Airgas (ARG)

Q1 2012 Earnings Call

July 28, 2011 10:00 am ET

Executives

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

Unknown Executive -

R. Worley - Vice President of Communications & Investor Relations

Robert McLaughlin - Chief Financial Officer and Senior Vice President

Analysts

Lucy Watson - Jefferies & Company, Inc.

Michael Sison - KeyBanc Capital Markets Inc.

Michael Harrison - First Analysis Securities Corporation

Robert Koort - Goldman Sachs Group Inc.

Mark Gulley - Ticonderoga Securities LLC

Edward Yang - Oppenheimer & Co. Inc.

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

Kevin McCarthy

David Manthey - Robert W. Baird & Co. Incorporated

Thomas Hayes - Piper Jaffray Companies

Presentation

Operator

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

R. Worley

Good morning, and thank you for attending our first quarter earnings teleconference. Joining me today are Peter McCausland, CEO; and Bob McLaughlin, Senior Vice President and CFO.

Our earnings press release was made public this morning and is available on our website as are the teleconference slides. To follow along, please go to airgas.com, click the Investors shortcut at the top of the screen, and go to the Earnings Calls and Events page.

During the course of our presentation, we will make reference to certain non-GAAP financial measures, and unless specified otherwise, metrics referred to in today's discussion will be adjusted for the unusual items identified in our earnings materials. Reconciliations to the most comparable GAAP measures can be found in our earnings release, in the slide presentation and on our website. This teleconference will contain forward-looking statements based on current expectations regarding important risk factors, which are identified in the earnings release and in our slide presentation. Actual results may differ materially from these statements, so we ask that you please note our Safe Harbor language.

We'll take questions after concluding our prepared remarks, and we plan to end the teleconference by 11 a.m. Eastern Time.

Now I'll turn the call over to Peter to begin our review.

Peter McCausland

Thanks, Jay. Good morning, and thank you all for joining us. Before we begin our earnings discussion this morning, the Airgas family extends our sincere condolences and sympathies to the family and friends of Alan Miller, who passed away earlier this week. Alan was Co-Chairman and cofounder of Innisfree M&A, our proxy solicitor over the past 2 years. We are all very grateful for all of his efforts on behalf of Airgas shareholders, and we recognize his distinguished career with honor and warm memories.

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

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

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

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

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

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

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