Applied Industrial Technologies Inc (AIT) 2008 Q3 法說會逐字稿

Good afternoon. Welcome to the Applied Industrial Technologies third quarter 2008 financial earnings teleconference.

All lines will be in a listen-only mode until the formal question and answer session. At that time instructions will be given. At the request of Applied Industrial Technologies today's conference call is being recorded. If you should have any objection you may disconnect at this time.

Applied issued its third quarter earnings release early this morning before the market opened. You may retrieve a copy of the release by visiting the Company's website at Applied.com. A replay of today's teleconference will be available for the next two weeks as noted in the news release.

Before we begin the teleconference I'd like to remind everyone there will be discussion regarding Applied's business outlook and there will be statements that are forward-looking. All forward-looking statements are based on current expectations regarding important risk factors, including trend 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 report and other filings made with the SEC. Accordingly actual results may differ materially from those expressed in the forward-looking statements.

Our speakers today include David Pugh, Chairman and CEO of Applied who will discuss Applied's overall performance during the quarter. We'll also hear from Mark Eisele, Vice-President and Chief Financial Officer who will discuss the financial performance in detail; and Ben Mondics, President and Chief Operating Officer who will discuss operational activity.

I will now turn the call over to David Pugh , Applied's Chairman and CEO.

Thanks, Amanda and thanks everyone for joining us today.

I'm going to keep my comments brief this afternoon and let Ben discuss the fundamentals of what we are encountering in this challenging economic climate. While our market data and our business plan projected this quarter to be our weakest, we were still a bit disappointed with the extent of the slowdown that we experienced during the quarter.

Coming off of a strong second quarter where we posted the 8.2% year-over-year sales increase, this 1.7% third quarter sales increase was a little bit weaker than we expected. I guess the only good news that we see in it is that the operational controls showed up well as we continue to turn out double digit increases in operating income. So we feel pretty solid about how we're managing in this process.

At this time, we don't see relief in sight for some of the key markets that have dragged us down and there are indications that the decline is moving into more segments and signaling a general broad based slowdown. As you've heard and has been documented, the housing segment is the most critically affected and the input that we're getting from key customers in this industry indicate that they expect the current rate of housing starts to linger through 2009.

So there's a fair amount of uncertainty and anxiety among our customers. The combination of high energy prices and tight credit in the housing market are pulling in one direction. You've got the federal monitoring policy and the stimulus package pulling it another. Whether they're going to offset each other is still to be seen. Now while we originally felt the fourth quarter would provide mild recovery, current indicators point towards additional slowing. So there's been a definite change since we last talked and I'm going to to let Ben and Mark fill in the details and we're going to change the order just a little bit today because I think you probably want to hear more about the what's and the why's of the marketplace than just the pure numbers.

So I'm going to let Ben go first today.

Thanks, Dave, and good afternoon, everyone.

We experienced a slowing of the economy during our third quarter and it affected many of the key industries that we serve. Not surprisingly, we saw decreased sales to the lumber and wood products segment which is heavily tied to the housing market. A general slowdown, however, was also felt in the pulp and paper and transportation equipment segment. On the upside, we saw strong increases in food products, metal mining, and cement compared to year ago performance. We also saw good performance from rubber and plastic products as well as the primary metals industries.

Overall, the strength of these industries could not overcome the effect of the weaker markets to maintain the growth rate we had coming into the quarter. Government sales continued to produce a double digit sales increase in keeping with our emphasis on developing this opportunity. Our salesforce continues to expand their sales calls to include all types of government entities. Catalog sales continue to grow and year-to-date we've seen a 23% increase. We will shortly finish production on our 1,100 page 2008-2009 catalog which will be distributed to customers starting in early July. The new catalog will include more than 40,000 products of all types.

Putting all of these factors together resulted in a sales increase of of 1% for our U.S. based service centers. Our U.S. fluid power companies increased their sales 5% compared to the prior year's quarter. The Vycmex acquisition in Mexico and the fluid power related products sold through our service center businesses have all contributed to the approximate 1% increase of fluid power sales as a component of our overall product mix. Although our Canadian sales increased 5.6% in U.S. dollars due to the impact of the currency translation factor, we continue to have our challenges in the forest products industries. We are, however, seeing some improvement in our fluid power business in Canada.

Elsewhere, our Mexican and Puerto Rican operations are performing well. Although they currently represent a small part of our business, our Mexican operations including the Vycmex acquisition, which we acquired in December, had double digit increases over last year's period. Our operations in Puerto Rico did as well.

Looking at the fourth quarter ending June 30th, we believe the markets we serve will continue to be slow. The economic indices for March, including the ISM purchasing managers index and industrial production, showed a slight improvement over February. However, manufacturing capacity utilization is still below 80 and the ISM index is below 50 indicating some level of contraction. Some of our customers in the lumber and wood products segment report that they don't expect any significant recovery this calendar year.

Putting it in perspective, housing starts peaked in 2005 with 2 million units. Since then, it has been steadily falling with 1.4 million units reported in 2007. Going forward, the market is expected to drop below a million units in 2008 with some level of recovery possible in 2009. We believe that the slowdown will continue in our fourth quarter and we expect sales will be flat to slightly up.

In anticipation, we have moved to keep our expenses and assets under control. In the face of a sluggish economy, we will continue to balance our operating cost with our sales and position ourselves for a fair return on assets. Our continuous improvement programs are helping us find new and better ways of doing things.

We have a strong team, a strong dedication to quality, and we have more than 600 improvement teams that work in our U.S. facilities with many more in Canada and Mexico. These teams drive efficiencies in all areas of the Company, as indicated by our operating leverage, and we continue to see opportunities for improvement in sales growth, market share gain, and operating margins as a result.

In summary, we have a good strategic plan at work which will help drive our top and bottom line results. Our employee associates are upbeat and working hard to generate profitable sales and efficient operations.

I'll now turn the call over to Mark Eisele for a discussion of our financial results.

Thanks, Ben. Good afternoon, everyone.

Let me provide some additional insights for our third quarter financial performance. We were very pleased to achieve a 12% third quarter earnings per share increase or $0.55 versus $0.49. Sales for the third quarter were $530 million which represents a 1.7% improvement over last year's third quarter. We had 63.5 selling days this quarter compared to 64 days in the same period last year. On a sales per day basis, sales increased to 2.5% over last year.

For the quarter, U.S. service center sales per day were up 1.8%, while sales per day at our U.S. fluid power businesses were up 6.2%. We believe approximately 80% of this increase in sales for the U.S. service centers relates to the impact of passing along supplier price increases. Sales for our Canadian operations increased by 5.6% in the quarter primarily as a result of favorable currency translation. In local currency, our Canadian service center sales were down 12.3% while the Canadian fluid power businesses were flat.

Our operations in Mexico, including Vycmex acquired in December, had a sales increase of 38.1%. Vycmex represented approximately 28 percentage points of the increase. Our Puerto Rico operations also improved approximately 12% over the prior year quarter. During the quarter, our number of operating facilities decreased by one to 451 as a result of combining two Canadian locations. Our product mix during the quarter was 20.2% fluid power products and 79.8% industrial products. This represents an 80 basis point increase in the fluid power product percentage from last quarter.

The gross profit percentage for the quarter was 27.3%, consistent with the guidance we've provided for fiscal 2008. This margin was 30 basis points higher than last year's third quarter. Our selling, distribution, and administrative expenses as a percent of sales improved to 20.1% for the quarter. This rate is 30 basis points lower than the third quarter of the prior fiscal year. We continue to see benefits from our overall focus on productivity improvements and cost control. Lower employee benefit and depreciation expenses were the main contributors to the improved percentages. We will, however, continue to invest in additional resources for our government and other growth programs in support of our ongoing corporate strategies.

The absolute dollar increase in selling, distribution, and administration expenses for the quarter was less than 1% compared to a sales increase of 1.7%. Our expectation for SG&A in the fourth quarter is to be comparable with our third quarter run rate with only a small potential increase. Our third quarter operating margin of 7.1% was 60 basis points above the 6.5% operating margin in the prior year third quarter. The higher gross profit percentage, along with improved rate of operating expenses to sales, were the significant factors contributing to the improved margin results.

Our net interest expense was lower due to the retirement of $50 million of our debt near the end of our second quarter. The effective tax rate for the quarter was 36.7% compared to 35.5% in the third quarter of last year. The higher rate is primarily due to a higher effective rate for state taxes in this period and U.S. tax law changes which have eliminated certain deductions related to foreign income. Year-to-date, our tax rate is 37.2%, and we anticipate this to be our tax rate for the entire year.

Our balance sheet remains solid with shareholder's equity at over $480 million and a current ratio of 3.3 to one. This ratio is consistent with the prior quarter and above the prior year level due to the debt retirement mentioned previously. Our return on assets rose to 19.8% for the quarter compared to 18.3% for the prior year quarter. As anticipated, inventory levels decreased to $10.4 million in the quarter primarily due to the burn off of special inventory buys made towards the end of the calendar year.

We expect inventory to decrease another $10 million by year-end. Projected inventory levels at June year-end should be approximately $10 million above our June 2007 levels. Included in this increase of course is the additional inventory related to the Vycmex acquisition.

Accounts receivable and day sales outstanding of approximately 40 days remain competitive. Cash provided from operations for the quarter was $11.3 million compared to $28.9 million for the prior year third quarter. This change in the third quarter reflects variability regarding the timing of certain income tax and accounts payable payments. Year-to-date, cash provided from operations is virtually double that of the prior year.

Cash used for financing activities in the quarter included $12.2 million related to our ongoing stock repurchase program and $6.4 million of cash dividend payments. During the quarter, we repurchased 435,000 shares of our common stock in open market transactions and have remaining authorization to purchase 1.055 million additional shares. We believe that our fourth quarter sales will put us towards the lower end of our annual sales guidance of 2.1 to $2.18 billion. As we enter the final quarter of our year we are tightening our annual EPS guidance to $2.15 to $2.25 per share.

Now here is Dave for final comment.

Thanks Mark.

Now I guess there you have it. It was a mild disappointment in sales and we brought solid earnings out of it. As we move forward we're going to have to expect to get more sales from non-traditional sources. Many of the unexpected disappointments are simply opportunities in disguise and to view this from a positive aspect, I would expect that this market climate would increase our M&A opportunities. We are going to adjust our sales to make sure we get through this temporary storm and stay on course for the long haul.

Amanda, we'll open it for questions now.

(OPERATOR INSTRUCTIONS)

Your first question comes from Matt Duncan with Stephens.

Good afternoon, guys.

Hi, Matt.

Hi, Matt.

tHE First question I've got is you alluded to some of the additional Markets where you're seeing some weakness and it sounded like most of them were still kind of housing or transportation related so I'm wondering if you can maybe flush out for us a little bit kind of what some of these additional end Markets are that are starting to show weakness and maybe the timing of when you started to see that and kind of what your customers in those Markets are telling you to expect for the next year or two?

Hi, Matt, this is Ben.

I guess we track SIC codes and looking at the largest category, which is also the most general, industrial machinery and equipment; we had been tracking from the June quarter to September through December in an upward trend and turned down sharply in the March quarter. So look at that one in general as a general economic indicator for the markets we serve, and that one turned down. A number of other ones, like I mentioned earlier, the forest products both pulp and paper and lumber and wood products turned down; transportation equipment turned down; a number of the other smaller categories for us. We did have some positives with primary metals, food, the cement industry, so some positives, but the negatives definitely out weighed the positives.

And at this point and I don't know if you're really ready to comment too much on fiscal '09, but we're only a couple of months away from the start of your fiscal 2009; maybe even if you just wanted to talk about the rest of calendar '08 what are your expectations for sales growth? Is this kind of low single digit, 1% to 2% kind of the range we need to be thinking in or do we need to maybe think that there's even a possibility things could turn negative? I'm just kind of curious based on what you're hearing from your customers what you guys are thinking about the next call it 12 to 18 months.

Yes, Matt, this is Mark.

Actually, we're in the middle right now of our annual budget process when we look at our fiscal 2009, and it would be premature, I think, for us to comment on what that is until we complete our stuff.

Yes, and for the fourth quarter and Mark gave you guidance toward the lower end of the sales.

Okay, it kind of implies maybe a 2% type number for the fourth quarter. Okay.

Next question I've got is given that things are kind of getting more challenging a little bit quicker than maybe you had thought, can you talk about some of the steps that you're taking to right size the business from an expense standpoint for a more challenging economic environment? What are some of the things you guys are focused on to help continue the earnings power of your business in this revenue environment?

Well, it's the traditional stuff in that it's simply absorbing attrition where we can rather than replacing every loss. It is watching the assets, it is watching discretionary spending. It is looking at the strategic programs that are out there and determining which ones have immediate impact in trying to decide whether the longer term ones--which ones we fall back on, which ones we don't. We're not pulling back on government, we said that we're still solidly in that. That's going to be a long term key segment for us but we have a number of things that we have been doing as we have been putting our toe into the water in certain market expansions. We can fall back on some of those and have some areas for conservatism here.

Sure.

Dave, kind of on the government point there had, are you guys still thinking government can do kind of up $25 million this year versus last?

Yes, Matt, this is Ben. We'll be in that range. We'll be slightly under that probably; and we'll end up I think we said we were at $50 million last year, we'll be in 70-75 at the end of the year.

Okay and then two more quick things. First, Mark what were the sales from Vycmex in quarter, what were their revenues?

Of the 1.7% sales increase that we had through the quarter , Vycmex was a little under, between 0.2 and 0.3 percentage points, so a little under 1.5 million.

Okay, and then last thing, Dave, you alluded to this a little bit but the acquisition landscape. It sounds like you're thinking maybe M&A could get a little bit easier in a tougher economy. Are you seeing signs of that yet or is that just kind of what you think you might expect to see if things do get meaningfully tougher here?

We have seen good signs of it. I just went over with our board today a pretty good list, and not only are we seeing signs of things opening up, we're seeing some of the multiples come down and being a strategic buyer with pretty good balance sheet, we feel like we're one of the key players to be able to take advantage of some of this.

Okay, thanks for the comments, guys.

Thank you.

Your next question comes from Adam Uhlman with Cleveland Research.

Adam, you there?

Adam?

Can you hear me?

Yes, okay.

Sorry about that. Mark, a question for you on the SG&A line.

Pretty surprising performance here. You pointed out depreciation expense and benefits expense helping hold that flat year-over-year. Could you talk about some of the other bigger categories in the SG&A line as well, how did that perform?

Well, we had just I'll call general broad based decline on many of the categories within our SG&A expenses and so we continue to demonstrate that we're going to be focused on cost controls. Obviously within any of the numbers you have some pluses, you have some minuses within the numbers, some of the pluses would be obviously we're adding SG&A for the Vycmex acquisition; SG&A does increase because of the Canadian currency translation, it helps on the sales topline but it also increases the SG&A expense at the same levels for that too.

So--and as we mentioned I think at the last quarter, where we were seeing some increases in let's say bad debt reserves and items of that nature, we saw a slight increase in that again for this quarter as well. So I think those are some of the main things that we're pluses and minuses, but when you ended up basically almost at the exact same total dollars as we did a year ago in SG&A.

Right. Okay, and then the second question here for you is we've seen steel costs go up quite a bit recently. Could you talk about what you're hearing from your vendors in terms of pending price increases or have you seen any announcements set so far here into the fourth quarter?

We haven't seen anything outrageous. We're seeing the normal price increases on a normal schedule with maybe a slightly higher percentage increase than the last couple of years.

But I think we still are seeing basically just like Ben said a normal schedule. If a supplier is doing a once a year increase we're still seeing at about that same anniversary date as a general rule.

Okay. Great, thanks.

Your next question comes from Jeff Hammond with KeyBanc Capital.

Hi, guys.

Hi, Jeff.

Just to follow-up on the raw material issue, do you think or what's your level of concern that the price increases get harder to put through in this tougher environment?

We haven't--I guess in the last couple of years, we haven't seen it anymore difficult than it's been, so really no change in the environment there.

And Jeff I think we've gotten more disciplined in doing it. So that's--it comes with the territory, and I think the world is getting used to a few prices going up these days if you've filled up your gas tank lately.

And then any--in terms of the deceleration in the growth rate, any major variation between your national account customers versus your smaller customers?

Jeff, we've actually done--we've done well on the national account piece, better than the remainder of the account base.

And would you say that as you talk to your customers would you say that it's more that they're reading the same headlines as you and they're sitting on their hands maybe tightening inventories or that they're actually seeing a particular weakness?

I think a little bit of both, and I guess back to your earlier question too on the national accounts versus the others, we can--the national accounts are something that's easily identifiable segments of business and the other piece is more of the broad base, so--

Jeff, just as a comment. We've sat around and compared this a little bit to October of 2000 where we came out of that quarter feeling very good and all of a sudden things dropped pretty quickly. Back then, inventories had gone up pretty high. Right now, manufacturing inventories have started to move up but haven't spiked up and I think that people still have 2000 fresh enough in their minds that they're pulling in their horns as demand decreases rather than trying to go into denial. So we're seeing is some slowdown with the demand this time and I don't think we're going to run into that extremely high level of inventories that we did last time.

Okay, and then I guess final question.

Looking at some of your peers and competitors in the industrial distribution space, it seems like their quarters maybe held in a little bit better relative to previous quarter trends. I know it's hard to gauge share quarter to quarter but I'm just wondering if you see any aberration within the quarter or market share dynamics that might explain that?

Jeff, good question and one we would expect to get. We don't really comment on our performance relative to other industrial distributors. We believe our results are in line with the economic indicators that we track and they're in line with a number of our suppliers' results for the quarter also.

Okay, thanks, guys.

Thank you.

Thank you.

Your next question comes from Holden Lewis with BB&T.

Are you able to hear me?

Yes, Holden.

Talking about the gross margin for a bit, this was the first quarter that you had managed to see sort of year-over-year gross margin increases. Can you talk a little bit about the degree to which pricing may have contributed, the degree to which maybe the pre-buy may have contributed and then talk about maybe Q4 and maybe sort of how we should be thinking beyond that in terms of your rebate in light of some softer revenues, perhaps softer inventory buys, if you could just give a little bit of color on those topics that would be great.

Okay, Holden, yes, this is Mark. Let me try to knock those off one at a time here.

As we went into fiscal 2008 even over last summer we had stated we thought we would get 27.3% gross margin percentage that we were knocking on that the first two quarters and in our guidance after the December quarter, we talked about that, that was our expectation in the fourth quarter too--or the third quarter as well, and so we were able to accomplish that. Some of the reasons we did accomplish that the is that yes, we did get better for point-of-sale pricing and saw more stabilization with that; and so--compared to a year ago, so that helped some. The situation with the year-end special buys, that calendar year blips we have every year, so I don't think that's really had a change this year compared to prior years, we see that impact on a regular basis. It's almost a seasonal thing for us.

As we go forward then looking at into the future for the impact of supplier purchasing incentives, that's something that we're talking a lot about right now and that's something that is one of the things that we want to make sure that we can maintain and/or expand our benefits there but with this environment that we're going into maybe a slowing economic environment that definitely will be more challenging. I think I got all your questions there.

Yes, I think that covers it well.

Thanks.

Did you get the rebates this year that were equal to last year and were those sort of on par? Did you improve them because this wasn't exactly an easy year, but how did the rebates trend this year versus last year?

I think we're trending stable to a little bit up, but it may be on an overall basis for the entire year it might have an impact of 10 basis points, something like that.

Which is pretty good because if I remember correctly I think in fiscal '07 you had done a lot of pre-buying and there's a bunch of stuff in there that I think really boosted the gross margin. I think when you started the year you weren't necessarily assuming getting flat rebates was considered to be somewhat of a task if I remember correctly.

True and as you know on these pre-buys when we have supplier purchase incentives on those, that goes on to the balance sheet until those inventories are then sold off in the future and then that rolls into the income statement.

Yes, Holden, it's not just a similar comparison year-over-year. Our purchasing group has also gotten more suppliers to jump in with us with regard to support--with pricing support for various reasons.

Okay. And did you give any guidance on the fourth quarter gross margin? If I missed that I'm sorry.

No, I think we're going to stay consistent with the overall annual guidance of around 27.2% to 27.3%.

Okay. And then lastly and really quickly in conjunction with your comments about the general economy, are you seeing collections weaken or anything of that sort?

I think the short answer is no, we have not. But I do think in the overall economy--we have this fiscal year, we have seen an uptick in bankruptcies from customers than in the last two or three years, where those were minimal, and so that's impacting us. We have--we are looking very closely at our credit exposure and credit situation to make sure that we don't have a deterioration that we're not on top of; but as of right now we have not seen a deterioration. Our aging of receivables is better today than it was a year ago, and better than two years ago. So we really haven't seen a noticeable shift, but we're very conscience of being on top of that.

Yes, Holden, I think and Mark maybe taking less credit than his guys deserve because as the credit market tightened, we tightened our controls, and so it didn't just happen that this isn't getting away from us. We're certainly managing this thing properly and I give a lot of credit to his folks.

Okay, thank you.

Thank you.

Your next question comes from Richard Marshall with Longbow Research.

Richard?

Hello?

Is your mute button on, Richard?

Sorry.

That's okay.

Can you hear me?

Yes.

Okay, great.

Just a few things, a lot has been covered already but just wondering if there were any particular product lines that did worse than expected this quarter?

No.

No, nothing that stands out.

Okay. So you can't point to any specific products that sold more slowly.

No.

Okay.

You had mentioned automotive as a particularly weak category this quarter. I'm just wondering to what extent the American Axle strike might have played into this or that it might be more one-time in nature that we could look towards improvement in that way in the near future.

Richard, I'm sure that there's some effect with the strike seemed to have a trickle down effect, but I think that general low sales of vehicles and some of that specific customer issues we've had really played more into it than the American Axle, I think it's a one-time event.

Okay. Also I guess in the past a lot of distributors have seen downturns as a time to maybe pick up share. Do you see any opportunities out there to maybe pick up some share during this period?

Well only to the extent we make acquisitions we'll pick up share, but share typically doesn't trade hands in this industry that easily unless someone truly stumbles in their service, so I don't see the economy driving that. The only way we would see the change is if we picked up more through the M&A.

Okay, great. And just the last thing, I guess you mentioned adding more salespeople in the government business. I was wondering if you were also maybe planning on reallocating any existing salespeople to that business maybe away from other areas?

Richard, yes. We've done that to some extent. We've hired people from the outside as well as redeployed some of our existing sales folks.

Okay. Great, thanks a lot.

Thank you.

Your next question comes from Brent Rakers with Morgan Keegan.

Good afternoon. A couple questions I think on the SG&A. First one just a housekeeping question. Mark, do you have the quarter ending headcount numbers for AIT?

Brent I don't have it here but going off memory it's in our 10Q next week, but I believe our headcount is virtually identical versus a year ago and of course we have the Vycmex acquisition in there too at the same point in time; and so we're still the exact same headcount from June of '07 to March of '08 and the Vycmex acquisition probably added around 60 people.

Okay.

So taking that into account we would have 60 less people in the same stores.

And then seasonally then that does tend to come down from the December quarter to the March quarter, is that correct?

I don't think we normally see that seasonally. I guess we would go back and look at the numbers but I don't think there's anything we can point to to say that's why that happens. It's just one of those things that does happen.

And then you had talked a lot about some different items within SG&A, but you also talked about how revenue fell short to some degree of your own expectations for the quarter. Do you have any sense--put a number to SG&a that pulled back maybe for being 10-15 million shy on the revenue line, how much that translated into the SG&A number?

Brent, I don't have a specific number for that. Obviously that's a big component. When, for instance, various incentive plans that we have throughout the organization are tied to performance, whether it be sales growth, profit growth, many different factors; and so once those factors slow down, then our incentive expense could theoretically go down somewhat and we did see that with lower--I call that part of our lower benefit cost for the organization. But I can't really tie it in and give you a direct link for a calculation on that.

Mark, do you have a sense of if you compare this March quarter year-over-year versus let's say the December quarter year-over-year, what the change was or what the benefit was to Applied in terms of that bonus accrual or that benefit cost?

I have not done that, Brent. I'm sure I could calculate it. I just don't have that here and have not done that analysis.

Okay and then just last question, I mean, you talked a lot in the past about relying heavily on the MCU in terms of a guide for your own business trends and you've typically talked about a 3 to 6 month lag with that. Just kind of scanning the numbers it looks like really the first kind of year-over-year pull back in that has just come in this March month, so it seems like this time, this contraction if you're really in that has happened much earlier. Do you have any maybe commentary as to why that would be the case and maybe make Applied more unique than maybe some of your peers this time?

I don't think you could look at it--well, I think when you look at the MCU, we're looking at the run rate on the MCU and so we would have a lag from that and I think it started--it peaked about seven or eight months ago, I don't have it right in front of me and it's been coming down since then, so I think we're seeing impact of that.

And then I guess one last question then.

When I look at the December quarter for Applied, it looks like you had some pretty good outperformers maybe versus some of the peers in that quarter and then obviously this March quarter looks like it's the opposite. To what level of conviction do you have that when you talk about the further weakness possibly in June--to what conviction do you have that this is not, I hate to say counter balancing a stronger December quarter as opposed to kind of the start of an economic pull back?

That's a great question Brent, and we haven't gone back and looked at that; but perhaps some of our customers did increase inventories in December, ahead of price increases coming in the first quarter of the year. So that's something for us to go back and look at. If you average the two quarters maybe we shouldn't be as down in the mouth as we are today.

Yes, and the other point to make as you know, Brent, as we've talked in the past is that we don't have a lot of visibility into the future since our sales of replacement parts are basically when something breaks, they call us and we send the part for that. So there's not--we don't have a lot of backlog and things of that nature. It's a very random demand, so it's a challenge for us to look into the fourth quarter and beyond with a lot of certainty as you were talking about.

And I'm sorry just maybe one follow-up comment, that if maybe Ben could comment on--I mean I know Ben you talked a lot about specific industries that have weakened and all that. Could we get a better sense of breadth here, are we talking about four, five, six large customers that have really contracted or are we talking about this being fairly broad based?

Yes, I think Brent if you look at as we look at the industry and look at the various SIC codes, where we're down is broad based; and as I mentioned earlier, our national account business is up more than the remainder of our business, so it gives us the indication it's more broad based than any specific customers.

Great. Thanks, Ben.

Thank you.

Thanks, Brent.

At this time, there are no further questions.

I'd now like to turn the call over to Mr. David Pugh for closing remarks.

Great, Amanda, thank you very much and, gentlemen, thank you for your questions today.

Just remind you a pretty good team working here that's working on this. We're not hedgehogs, we have a few tricks to pull, and we're working at all levels on this so stick with us. Looking forward to next quarter. Thanks a bunch. Bye-bye.

This concludes today's Applied Industrial Technologies third quarter 2008 financial earnings teleconference. You may now disconnect.