Applied Industrial Technologies Inc (AIT) 2003 Q4 法說會逐字稿

Hello, and welcome everyone to the Applied Industrial Technologies' fourth quarter 2003 financial earnings conference call. At the request of Applied Industrial Technologies, today's conference is being recorded. If you should have any objections, you may disconnect at this time.

I would like now like to introduce, Mr. Jim Laslisky (ph), principal of Public Relations Partners, a consultant to the Company. Mr. Laslisky, you may begin when ready.

Thank you, operator. And good morning everyone. On behalf of Applied Industrial Technologies, I would like to thank you for joining our call. You should have received our earnings news release which was issued Friday. If you have not received the releases, you may retrieve it by visiting www.applied.com. A replay of today's broadcast will be available for the next two weeks. Archived instructions are contained in the news release.

I would like to remind everyone we will discuss Applied's business outlook during this conference call and make statements that are forward-looking. Applied intends that all forward-looking statements be subject to the Safe Harbor of the Private Securities Litigation Act of 1995. All forward-looking statements are based on current expectations regarding important risk factors, including trends in the industrial sector of the economy, the success of our various marketing strategies, and other risk factors identified in Applied's most recent periodic reports and other filings made with the Securities and Exchange Commission. Accordingly, actual results may differ materially from those expressed in the forward-looking statement. And the making of such statements should not be regarded as representations by Applied or any other person that the results expressed there and will be achieved.

Applied assumes an obligation to publicly update or revise any forward-looking statements, whether due to new information or events or otherwise. This conference call is the copyrighted property of Applied Industrial Technologies. Any copying, rebroadcasting, publication, posting, transcription or distribution of any portion of this call without Applied's expressed prior written consent is prohibited.

With that said, our speakers today include David Pugh, Chairman and CEO of Applied, who will discuss our overall performance during the quarter and the year just ended. We will also hear from John Whitten, Vice President and Chief Financial Officer, who will discuss our financial performance in detail. And Bill Purser, our President and Chief Operating Officer, who will discuss our operational activities during the quarter.

Here to start us off is David Pugh.

Thanks, Jim. Good morning. As you can see from our release we put in another relatively solid quarter of improved earnings in a very sluggish economy. Our attention to detail with regard to margin management continues to provide us with some positive results. Due to the highly competitive nature of our business in the great challenging market, we have haven't necessarily laid down the gauntlet on margins or changed any major paradigms. We're just making steady progress without jeopardizing our sales performance. And this is a delicate balance. And we will continue to manage this as the market allows.

While we still have opportunity ahead of us, we are pleased with the current performance. In addition to the base progress that we're making, we had two special items that came in ahead of schedule to provide a nice year-end impetus to our earnings. The timing for closure on both items was impossible to forecast, so they understandably they were not in our fourth quarter guidance.

Asset management still going well. We have the duel positive of inventory coming down, while on-time performance continues to go up. It just says that our quality processes are having the desired impact. Our cost control has been another area of steady performance. During this almost three year now severe downturn in our economy we've had no dictated major reductions in force that would jeopardize our long-term future. And we have taken no restructuring charges to improve future earnings. We simply made the moves along the way that prudent analysis would dictate. Our inability to grow sales is the one major disappointment of our key initiatives. But we're not alone, and it doesn't appear that we are losing any market share. We continue to be frustrated in our attempts to uncover acquisition opportunities at prices that would provide a fair return to our shareholders. But we're still looking. And we're still in a stolid financial position to move on the right situation.

Domestic service center sales experienced a year-over-year decline for the last five months of our second half. And July continued along the same areas. So it is six months in a row of year-over-year underperforming in sales. And we seen that no let up insight. July actually was our worst month of the current calendar year on a year-over-year performance. Now while some have predicted a recovery within sight, we just haven't seen it anywhere. And how could it when we have had 35 consecutive months of manufacturing employment decline. Still, our domestic team is still finding ways of increasing earnings. I think that is a pretty good job in a very tough economic climate.

Our Canadian sales team continues to contribute stellar performance, both in sales growth and operating income. Our investments in this geography were well timed and well placed, and there being well-run. We have also experienced a pretty good turnaround in the profitability of our Fluid Power operations. We feel good about the leadership there and the future success in that business. There are always going to be opportunities for improvement. And we're far from being complacent at this point. But I am very gratified with the effort and the results provided by our associates over the last two operating periods, and I certainly don't expect for them to let up now.

At this point, I will turn it over to John Whitten to provide a few more details behind the numbers.

Thanks, Dave. And good morning everyone. Let's start with some insights into our performance for the quarter and year-to-date. Specifically, our net income per share of 40 cents per share and our sales of 372 million came in at the middle of our guidance that was provided on July 3, 2003. From the standpoint of sales, the long anticipated upturn has not occurred, as Dave mentioned. We saw weakness in our U.S. service center based business that continued into July. This weakness was partially offset by strong sales performance of AIT Limited, our Canadian operation and a turnaround of our Fluid Power business.

There is one item from the quarterly income statement that needs some explanation. Our gross profit margin for the quarter was 27 percent. This was up about 150 basis points from the prior quarter. 120 of those basis points were from favorable annual physical inventory adjustments. And about 30 basis points or .3 percent of the increase were from improvements in pricing and freight recovery. The prior year fourth quarter had inventory gains that increased gross margin by 70 basis points. Gross profit margin for the year increased by 60 basis points to 25.9 percent from 25.3 percent last year. Bill Purser later on is going to review the margin improvement factors in his comments.

Same-store sales were down .2 percent versus the same quarter last year. There was a reduction of about 25 facilities in the United States and Mexico during the year. These reductions were partially offset by the acquisition of certain assets of IECO Industrial Equipment Company in Canada, with 16 facilities in Alberta and British Columbia. At June 30th, 2003 we had a total of 440 facilities versus 449 at June 30th, 2002.

Our sales mix for the twelve months was about 85 percent Industrial Products and 15 percent Fluid Power products. Industrial Product sales increased by about 1.1 percent for the year, while Fluid Power sales increased by 3.2 percent for the same period. These increases were partially offset by a sales decline in our small electrical shop business that was closed during year.

The increase in our SG&A expenses for the fourth quarter were primarily the result of the IECO acquisition, as well as higher compensation and benefit costs. The fourth quarter also included a onetime pre-tax gain of $2.1 million or 7 cents a share from the settlement of a property insurance plan. Excluding this onetime gain, income from operations increased by 23.5 percent for the quarter and 17.6 percent for the year. For the quarter the Company had $650,000 of gains on sales of assets, primarily real estate. For the fiscal year the Company realized approximate gains of about $3.2 million from the sale of property.

Our interest expense for the quarter was down $300,000 from last year, and down about $1.4 million for the year as a result of lower average borrowings and lower effective interest rates. Our share repurchase numbers were included in the July 16th press release. For the year we repurchased 581,000 shares force pursuant to Board authorization. Our average purchase price was around $17 a share. And currently we have about 19 million shares outstanding.

Our balance sheet continues to be very strong. Our inventory balance declined by about $6 million during the fiscal year year, and was down $12 million from the March 31st quarter end. Our total cash flow provided from operations was about $67.3 million, here again turning in another good year from a cash flow perspective. Capital expenditures were about 12.8 million versus $10 million for the previous year.

One additional highlight, and that is the fact that the cash that was provided from operations of $67.3 million, does not include an additional $10 million in proceeds from other activities. These other activities included a $7.5 million proceeds from the -- was realized from the sales of property, and the $2.5 million of proceeds from favorable termination of interest rate swaps earlier in the year.

Our depreciation and amortization came in about $16 million for the entire fiscal year. Our next scheduled debt payment on our remaining long-term debt is not due until December of 2007. We provided our financial guidance in the press release, but just to reiterate that, our financial guidance for the next year is as follows. For the first quarter we expect flat sales in the range of about 360 to $370 million, and earnings of 20 cents to 25 cents a share. For the year we expect our sales will come in somewhere in a range of about 1.45 billion to 1.5 billion, or about the same level as the previous fiscal year of 2003.

We do expect however, to see continuing improvements in profitability. We expect gross profit levels to be in the range of about 25.5 percent to 26 percent. We anticipate that a decline in rebates will be offset by improvements in freight recovery and pricings, so our gross profit will be approximately the same for 2004 as it was for the entire 2003 fiscal year. We expect a decline in our SG&A expenses from the elimination of losing operations that occurred during fiscal 2003. As we mentioned before, we closed and consolidated 25 operations, primarily in the U.S. during the last fiscal year.

Interest expense should come in around $5 million for the entire year, about the same level as 2003. We also expect that our overall income tax rate will trend down somewhat and will be somewhere in the range of about 35.5 percent from the entire year.

So putting it altogether, we are expecting that the next fiscal year's per share earnings should come in within a range of about $1.10 to $1.20 a share for the entire year. We expect about 48 percent to 49 percent of our total sales to occur in the first half, and 51 to 52 percent to occur in the last half of fiscal 2004.

For cash planning purposes, we expect depreciation and amortization to be around 13 to $15 million, and property additions to total between 14 and $15 million. About one-half of that total of property additions will be the purchase of real estate under synthetic lease arrangements currently (technical difficulty) operating leases at June 30, 2003.

Now, what I would like to do is turn the call over to Bill Purser for commentary on our sales, margins and operations. Bill?

Thanks, John. And good morning everyone. I ask that you bear with me as I'm fighting a summer cold, courtesy of my grandson. As Dave said, sales growth is a real challenge right now, especially in the U.S. I don't think that is news to anyone listening on this call. Everyone in industrial distribution is in the same boat. Customers can hold down costs, postpone capital spending and maintain equipment only to keep it running. The competitive landscape is brutal. And that makes any gain in market share extremely difficult. We have seen many of our competition, or competitors I should say, using price reduction strategies. We just (inaudible) approach is in our long-term best interest.

To keep our operating success in 2003 was a continuing focus on the four strategic priorities established two years ago, and that Dave mentioned earlier, improving margins, containing costs, managing assets and growing sales. Strengthening the fundamentals of a large and complex business such as ours takes time and patience. But we have stayed the course and now we're enjoying the initial results.

Our increase in gross margin last year represents progress across a number of areas. We are purchasing more wisely on a corporate level, and our field organization is now equipped with better pricing management tools at the service center level. We have done a better job of recovering freight costs and now are closer to the industry norm. Applied's sales mix has continued to improve with high margin sales from our catalog and fluid power product. As I mentioned earlier, the pricing environment continues to be very difficult and customers are increasingly price sensitive. We continue to focus on total costs with our customers in ways that we can help reduce their operating costs without focusing on unit pricing.

In regard to our own costs, we're carefully monitoring and managing payroll expenses, while at the same time we are avoiding any wholesale downsizing that we feel would diminish our organization's capabilities. At the same time, we're providing our people better tools such as systems and training that will increase productivity. We are spending very conservatively in discretionary areas such as travel and entertainment. As a result of asset management initiatives, and through enhanced technology and logistics, Applied today transacts more business and delivers on time to customers more reliably with fewer physical and less inventory than in the past. Systems allow us to better predict what a customer will buy, so we can stock it in the right place or replenish it automatically without unnecessarily carrying costs.

We also said survey our customers on a regular basis to make sure we understand what is most important to them. We evaluate the on-time error free performance of each service center quarterly to ensure it's properly positioned to serve our customers' needs. On an ongoing basis, we prune underperforming locations and open new ones as market conditions dictate. And even in a weak economy for industrial customers, we have managed our relationships to minimize bad debt expense.

Our fourth strategic area is sales growth. And today's point, this has been the most disappointing of all our strategies. While maintaining a flattop line means we have succeeded in replacing business loss from customer downsizing, plant relocations, plant closings, I'm really still disappointed in the inability to increase sales to existing customers. We found some degree of success in targeting specific industries and segments with specialized tools and resources created by our marketing team. I'm also encouraged by our catalog sales, which have grown to approximately $38 million a year. In the coming business year, we will continue to focus on the four strategic initiatives. However, there will be a strong emphasis on sales and sales training. We will believe that with our broad portfolio of products, we have additional sales opportunities with our existing customer base.

This concludes my comments and I will now turn the call back to Dave for a wrap up.

Thanks, Bill. Again, I can't say enough about the collaborative efforts of our associates to drive increased earnings in what has been a market environment as I have experienced. I keep hearing optimism about the impact of current economic stimuli. I will just have to say, we're ready. We can all use a little relief. I feel we're taking a realistic approach to our fiscal 2004, establishing some rather aggressive earning targets in the face of what we expect to be a flat market at best.

At this time, I would like to open the channel to questions, and take some of the details -- give you some more details. Thanks. Debbie?

Holden Lewis at BB&T.

The order of magnitude of some of the impacts to your gross margin this year, I mean specifically you had some nice items that impacted the gross margin from the discounting standpoint, which is still not likely to recur in, at least in full. Can you give us a sense of what were the full year impact in terms of basis points that directly is attributable to the discounting in the year?

Holden, This is John Whitten. Are you talking about the rebates?

Yes.

Just looking at it, probably for the entire year we're probably -- two-thirds of our increase was from rebates and one-third was from freight recovery.

So you had 60 basis points and about 40 basis points of that was from the rebates?

Yes.

Now the rebates, you would not think are -- the unusual circumstances, you know the Torrington (ph) transaction with Timkin (ph), and the first half sort of inventory ramp and those type of things, you're not expecting to see those recur are you in terms of the same order of magnitude?

Certainly not to the same level of magnitude, Holden. That would be coming down. Because we're just not going to be seeing some of the growth aspects out there. And our suppliers are certainly feeling the same impact in this economy as we're working with. So at some point the prices are going to have to be -- the price increases are going to market and it will have they are going to have to stick.

How much of a benefit did you get? You noted in the fourth quarter you got a benefit from pricing and transportation of about 30 basis points. What was that for the year? And what kind of number are you expecting for the full year of '04?

Holden, This is John Whitten. What we are looking at is probably to continue to improve our transportation recovery. Because as you know, we really didn't initiate that until the second quarter of last year. So we are going to see the benefit of that in our first quarter and part of the second quarter. In addition to that, we do have initiatives that we're working on to improve our margins from the standpoint of pricing. There's a lot of training. There's a lot of systems work that is being done. So we feel comfortable that we will be able to replace the reduction in the rebates with additional pricing. And that in our guidance reflects that.

So in the last quarter or two, have you seen much sequential improvement in the transportation? Or when you said you are kind of at the industry norm, you kind of think you're probably at the run rate now that you're likely to get for all intents and purposes on the transportation initiative?

At this point in time, we still -- I'm sorry, Holden, this is Bill. What we do believe is that there are additional opportunities. We're not satisfied with the industry run rate, we still feel there are other opportunities for us there. So this will be part of the initiatives, one of the tactics to support the margin initiatives that we will continue to work on.

But you kind of think that the easy fruit has been picked, and now it is a little more challenging?

Yes. We anticipated, and this happens with almost every program, that you're going to get below hanging fruit first, and then you hit a plateau. And we have had hit that plateau, and we have some programs to carry us to the next step.

Do you have what the contribution for the full year was? I guess, pricing then didn't add much to the full year gross margin; the extra 20 basis points is mostly transportation?

It did not. Our pricing -- we did see some improvement in the last quarter in our pricing, which kind of gave us the knowledge that we needed as far our guidance is concerned. But it really did not contribute very much for the entire year.

So your transportation for the year contributed -- I am just kind of looking for where you're going to offset this entire 40 basis point that came in from rebates. Assuming the market stays flattish, are rebates going to be an incremental benefit for the year in kind of a flattish environment? Do you have things negotiated or already set up that would suggest that, or in a flat environment are rebates kind of a sort of a zero factor?

A difficult question to answer, but the rebates are predicated on purchases. If the run rate is flat, the economy is down, less purchases, we would tend to say that we're going to have less in a rebate. What we don't expect is any of, let's call them windfalls of last year that you have already mentioned that occurred with some of the manufacturers. We're not anticipating those this year.

So rebates will be a play, but they will not be as significant as they were last year. We do feel though that to John's plane some of the other enhancements we're working on are going to offset that difference that we realized this past business year.

Let me correct one thing, just a little semantics. Bill made the comment that rebates were based on purchases. Rebates are based on sales. And to the extent that we can run inventories up, but until we sell that inventory, we do not take the rebates into... you know.

Good point.

So even if you were to run inventories down that has no bearing on the rebates? Well, except you would have to purchase less products, so there is a relationship there, right?

Right. First of all, I think we have done a very good job of rightsizing our inventory at this point and over the past several years. Rebates, I think we've taken a very proper look at what rebates are going to do for the coming year. And we expect that to be down, although we will have to offset that with some other areas of margin management, and we think we can. We think we have been at a mature level on purchasing practices. Last year we started up the freight recovery piece. We're well into that now. Some of the pricing systems we have in place are just starting up. So we're looking at contributions from all areas to offset a very competitive environment out there.

So even though the transportation piece, the contribution may not be great in the second half next year, the pricing is ramping up. And even though for the full year those two together were 20 basis points, you think that you can actually step up the contribution to get back that 40?

We do.

We do.

Okay, now what would the step up be from? Is the pricing just of a greater magnitude than the transportation piece?

Holden, appreciate that we're not going to give you all the details of that with everybody listening to us.

Right. Is the pricing mostly in the Fluid Power? Is that where the improvement came from?

No, it is not necessarily in the Fluid Power. It is across all product lines.

Okay. And could you just explain then where the profitability of Fluid Power came from? I'll just jump back in the queue. You said there was a turnaround in profitability there?

A lot of that was inefficiency.

It was not necessarily product -- better purchasing of product, but more efficiency, operating efficiencies, within the Fluid Power Group.

Which are sustainable?

Yes.

Jeff Hammond with McDonald Investments.

I guess on the volume purchases, are you vendors telling you something that suggests you're not going to get those volume purchases? Because my understanding is in a tough environment they're looking to get product out the door, particularly at year-end, and that was a good portion of the reason you had those opportunities last year. So if we're still in a tough environment come fourth quarter of the calendar year, why wouldn't that repeat?

Jeff, this is Bill. We normally begin to have some indications from suppliers that that might be the case by this time of the year. We're not hearing that. We're not seeing now. So that is leading us to believe that we probably won't have that rash of opportunities toward the end of this calendar year.

Okay. And then on the freight recovery, you said you get 30 basis points year-over-year improvements based on that this year. If that correct?

Correct.

So you would, I guess, at the current run rate get about 30 basis points of year-over-year improvement in the first half of fiscal '04, because you really -- that was really, I guess, moving along at that point?

We are expecting that to actually move up a little bit more. We're expecting some improvement in that.

Would you expect to get incremental margin improvement in the second half of fiscal '04 from freight recovery?

I would think that we would.

Jeff, we would be disappointed if we didn't, because I do not think we're at maturity in freight recovery processes right now. But as Bill mentioned earlier, as you get farther down the line they are tougher to come by. So we're not banking them totally at this point. And we still have the pressure on to make it happen.

Okay. Perfect. You talked a little bit about average daily sales rate. I was a little bit surprised by the commentary on the release about June. If I take the manufacturing side as a whole people were fairly encouraged about what they saw in June, at least relative to April and May. And I'm seeing, I guess, a little bit different picture from you guys as far as some deterioration in June and July, being it sounds like a disappointing month.

And not only from us, Jeff, but I think if you look at other public information with people in our industry, you'll see some of the same thing. And as I have been to industry seminars lately with our suppliers, I'm hearing the same thing. So with the manufacturing turnaround, if there is such out there, certainly has not hit the MRO business, and I'm not even seeing in the OEM business at this point.

And then two housekeeping items. Is there any expectation for real estate gain fiscal '04? Is that in that guidance? And then what is incremental pension, medical insurance in the fiscal '04 guidance?

Jeff, we have budgeted for approximately $1 million of real estate gains for fiscal 2004. Currently, based upon everything we see, and the inventory of unsold properties, right now based on what we're seeing, we may come in a little bit under that. But we think that usually opportunities tend to show themselves as we continue on through the fiscal year. So that is what we have put in the guidance is $1 million.

The other question about the hospitalization and the general insurance, we have provided for that based upon the best estimates of the people that provide us with those coverages. We have budgeted for an increase in both of those. I don't have those numbers right here, right now, but we did spend some time talking about those items as we budgeted those.

Is there is a substantial increase again similar to the last couple of years?

We do expect some increase. We saw in the fourth quarter we had a little bit of a benefit in healthcare. But we expect that that is not going to be sustained, and we did budget for additional amounts for next year.

Holden Lewis at BB&T.

Just explain the D&A. Sequentially your D&A jumped Q4 over sort of the Q2 and Q3 levels. Is that just a function of adjustments? It doesn't sound like you expect that is going to kind of the norm. And it sounds like you are expecting the actual number in '04 to come down, and what is that from?

Holden, we kind of look at our depreciation as pretty much a systematic process. When looking at it of course we always kind of look at also the useful lives of certain items,. But we did adjust some useful lives primarily in the systems area, because we did a major change out of a platform during the latter half of the year. We reduced the number of platforms. And as a result, we took the remainder of those systems into our depreciation expense. So we did have a little bit more depreciation fourth quarter. It is pretty much as we anticipated. But we expect that going forward the numbers we provided in the guidance were pretty good.

So you basically accelerated some of your D&A write-downs into Q4, and then next quarter and into next year, that drops off, and we're looking at 3.5 being kind of more the norm?

Yes.

Can you give me again what the growth numbers for the year were for the Industrial Segment and the Fluid Power Segment?

The growth numbers?

I think you had said like the Industrial was up 3.2 percent, the Fluid Power 1.6 or something? I missed those numbers.

Backwards. Just the other way around.

1.64 for IP and 3.2 for Fluid Power?

The Industrial Products was 1.1 percent, and Fluid Power was 3.2 percent. Now that was offset by the sales decline in our small electrical shop business which was closed during the year. In other words, that operation was eliminated. That was included in our other business segment. We actually closed that during the year.

What was the Q4 Industrial Products and Fluid Power growth or shrinkage rates?

I don't have those right now, Holden. I don't have those in front of me.

Mark Koznarek with Midwest Research.

One clarification to start, you said same store sales were down 02.2 percent. Was that in the quarter or the year?

That was for -- let me just go back to my notes here. That was for the quarter.

What would that have been for the year then?

I don't have that number. I don't that number immediately available. I will have to get back to you on that one.

That doesn't sound that bad really. You talked about the last five months through June showing sales declines, and then July down again. But down only 0.2 for the quarter, doesn't sound that bad. Are we talking about just marginally down? I think, Dave, you had made those comments?

Well, Mark, first of all, January was up. We started seeing the downward turn in February, and again increasingly bad. If you take a look at the June numbers, I believe we were off from same store sales about 4 percent in the U.S. Now that is domestic same store sales in the U.S. So it was as -- it trended downward over the quarter, so the exit rate was not pretty at all, and July continued in the same mode. So we're somewhat cautious about was out there.

I just spent three days out with customers last week, and it was a mixed bag. I saw even the food industry being down where I didn't expect it to be down. Aggregate was coming back a little bit. Some of the base industries were still -- even pharmaceuticals was off a good bit. We're seeing a mixed bag over all. We're not seeing the wheels start to turn a whole lot faster than they have been turning.

That was actually my next question. If you could step through the some of your key end markets and talk about performance in the quarter and what near-term expectations are?

Mark, this is Bill. In looking at the key markets that we're in, one bright market for us appears to be the aggregate market. We're saying it take hold. We're seeing some of the funding from the TEA (ph) 21 federal funding to be released. States are now matching the funds. We're starting to see more activity there. The harsh winter last year didn't help, and prolonged winter didn't help the situation for that industry as well, but that looks like a good one for us.

Even though the overall forest industry has been pretty flat and going through a lot of downsizing, we have been fortunate enough to have some increases in that industry as well. Food is down to flat, depending on where you are standing in our particular markets. But we do believe food will make a turnaround as well. Automotive is one that concerns us somewhat. We have seen a downturn in automotive as a result of expended shutdowns. Many of the facilities, plants that we deal with instead of taking their normal two-week shutdown they have extended three weeks and longer. We're a little concerned about that industry at this point in time. But that gives you, I think, an overview of the key industries that we're looking at for the next year.

A final one I had was, maybe I haven't been paying close enough attention, but I didn't realize that there was a challenge with Fluid Power such that you were talking about this turnaround in profitability. Can you back me up and describe briefly just what the problem was and what the recovery has been?

I think we had some operational issues. In the beginning the strategies and one of the initiatives being operational excellence, I think we carried that over to the Fluid Power Group and made some very good decisions, business decisions, within that group as to operational excellence and how we wanted them to perform. but I think we have seen the results. We have been very pleased with how that has taken hold.

So it is more just an internal cost issue rather than a sales sort of pricing, something like that?

Well, we have had a sales increase. But I would say the effort, or the results from the effort, have been probably more along the line of internal operations.

I've got some of the numbers that were requested before; we deferred answering. First of all for the year-to-date on the same store sales, or for the quarter, we had mentioned we're down .2 percent. For the year we were actually up .4 percent on same store sales. For the breakdown of sales for the quarter for Fluid Power and -- Industrial Products were up .5 percent for the quarter. Fluid Power was up 3.1 percent. And of course, those were offset by the fact that we closed the Engineered Systems Automation. So that responds to the two questions that we deferred previously.

Nick Dempsey with Barrington Research Associates.

Any progress on the Fluid Power contracts, national distribution contracts?

Nick, as a matter-of-fact there has been some. We are, I guess, in negotiations is the proper term at this point in time, but what I consider to be extremely good progress has been made. And we may be able to announce something to you by the next teleconference. But right now I can't go any further other than to say that I'm quite pleased with the way the talks were going.

That should be a nice positive development after years of frustration. Could you give us the sales volume of the electrical shops that were closed down?

I think I can give this to you. For the year, they were about 1.4 million this year versus almost 4 million the previous year. In the quarter it was almost nothing. It was about 500,000 last year and less than half that this year.

Any progress on the Internet business? Is that getting more of your volume?

Nick, this is Bill again. We have seen an increase in the business, but it is really, I would say channel switching. Many of our customers (inaudible) moved to maybe e-market places. And I am talking about large strategic customers; they have moved some of that business over to the Net. We still don't see the medium-sized customer moving too much of that. The larger customers are probably going to be the leaders there, but again it is more switching than I would say any additional business at this point in time. Still is a small part of our total.

The good news on the that, Nick, is that because of our installed capability and that capacity that when they do switch to that, it means we feel like we have a higher retention capability.

John, the headcount for the year and the number of shares out at the end of year?

Bear with me one second, I'll get that for you. The headcount, we had at June 30th, 4,327. And that versus at the end of last year, 4,445. And keep in mind that when we acquired IECO we added about 100 employees from that acquisition. And the other thing, what was it you wanted?

The end number of shares out?

The number of shares outstanding?

Not the average shares, but the absolute?

Let's see. Bear with me for one second. I'll get you the numbers on that -- the detailed balance sheet. We had 24,096,000 shares issued, then you would subtract from that 5,076,000 in treasury. So it is roughly 19,020,000 thousand.

We have no other questions standing by at this time.

Very good. Thank you very much, operator. And thank you everyone for tuning in today. We appreciate your attention.

Ladies and gentlemen, we thank you for your participation. This does conclude our conference and you may disconnect at this time.