L'Air Liquide S.A.

Joseph Marczely - Peter McCausland - Founder, Executive Chairman and Member of Executive Committee Michael L. Molinini - Chief Executive Officer, President, Director and Member of Executive Committee Robert M.

McLaughlin - Chief Financial Officer and Senior Vice President

Mark R. Gulley - BGC Partners, Inc., Research Division Kevin W.

McCarthy - BofA Merrill Lynch, Research Division Ryan Merkel - William Blair & Company L.L.C., Research Division Robert A. Koort - Goldman Sachs Group Inc., Research Division David J.

Manthey - Robert W. Baird & Co.

Incorporated, Research Division Thomas L. Hayes - Northcoast Research David L.

Begleiter - Deutsche Bank AG, Research Division Michael J. Harrison - First Analysis Securities Corporation, Research Division Walter S.

Liptak - Global Hunter Securities, LLC, Research Division Michael J. Sison - KeyBanc Capital Markets Inc., Research Division Laurence Alexander - Jefferies LLC, Research Division

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

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

During the course of our presentation, we will make reference to certain non-GAAP financial measures. And unless otherwise noted, 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 will be found in our earnings teleconference and slide presentation. 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 materially differ from these statements, so we ask you please note our safe harbor language. We will take questions after concluding our prepared remarks as time permits, and we plan to end the teleconference by 11:00 a.m.

Eastern time. I will now hand the call over to Peter to begin our review.

Thank you, Joe. Good morning, and thank you, all, for joining us.

Please turn to Slide 2. Overall, I'm very pleased with our performance this quarter.

Our earnings were up 4% year-over-year to $1.30 per share. Organic sales were slightly better than expected, up 4% with hardgoods growth outpacing gas growth.

Our operating margin of 12.9%, down slightly, reflects the mix toward hardgoods, and Bob will get into that a little more later. We had our first positive organic sales volume growth quarter in 2 years, with hardgoods volume up 5%, strong relative to recent history; and gases volume flat.

Within gases, bulk volume was up, but industrial cylinder gases were down slightly. Within rent, Red-D-Arc volumes were up 10%, which is a good sign of future nonresidential construction activity.

Recently, both nontech industrial production and nonresidential construction have been showing improvement. And historically, that has been a good environment for Airgas.

98% of our business is based right here in the world's largest economy, and we believe the fundamentals for long-term growth in the U.S. economy, particularly in the manufacturing, construction and energy industries, will be favorable for years to come.

Overall, we are seeing modestly strengthening business conditions and expect near-term continued improvement despite softness in a few sectors. Imbalances in supply and demand for certain products, particularly argon, have pressured our product costs and distribution expenses.

We are raising prices accordingly but may experience some lag on recovering such cost. Refrigerants is performing below our expectations, but the recent EPA ruling might have a positive impact on the business after some reduction of the industry inventory buildup as a result of stockpiling, the earlier relaxation of the EPA phaseout quantities and mild weather.

We do not expect much improvement in refrigerants this fiscal year. We continue to focus on leveraging SAP to improve the productivity of our business.

We're also focused on controlling costs where possible and improving our sales and marketing capability. Our EPS guidance of $5 to $5.10 for the fiscal year ending March 31, 2015, represents 6% to 8% growth, the midpoint of which would deliver our first $1 billion EBITDA year, a tremendous milestone in the consistent growth history of Airgas.

Now it's Mike's turn.

Thank you, Peter. Please turn to Slide 3.

We continue to invest in our sales and marketing strategy, which is focused on tailoring our value proposition to the unique needs of each major customer segment. In the second quarter, our strategic account sales were up 4% compared to prior year, reflecting the overall business conditions that Peter mentioned earlier.

Another quarter of evidence continues to show that the decline in segments like heavy manufacturing and mining has abated, and the headwinds that we have faced have subsided. In the second quarter, sales of Strategic Products increased 4% over the prior year, with bulk and specialty gas categories showing the most improvement on both price and volume.

Sequentially, CO2 and dry ice sales increased 12% on normal seasonality in those businesses. Our Radnor private label hardgoods sales were up 6% year-over-year, consistent with our total hardgoods organic sales.

We remain focused on managing things within our control, including leveraging the SAP system, managing expenses, expanding our telesales business, enhancing our eBusiness platform and adjusting our regional management structure to increase our focus on sales growth and drive decision-making closer to our customers. We continue to become more proficient in leveraging SAP to manage all aspects of our business.

This is evidenced by SAP data successfully driving strategic pricing decisions, continued improvement of transaction recording accuracy, improved order fulfillment and improved DSOs, collections and cash application processes. This quarter, we successfully launched our enhanced eBusiness platform, enabling customers to interact and transact with their guests through a robust suite of functionality and services.

Our initiatives to drive customer adoption are well underway. Our expanded Total Access telesales business continues to perform very well, delivering more than double the growth of the base business.

The implementation of our new district manager structure is nearing completion. When complete, this will result in smaller, locally managed teams making decisions closer to our customers with an increased focus on top line sales growth, improved fulfillment and transactional excellence in all aspects of our order-to-cash process.

We look forward to sharing more details around these initiatives and others during our upcoming Investor Day. Now let me provide a brief update on refrigerants, helium and argon.

As you are aware, the EPA posted its final 2015 to 2019 HCFC allocation rule, providing clarity for the future. While this should be incrementally positive for reclaimers like Airgas, what remains unclear is how it will affect market dynamics in the near term as the market works off the excess inventory that has been built up throughout the supply chain.

While we are still expecting a modest tailwind in the back half of our year, we believe it will be less than originally estimated, and for the full year, will be neutral rather than a slight tailwind on a year-over-year basis. It remains our belief that the long-term dynamics will favor the migration toward the use of reclaimed product, and we remain very well positioned as the leading reclaimer and recycler of R-22 in the U.S.

On the helium front, the supply chain is steadily improving, and we expect it to continue to improve. We are working hard to win back some of the customers we lost during the peak of the helium shortage.

Unfortunately, as we had feared, the helium market has contracted, with numerous customers switching to alternatives, increasing conservation efforts or deciding to no longer use the product. Argon supply right now is very challenged, with multiple suppliers dealing with production issues, resulting in customer allocations.

We expect these issues will be resolved by calendar year end. However, even before these events occurred, argon production was running only slightly ahead of demand, driven by energy and infrastructure construction.

There is very limited announced new capacity coming online over the next several years. So even without supply chain interruptions, we expect argon supply to remain very tight with rising costs and prices.

As we look forward, we continue to believe the long-term growth prospects for the U.S. manufacturing and energy industries as well as the construction to support these industries are strong, and Airgas remains well positioned to capitalize.

Thank you. And now I'll hand it off to Bob to review our financial results and guidance.

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

Sales increased 6% year-over-year to approximately $1.4 billion, reflecting a 2% contribution from acquisitions and 4% organic sales growth, with gas and rent up 3% and hardgoods up 6%. In aggregate, organic sales volumes were up 2%, and pricing was up 2%.

On a sequential basis, second quarter sales were up 3% over the first quarter. Gas and rent represented approximately 63% of our sales mix in the quarter, down from 64% in the prior year and up slightly sequentially.

Gross margin for the quarter was 55.8%, a decrease of 30 basis points in the prior year, reflecting a sales mix shift towards lower-margin hardgoods, partially offset by less lower-margin refrigerant gas sales in the mix. Selling, distribution and administrative expenses increased 5% over the prior year, with operating costs associated with acquired businesses representing approximately 2% of that increase.

The remaining 3% of the increase reflects normal expense inflation as well as expenses associated with the company's investments in its long-term strategic growth initiatives, including its eBusiness platform and the continued expansion of its telesales business through Airgas Total Access. Operating income for the quarter was $176 million, up 4% from last year's operating income.

And operating margin was 12.9%, down 30 basis points from the prior year. The increase in operating income was primarily driven by the organic sales growth of 4%, and the slight compression in operating margin was primarily driven by the sales mix shift towards lower-margin hardgoods.

Sequentially, operating income was up 13%, and operating margins were up 110 basis points. I'll cover the primary drivers of those increases when I discuss our distribution segment results.

EPS of $1.30 was up 4% over the prior year adjusted EPS. There were approximately 76 million weighted average diluted shares outstanding for the quarter, an increase of 1% year-over-year.

Return on capital, which is a trailing 4 quarters calculation, was 12.1%, down slightly from last year. Year-to-date free cash flow was $147 million compared to $238 million the prior year.

And adjusted cash from operations was $356 million compared to $397 million in the prior year. The reduction in operating cash flow represents the current year increases in working capital and support of sales growth in addition to the comparison of a particularly strong prior year, which benefited from improvements in accounts receivable following the yearly SAP convergence.

Free cash flow in the current year is further impacted by year-over-year increase in capital expenditures, reflecting investment in revenue-generating assets, including 2 air separation plants, our eBusiness platform and a new distribution center. Total debt decreased by approximately $52 million year-over-year to approximately $2.4 billion at September 30.

Our fixed float debt ratio at the end of September was approximately 68% fixed, and our debt-to-EBITDA ratio was 2.6, within our target range of 2 to 3. Now turning to Slide 5, we'll look at our segment results.

Sales in the distribution segment were up 7% in the quarter versus the prior year to $1.2 billion. Organic sales in the distribution segment were up 4%, with both pricing and volume up 2% each.

Distribution gas and rental organic sales were up 3%, with pricing up 3% and volumes flat. Distribution hardgoods organic sales were up 6%, with pricing up 1% and volume up 5%.

Gas and rent represented 59.1% of the distribution sales in the second quarter, down 70 basis points compared to the prior year and up 20 basis points from the first quarter. Distribution gross margin of 56.3%, a decrease of 60 basis points from the prior year, primarily reflecting a sales mix shift towards lower-margin hardgoods and a sales mix shift within hardgoods to lower-margin equipment.

Selling, distribution and administrative expenses, excluding the impact of operating costs associated with acquired businesses, increased 3% year-over-year. Operating income in the distribution segment increased 5% year-over-year to $159 million, and operating margin declined 20 basis points to 13.1%.

The increase in operating income was driven by the organic sales growth of 4%, and the slight compression of operating margin was primarily driven by the sales mix shift towards lower-margin hardgoods. On a sequential basis, distribution operating margin increased by 130 basis points, driven by the acceleration in organic sales growth, coupled with gross margin expansion on the second quarter price increase as well as lower sequential stock-based compensation expense, which is front end-loaded in our fiscal year due to the retiree eligible vesting provision, partially offset by higher variable compensation and healthcare costs.

All Other Operations reflects our CO2, dry ice, refrigerants, ammonia and nitrous oxide business units. Sales for All Other Operations were down 1% from the prior year, with organic sales also down 1%, as sales increases in our CO2, dry ice and ammonia businesses were offset by the decline in sales of our refrigerants business.

Sequentially, sales in All Other Operations increased by 9%, reflecting the normal seasonality of the businesses that comprise this segment. Gross margin for All Other Operations was 48.4%, an increase of 110 basis points from the prior year, primarily driven by a sales mix shift away from the lower-margin refrigerants, partially offset by margin pressure in our CO2 and ammonia businesses.

Operating income for All Other Operations was $17 million, a decrease of $2 million compared to the prior year, and operating margin of 11.4% was down 120 basis points year-over-year, both driven primarily by margin pressure in refrigerants and CO2. Please turn to Slide 6, capital expenditures.

Year-to-date, CapEx represented 8.3% of sales. The increase in CapEx was primarily driven by our investments in revenue-generating assets, including 2 air separation plants, our eBusiness platform and a new distribution center.

Excluding major projects, CapEx as a percent of sales was 5.1%. For the full year, we expect CapEx to be in the range of 7.5% to 8% of sales.

Now I'd like to discuss our earnings guidance for the remainder of the fiscal year. Slide 7 walks through the primary elements of our third quarter, implied fourth quarter and revised full year guidance.

The first column shows the sequential walk for the third quarter using second quarter EPS of $1.30 as the starting point. The impact of 2 less selling days in the holidays are expected to be a headwind of $0.07 to $0.08.

Seasonality in our all other business units, excluding refrigerants, is expected to be a headwind of $0.05. And the base business is expected to contribute between $0.03 and $0.07 to EPS, reflecting sequential growth in EPS of between 2% and 5%.

In aggregate, we're assuming EPS for our third quarter to be down 4% to 8% on a sequential basis. The second column of the slide shows the year-over-year walk for the third quarter using fiscal 2014 third quarter adjusted EPS of $1.18 as the starting point.

Variable compensation reset is expected to be a headwind of $0.03 to $0.04. And the base business is expected to contribute between $0.05 and $0.11, reflecting year-over-year growth of 4% to 9%.

In aggregate, we are estimating EPS for the third quarter to increase by 2% to 6% year-over-year to a range of $1.20 to $1.25, reflecting the above inorganic sales growth in the mid-single digits. The third column shows the year-over-year walk for our implied fourth quarter guidance using fiscal 2014 fourth quarter adjusted EPS of $1.15 as the starting point.

Variable compensation reset is expected to be a headwind of $0.04 to $0.05. The assumption that the extreme weather and power cost in last year will not repeat is a tailwind of $0.05.

Refrigerants is expected to be a benefit of $0.03 to $0.04. And the base business is expected to improve by $0.13 at the low end and $0.18 at the high end, representing 11% to 16% increase on strong organic sales growth.

In aggregate, we are estimating EPS for our fourth quarter to be in the range of $1.32 to $1.37, representing year-over-year growth of 15% to 19% and reflecting organic sales growth in the mid- to upper single digits. The right-hand of the column shows the year-over-year walk for our revised fiscal 2015 EPS guidance range.

Variable compensation reset is now expected to be a headwind of $0.09 at the low end and $0.11 at the high end. We are currently projecting refrigerants to be neutral year-over-year, and the assumption that the extreme weather and power cost in the fourth quarter of last year will not repeat is a benefit of $0.05.

And on a year-over-year basis, our base business is expected to increase by $0.29 at the low end to $0.41 on the high end, representing a 6% to 9% increase. In aggregate, we now expect EPS for our fiscal 2015 to be in the range of $5 to $5.10, which represents year-over-year growth of 6% to 8% and assumes a normal seasonal volume pattern in the back half of the year relative to current levels, with softness around the holidays and strengthening in February and March.

Organic sales growth in the mid-single digits for the full year and all the items I mentioned above. Our previous fiscal 2015 guidance range for both earnings per diluted share and adjusted earnings per diluted share was $5 to $5.20, an increase of 6% to 10% over the prior year.

The guidance revision primarily reflects mixed pressure from continued outperformance of lower-margin hardgoods, cost pressures related to supply disruptions and a lower than previously estimated contribution from refrigerants. Thank you, and I'll now turn it back to Joe to begin our Q&A session.

Thanks, Bob. Please note our Investor Day will take place December 4 in Philadelphia, and this event will be webcast.

That concludes our prepared remarks. [Operator Instructions]

Two questions on pricing, if I may. First of all, with the majors announcing another round of price increases recently, I'm wondering if you think that is going to help bolster that part of your business strategy.

And then secondly, I think you've been kind of patiently waiting for the pricing tool from SAP to really kind of kick in and boost pricing there. Mike, you referred to that briefly in your comments.

So wonder if you can comment on those 2 aspects of pricing, both from the marketplace and what you're doing internally.

Sure. We raised prices very successfully, again, in July.

And right now, we're taking individual pricing actions on products that are under pressure and are in short supply that have logistic challenges to recoup that. We've been using SAP for pricing now for 2 years, I think, going on 2 years.

The single biggest SAP benefit that we have realized so far has been related to pricing. As I've said, for the last 2 years at least, use of data for pricing is similar to eating an apple.

You got -- you have some early big bites and some low-hanging fruit, which we have mined. And -- but there are many, many bites left.

And we will continue to use that and continue to add more functionality and tools to make it easier for our sales folks to use the data and present it in a friendly manner to make quick decisions. So we're really very pleased with where we are and will continue to use the data and the tools to drive pricing as much as we can.

As my follow-up, looking for leading indicators, hardgoods sales are doing well, and within that, so equipment sales are particularly well, even though it had a negative mix impact certainly. Are you drawing some comfort from the fact that those leading indicators are flashing positive for the first time in some time?

Well, yes, I mean, I've been in this business for a long time. And going back to the beginning of time, strong hardgoods sales and strong equipment sales as a piece of hardgoods has always been -- up to the last 2 years when everything seemed to disconnect.

That had historically been the leading indicators that we had looked at. So yes, we're hoping that we're back on the track to historical trends.

The other thing that we look at, Mark, is nontech industrial production and nonresidential construction, which are macro indicators, and they're both heading in the right direction, as I said in my remarks. And I think that's another reason that we're optimistic.

And just, again, to build on that, the other piece that Peter mentioned earlier, the strong results and the strong pipeline that Red-D-Arc is showing also gets us optimistic that the nonres construction recovery that we've been waiting patiently for is beginning to take hold.

Just maybe to follow up on SAP. If we look at your total company operating margin of 12.9%, I guess it was down 30 basis points year-over-year.

What impact do you think SAP might have had on that? And to extend your apple analogy, as you take the smaller bites going forward, what sort of incremental uplift might we expect?

That -- all of that, which you just asked about, will be a significant discussion topic at our Investor Day in December. Because clearly, ongoing leveraging of SAP to enable sales growth operating efficiencies, pricing improvement are key elements of our long-term strategy.

So I think we will continue -- we continue to expect to see contributions in many, many areas as we more fully leverage SAP.

I mean, Kevin, to be more direct to your -- a more direct answer might be had the economy performed like we had hoped the last couple of years, our operating margin would've been a lot better because of our SAP results. And we think it's pretty good, given the slackness in the economy that we've experienced.

And the important thing to remember is now that we have that platform on SAP now, and 85%, 95% of the heavy lifting is over, and we're really focused on the -- getting the SAP efficiencies that -- and we're very optimistic that we'll get them.

Okay. We'll stay tuned on December 4.

As a follow-up, Mike, I think you had mentioned that the helium market was shrinking in your view. Can you elaborate on that?

How much might it have declined? And which customers are no longer using helium?

What applications and what are they using instead? What's the dynamic there?

Well, I'll give you 3 examples. And I don't have a percentage to give you.

But I'll give you 3 examples that maybe will make this more realistic. We have some large industrial customers who have gone on a significant conservation mode, which could include -- which in many cases includes tightening systems, eliminating leaks and being more restrictive of how their operators use the product, which could -- which had resulted in 10% to 15% or more reductions for customers that practiced -- have practiced that.

We have some analytical guest chromatography users that have switched because of the shortage -- had switched from helium to hydrogen as a carrier gas, which on an effectiveness basis, works basically just as well as helium. It does add a bit of a flammable gas risk, but it's not so risky that people didn't adopt it.

And now that they've adopted it, the cost of hydrogen is significantly less than helium, and they're sticking with it. And the third one is the hospitality segment, where there are segments within that of restaurants and grocery stores and chains like that, that had such difficult time realizing or getting the product that they stopped using it as either to sell it or as novelty items, as giveaways.

I guess on the refrigerants piece, just 2-part question. First, what changed in your outlook that now, for the year, it's a neutral impact?

And then secondly, have you seen the OEMs announce a price increase for R-22? And if so, how much?

Let me do that part first. I'll do the second part first, and then maybe we can talk about the volumes in refrigerants.

Since the announcement and -- since the EPA announcement, all 3 of the OEMs have raised prices on R-22. Now that's good.

The thing to take with a grain of sand here is that this is an industry that has not been particularly price disciplined in the past on selling at published prices. So what remains to be seen, and this is why we're kind of being cautious here to assess what the impact is really going to be, is does -- do those price increases hold?

And I think on the orders, just for orders of magnitude, they were on the order of 10% increases probably. Will those price increases hold?

Or will there be just additional discounting off of a new number? Too early to tell.

You want to make a comment, Bob, about volumes?

Yes, volumes was the primary driver relative to the takedown in the year-over-year tailwind. And we were a little bit further behind in the first half -- not material enough to call out, but we're a little bit behind in the first half as well in the current quarter, and we're just not going to make up that shortfall or get to as big of a year-over-year tailwind in the back end as we anticipated, primarily related to volume.

The good news on this whole story is that we now have clarity. We now have a specific ramp-down over the next 5 years to get to 2020.

We have some data that the EPA collected that would say there's a lot of inventory in the supply chain, of which not all of it but blocks of it will probably have to be worked its way through to really get demand back. But the really optimistic part is that in 2020, when production and importation is 0, the EPA is still estimating a 50-million-pound-a-year demand for refrigerant 22.

And that demand -- and in each of the years between now and 2020, the demand is expected to be about 2x what the production and importations levels are. So going forward, it continues to validate why we're even in this business, and we are still pretty optimistic now that we have clarity on the path forward.

The other challenge we're getting an early read, Ryan, is this is the slowest quarter for the industry being the -- lead into the winter quarter. So it's going to -- it might take some time to really get a read and see what happens in the market.

Okay. And then second question.

Why exactly are gas and rent sales not stronger than 3% growth? Presumably, there's some price in there.

And I cover industrial distributors. And generally, the trends are just a bit better than that.

So I'm wondering what is the disconnect.

I mean, if you look at the significant chunk of our growth in hardgoods, it was on equipment, which is capital. If you look at our -- the production part of hardgoods, which is the welding wire and the filler metals and things like that, which more likely would be consistent with gas demand, they're not up anywhere near the magnitude that the capital equipment is up.

So one of the -- and the same thing with construction. We don't -- we have not seen -- we're beginning to see that in construction.

But the use of -- the hardgoods and the gases that are used together didn't -- have not shown the growth that the capital equipment has shown.

And the rent has been consistent with the gases growth so...

Right.

But no specific end market color that will explain that or...

Well, we continue to be challenged on the gas side in medical home care, as we talked about, in part because of -- there's been pricing challenges in that. And then we've talked about the Lincare situation.

So that's a piece of our business that has been a negative, and that's all gas. A little slowdown on the food side, but we had some comp issues with some big gas jobs last year, some big purged jobs that created a comp that was challenging.

But nothing else, I would say, more fundamental than that.

I was wondering if you could talk a little bit about how you think the tone of the nonres market, if at all, has changed here in the last 60 or 90 days.

Yes. Well, all the big projects that we've been hearing about are actually starting up.

And we've been awarded some significant gas business in the last 60 to 90 days at some of these big projects. The nonres wound down up until like 6 or 9 months ago.

It was still -- the bigger jobs are winding down and the newer -- the old, big jobs, and the new ones haven't started. But now they're going in earnest.

And these are LNG facilities, big pet chem projects, energy stuff like pipelines and compressor stations and that kind of thing. And then -- but it's very broad-based.

There's a lot of municipal activity. There's stuff that we haven't seen in a long time.

So not only do we have that big energy pet chem slug, but we have a broad-based resurgence in nontech industrial production. And the bigger jobs, I would say, in the last 6 months have started to break lose and started to get really active, and they're starting to get very active.

So we're very encouraged. I mean, that's consistent with the stats that were -- the macro stats that were -- that the government is publishing.

So...

Would you think -- would you characterize sort of your secular growth looking forward any differently than we've seen in the past? I mean, we've obviously -- the U.S.

manufacturing renaissance competitiveness around energy and downstream businesses is creating a tailwind that wasn't there. I guess maybe on the other hand, the emerging market growth for the last decade is probably decelerating.

How do you see it all net out for you in terms of what you think of the longer-term, sort of top line to operating profit line growth rate? Is it any different looking forward than in the rearview mirror?

For me, I'm the -- I'm like half-full guy. I'm extremely optimistic about the U.S.

economy, and we're 98% U.S. sales.

We think that energy, manufacturing and construction supporting all that is going to be very strong. We've had a great earnings growth -- I think we've had the highest earnings growth rate in the industry over any period you want to look at, 3 years, 5 years, 10 years, and we've done it in a really crummy industrial environment.

And so I think all the hard work that we've done with SAP and building out our platform and shoring up our gas supply is going to really position us very, very well for what we see is an improving U.S. economy.

First off, Mike, the reasons that you tapped down the high end of the fiscal '15 guidance should either improve or help as we move out over the next 6 to 12 months and looking into fiscal '16. As I'm thinking about it, if equipment sales does bode well for gas sales and overall business momentum, you just raised prices on argon, the EPA thing is probably a medium to longer-term positive, the underlying market feels more steady, and the SAP is behind you, this comp reset.

I mean, there's just a lot of factors that are pitching here in this year. It seemed like those areas are all pointing in the right direction into -- over the next 6 to 12 months.

Could you -- am I off base here? Is this your thinking as you're going through December Analyst Meeting that some -- those are going to be some of the topics that you'll be addressing?

Yes. Yes to all.

Okay, fair enough.

Yes, you're being off base.

Yes, you're not off base. At least we don't think you're off base.

And even to the previous question, the -- deep diving into the manufacturing and energy and the construction segments that support those are really important for us, and we will explore those in much more depth at the investor meeting. But the -- we are running the business, we're not running projects right now, we're running the business.

And we don't want to underestimate the impact of our structuring and putting district managers in the field and getting another year under our belts with our telesales team working with our field sales team and our eBusiness platform that -- I mean, there are a lot of things that are coming together here now. And they're all things we've been talking about for a long time.

But now we can say and show and demonstrate that they're operating.

Okay. And then just specifically on the refrigerants business again.

As you look at past refrigerant phasing of cycles and think about the price increases that have been seen there, I think they go well beyond sort of 10% price increases, doubling and tripling of prices. And I'm wondering, as you look at that business, does your viewpoint change at all in terms of the sort of 5-plus-year outlook there?

Do you see that as being a several-hundred-million-dollar business just on the back of price increases even before volume kicks in and helps you?

I'm not sure.

It's $100 million now.

It's $100 million now. And it's -- but this is just going to be an ebb and flow here situation because you're going to have one product that's going to run up in price, and then it's going to be -- it's going to -- over time, going to kind of diminish the demand, and there'll be another one to replace it.

I mean, this is -- the scenario of R-22 and what's happening is probably going to play out over a whole bunch of other products over the next 10 to 15 years. So I don't know.

We really never -- we know the quality of what we've got is going to be a lot better, but as far as gauging the size, I'm not sure we're ready to do that.

I mean, reclamation services is a very small part of our business right now, and we expect it to be a very big part of our business once the phaseout is complete. What happened with refrigerants, in the past, as you mentioned, during the phaseout, with each scheduled phaseout, there was price increases and then there was conversion to reclamation by a little bit more.

And the EPA threw -- everybody stockpiled for the next phaseout, and the EPA reversed course and threw a monkey wrench into it. And then we had a very cool season.

And those 3 things set the business back. And now the EPA has come back with a phaseout.

And I would expect more normal patterns to emerge from this. I think the government is committed to getting rid of R-22 and enforcing the reclamation.

So I think it's going to be a nice business for us and -- but we've had some rough waters here for the last couple of years.

And refrigerants -- for many that have been around a long time, back in the day, refrigerant 11 and refrigerant 12 were the big workhorses of the refrigerants business, and they have been not in production for, I don't know, 30 years probably. And there's still a market for reclaimed refrigerant 11 and refrigerant 12 that we continue to play in.

So it's going to be interesting.

First question is regards to the e-commerce platform. I was just wondering if maybe you can provide some color.

Is that fully rolled out now? And are you seeing any early adoption?

Well, the -- yes, it's rolled out to all of our customers. It's primarily geared right now for the distribution group customers.

And adoption, I don't have the latest adoption levels. I'm sure we're going to discuss that in our adoption targets at the Investor Day.

But I am comforted to know that all the functionality works and customers are able -- those that do want to use it are -- have been positive in their comments on the ability to get information and things -- self-serve on things they hadn't been able to get before. So I'm feeling pretty good about that.

On the other hand, there's lots of other things that everybody wants. As soon as you put one of these out there, there's a list of 100 more things, so we're continuing to work on making it better.

Okay, great. And then maybe as a follow-up on the contribution to the growth, do you spread some color on what you're seeing as far as contribution from some of your smaller accounts versus some of your larger accounts?

Well, the small account growth is really being driven by Total Access. And that has been very encouraging because one of the challenges that a company like us has is staying focused on smaller customers and not just get totally enamored with the big ones.

And so we are continuing to build out Total Access. We're continuing to migrate more and more customers.

We're continuing to add significant numbers of new smaller customers to our customer list every month. So again, based on that data, I would say that we're feeling pretty good about that segment of the customers and being able to provide them value to what has historically been an underserved block of customers.

Mike, as nonres construction picks up, as nontech IP picks up, how do you think about operating leverage for those volumes heading into back half of the year and into next year?

We -- I think this is pretty well known that our distribution platform is a heavily fixed-cost platform. We have lots of locations, cylinders don't travel very far and the like.

So the operating leverage that we get -- and if you look back at our history, when our top line sales grow, and we have a mix of -- historical mix of gases and hardgoods as a blend, we get a lot of leverage. And we're expecting and planning and banking on that happening again.

Yes, I mean, the implied fourth quarter guidance has very strong EBITDA fall-through. In part, as we carved out, helped by the favorable comp on the weather.

But that's a very healthy high-20 fall-through in the fourth quarter. Not that, that will be the norm.

Again, helped by the weather. But as Mike said, we have positioned ourselves that as we get sales and volume growth blended between gas and hardgoods and above expense inflation, it's going to be very heavy dollars to the bottom line.

And that's not new. I mean, well, that's been our story for a long time.

And Mike, just on bulk gas, you can see it did quite well in this business. What's been the key to success?

And how long can these above-market-type growth rates continue on the bulk side?

Well, I mean, it's been a trend and it's been a truism, I guess, you would say, in our industry for as long as I've been around that the packaged gas customer of today is the bulk candidate of tomorrow. And to the extent we have over 1 million customers on our active customer list, we have a very significant potential of -- lead-generation list of potential bulk customers.

And we're going to mine that. We're going to continue to mine that as hard as we can.

Plus, we came up in this industry in the packaged gas business and had lots of customers where we served all the cylinder gases but not the bulk. So as those bulk relationships come due, we have -- obviously, are well positioned to gain that business as well.

And we've been successful in that regard. And being vertically integrated, we supply 65%, I think, of our own molecules and natural gases to our customers, and then we leverage what -- where we do have production, which is in about 50% of the geographies, but 65% of the molecules.

We leverage that production to -- and our large buy to get competitive pricing from competitors, producers and other markets. So it's an advantage for us, and there's lots of opportunities.

Just looking at the mining and heavy equipment side, you mentioned it's a positive that we've anniversary-ied the weakness there. But can you talk a little bit about -- have you seen positive trends with those customers?

Or are they just kind of flattish sequentially?

No, I think what we were trying to say is that they stopped declining more so than they recovered. They're still pretty weak, but they've certainly leveled off.

And we don't think they're going to lower, but we haven't seen big improvement with those customers. And there are quite a few of them.

The mining equipment and the defense equipment suppliers that took huge hits when China turned down and when we pulled out of Iraq and Afghanistan, if we have.

And then just looking at the interest expense line, it went up pretty substantially over the last quarter even though the overall debt level didn't change very much. What's driving that?

And kind of what's the quarterly interest expense that we should be modeling for the rest of the year?

We prefunded back in June the note that we paid off in September. So that was -- created a hurdle in this quarter that we're in.

And so we paid off that note in mid-September and basically funded that by drawing on our commercial paper line. So we'll get a little bit of a sequential tailwind -- or excuse me, headwind.

Tailwind helped going into our third quarter by a couple of million dollars.

It's nice to see the organic revenue growth, and I wonder if there's a way that we can discern between Total Access and a market share gains versus the markets picking up.

The Total Access is probably -- it's not big enough at this point to be probably thinking about market share gains as relates to Airgas. It's a lot of customers, but they're relatively small customers.

Now we -- yes, I mean, for now, it's too early.

Okay. Yes, at what point do you think it's large enough where you're starting to get 1%, 2% market share gains because of it?

I -- that's a lot of market share gain, probably more than -- that's a lot of market share gain.

Okay, fair enough. Just a follow-up on the nonres construction conversation that we've been having.

Energy prices have come down quite a bit, and I wonder if there's a way of thinking about how that impacts some of your customers.

Well, it's good for the consumer. That's for sure.

And if they continue to fall, it could have a negative impact on some of our energy customers. But we think that there's probably a $20 or $30 cushion between the price of oil and where these activities become uneconomic.

But it's really not impacting our business for the most part. The energy infrastructure work continues and will continue.

Energy use is going up as the economy improves and as some of these big projects get built. So I guess, potentially, if the price of oil went down to $50 a share or something, it would have a negative impact on the drillers.

But that's a very small part of our overall energy business.

In terms of acquisitions, any pickup there, Peter or Mike?

A lot of activity, competition, high prices. No -- nothing -- no big change from last time.

It looks like we're headed toward $100 million to $150 million. We haven't lowered the $150 million because you just never know.

We're actively talking to about 30 different companies of significance, and most of them are independent distributors, but there are a few others as well. And I think as the economy continues to improve, if that's the way it turns out here, and we expect it will, that there'll be more consolidation, but no real change.

Okay. And one quick follow-up on pricing.

I saw you've raised some prices there at the beginning of October. How much of the organic sales growth assumption do you have is supported by maybe that increase and prior increases?

I would think about -- it was -- we posted 2% price in the current quarter, probably maybe slightly above that for the balance of the year.

I guess, first of all, could you talk a little bit on your current thinking around appetite for expanding your vertical integration into the geographies where you aren't currently vertically integrated and the logic or optionality between buy versus build? And secondly, as you think about the disconnect between your leading indicator businesses and your core business, is any of this due to an increase in churn rates on your package -- on your cylinders or losing share to micro bulk?

Well, the first one, we're primarily interested in secure supply of gases, and we're taking steps to build where we can't -- where we need secure supply or -- and/or negotiate agreements with other producers. We have large agreements with several companies.

We think we're an important customer to them. And I think that those arrangements will continue.

We're not -- air separation plants are expensive. We're not interested in covering the U.S.

with our own air separation plants just to say that we have them. Because we have such a presence in so many markets, we're given opportunities that are hard to turn down sometimes.

And we'll -- so we're looking at this mostly on an opportunistic basis because we think what we have and our relationship with a couple of companies that don't have a packaged gas channel and use us as a means to that channel will suffice. I wouldn't be -- I think Mike said on the last call, don't be surprised if we build 1 or 2 a year, but there's not going to be any huge building program that we can foresee right now.

And what was -- and the other one was on packaged gas churn. Do you want to...

Yes, give me that question again on the second part.

So there was a discussion earlier in the call about the disconnect between some of the leading indicator businesses being healthier, and you haven't yet seen it flow through. I can't remember exactly the phrase Mike used, but it's sort of -- it's an unusually wide disconnect in the last couple of years.

And so I was wondering, have you had a look at -- or do you have any views on whether that disconnect is occurring either because more cylinders are being returned and you see more churn in the customers? Or are you seeing sort of more customers peeling away from the traditional cylinder rental into micro bulk applications earlier?

Yes, okay. Well, I think what I meant to say was that other than the last 2 years, the using of -- or the following of the sale of capital equipment was a good indicator of future strength in both gases and production hardgoods.

So this is really the first time we started to see the capital component starting to grow. Now we also sell -- actively sell micro bulk as an option in a customer to bring -- to rightsize the mode of the customer's gas supply to their application.

And the micro bulk application is a relatively new one, having tank sizes in that middle range between the historical liquid cylinders and bulk. It is growing pretty significantly.

A portion of -- and I don't know whether it's 20%, 30%, 40%, there's a percentage of our micro bulk growth, which is a mode change to -- for an existing customer we already have, okay? So to the extent that there are cases where moving a customer to micro bulk, which we do because it's the right thing to do for the customer, could result in us taking back some of the liquid cylinders primarily.

Not so much high-pressure cylinders, but it could have an effect on liquid cylinders to the extent of the percentage of micro bulk that is actually an existing Airgas customer. So there could be a piece of that.

I don't think it's big. I don't think it's material enough to really worry about.

We watch the utilized cylinders very, very closely every month. All of our regions do as to what the balances are doing and if there's a decline, what decline, what happened.

So we don't really see some secular trend that's occurring of any big consequence that says it's going to dramatically impact our cylinder -- utilized cylinder numbers.

Again, thanks for joining us today. And we'll be available all day for any follow-up questions you may have.

Thank you.