Airgas (ARG)

Q1 2013 Earnings Call

July 25, 2012 10:00 am ET


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


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 L. Hayes - Piper Jaffray Companies, Research Division



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, 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 for life of the 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 starts 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.

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