've acquired 6 businesses with approximately $75 million in aggregate annual revenues. Our acquisition pipeline is far more active than it was last year and our appetite for acquisitions remain strong. We expect opportunities to continue to consolidate the fragment in U.S. package gas industry and those opportunities should increase noticeably in the next 12 to 18 months. On the strength of our third quarter results and outlook for sustained volumes in the coming quarters, we have updated our earnings guidance for fiscal '12 to a range of $4.03 to $4.07 per share, representing 21% to 22% growth over fiscal 2011. Sales trends through the holiday period were as expected, and January sales trends are just a continuation of a modest, steady growth environment.

Please turn to Slide 3 to review some of our key initiatives. Our sales and marketing strategy focused on segment alignment continues to gain momentum. In the third quarter, Strategic Accounts business was up 11% from the prior year, driven by new account signings across all customer segments and by increased activity in our existing metal fabrication, technology and services, and oil, gas and chemicals customer basis. New and existing Strategic Accounts customers drove particularly strong results in safety products and filler metals this quarter. Strategic Accounts present us with tremendous cross-sell opportunities, both in terms of product lines and locations, and represent more than 20% of our sales. I encourage you to review our strategic products slide in the appendix in detail after our call.

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