Applied Industrial Technologies Inc (AIT) 2008 Q4 法說會逐字稿

Good afternoon. Welcome to the Applied Industrial Technologies fourth 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 is being recorded. If you should have any objections, you may disconnect at this time. Applied issued its fourth quarter earnings release earlier this morning before the market opened. You may retrieve a copy of the release by visiting the Company's website at www.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 would like to remind everyone that there will be discussions 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 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 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 details and Ben Mondics, President and Chief Operating Officer, who will discuss operational activities. I will now turn the call over to David Pugh, Applied's Chairman and CEO.

Thanks Michelle, and thank you for you folks out there who are joining us today for our year end call. I'm pleased to announce that our fiscal 2008 was another record year for the company. Our business focused on profitable sales growth and yielded in our sixth consecutive year of record sales and earnings. While the economy did soften a little bit in the second half, the things that were under our control such as inventory management, other asset management, productivity improvements, cost controls, all were handled well to post strong financial results that you've seen. The sales did go up to $2.1 million, a 3.7% gain in 3.7% gain we took earnings per share of 13.5%. So our investments in information technologies and employee training programs continue to give us good operating efficiencies. The productivity that we've shown as reflected in the historically low SG&A as a percent of sales that we have shown for the year, we were able to generate excellent cash at $110 million. Gives us a good cash balance at the end of the year, and allows us to do strategic things. In addition we raised the dividend last year to 25% to $0.60. So cash flow is going very well and that will position us to continue to run this company on a strong basis. I'm sure you noticed that the top line of the sales was a tale of two significantly different halves.

The softness that we experienced in the second half relates to a continued decline in some market segments that are key to us. Today's market is unusually dichotomous with regard to strength of segment. It's obvious that anything related to housing is a problem. Anything related to energy is in a boom situation. And Ben will add more details about our market segments and their effect on the top line in his comments. But operationally I want to assure you we are strong and we continue to improve. The cost controls, the pricing discipline that kept our operating margins at great levels, and that, coupled with excellent asset management has given us exemplary cash generation. So while the sales volume is of temporary concern, the rest of what we manage is under control and we feel like we have the plans to mitigate the the market challenges that we are going to face in fiscal 2009. So here's Ben to give you a few thoughts about that.

Thanks David and good afternoon. In last quarter's teleconference, we made the statement that our indicators were pointing to additional slowing in our fourth quarter. The indicators turned out to be true, as we saw continued issues in a number of the key industries we serve. Despite a strong headwind, our associates worked hard to deliver good sales and earnings. The key to understanding our performance in the second half of 2008 lies in the industry mix of our sales. We have been very successful over the years in certain markets that match up well with our product and application knowledge. Today, some of those markets are suffering, primarily due to the housing markets and they have influenced our sales line. Not surprisingly, we saw decreased sales to the lumber and wood products industry. Through the second half of our fiscal year, our business to that segment was down double digits compared to the same period of 2007.

Mirroring that decline was the performance of our customers in the transportation equipment segment. Some but not all of that sales decline was countered by strong increases in power generation, primary metals, food and metal mining. Government sales also continued to produce double digit increases and totaled over $72 million for the year. Our sales force continues to expand their efforts to include all types of government entities, local, county, state, and federal. Catalog sales continue to grow and we enjoyed a strong double digit increase compared to last fiscal year. Our new 1100 page 2008, 2009 catalog began distribution to customers last month. The new catalog includes more than 40,000 products of all types. During the year, we signed a number of new supplier agreements, including Dixon Sanitary, a maker of stainless fittings and valves for the food and pharmaceutical industries and DeWalt Industrial Tool Company, a manufacturing of professional tools and accessories. Last month we announced authorization by NSK Corporation broadening our bearing product line. Our national account business continued to perform well and was up again this year.

Conversely, we lost some ground at the non-contractual side of our business, which we attribute to our served markets as mentioned earlier. For the fiscal year, our US fluid power subsidiaries increased their sales by 2.6%. Although our Canadian sales for the year increased 5% in US dollars due to the impact of the currency translation factor, we continued to have our challenges in the forest product industries. Our same store Mexico and Puerto Rico operations continue to perform, improving annually by 1.2 and 4.6% respectively. Looking into fiscal 2009 we believe some markets we serve will continue to be soft. The latest economic indices including the ISM purchasing manager index at 50 and manufacturing capacity utilization below 80 are consistent with sluggish growth in the industrial economy. We believe that the economy will remain soft through our first and second quarters, but overall for the year, we should see a sales increase of between 2 to 7%.

In anticipation, we are continuing our efforts to keep expenses and assets under control, and we'll balance our operating cost with our sales to position ourselves for a fair return on assets. At the same time, we will continue to invest in those areas that offer opportunities for profitable growth in the short and long term. Finally, we have been aggressively pursuing acquisitions in the second half of 2008 and completed the purchase of two Mexican distributors, Vycmex in December and Enol in June. As a result, Applied Mexico is now the largest bearing and power transmission distributor in Mexico. In July of 2008, we announced an agreement to purchase Fluid Power Resources and seven of its fluid power distribution businesses in the United States. Once this acquisition is completed, Applied will be the largest fluid power distributor in North America.

It is gratifying to achieve our 6th consecutive year of record sales and earnings. We have ample opportunity for continuous improvement, better ways to run our company for the benefit of shareholders. We made a lot of progress in our efforts to improve our annual operating margin over the last six years, improving from 2.5% to 7.3. That improvement was generated by a focus on all aspects of the business, including profitable sales growth, margin improvement, expense control, and asset management. These efforts will continue in fiscal 2009. Our operations in the United States, Canada, Mexico, and Puerto Rico as well as our food power subsidiaries have all contributed to this success and I thank all of our associates for their efforts. Keeping our focus on value creation, we expect to see a good year ahead.

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 insight for our fourth quarter and fiscal year financial performance. We had 64 and 63.5 selling days in fiscal 2008 and 2007 fourth quarters respectively. For the quarter, total US service center sales were flat compared to prior year, and US fluid power operations sales were up 4.1%. We estimate that overall sales were positively impacted by passing along supplying price increases of approximately 1 to 2 percentage points. Therefore, the volume and mix of sales at our US service centers was down for the quarter. Sales in our Canadian operations improved by 2.4% in the quarter. This represents an 11.4% increase due to currency translation, offset by a 9% decrease from volume mix and pricing. The decline in Canadian sales and local currency was fully attributed to our Canadian service centers as our fluid power businesses sales in Canada were relatively flat.

Our same store Mexican operations grew 3.7% in the quarter, with additional sales of $2.4 million attributable to the results of our Vycmex acquisition. Our Puerto Rico operations also reflected a 4.1% increase in the fiscal 2008 fourth quarter versus the prior year comparable period. During the quarter, our number of operating facilities increased to 459 locations due to the inclusion of the ten Enol locations acquired at year end. These Enol locations will begin to be included in our operating results starting July first. Our product mix during the quarter was 20.2% fluid power products and 79.8% industrial products. Our gross profit percentage for the quarter was 27.0%, slightly lower than our annual guidance but ten basis points higher than last year's fourth quarter. Overall for the year, our gross profit percentage was 27.2%, which is consistent with the prior period. Our selling distribution and administrative expense as a percent of sales was 19.7% for the quarter. The absolute dollar increase in SD&A for the quarter was only 0.1%. We continue to invest in long term sales growth, productivity improvements and cost control opportunities while still keeping SD&A increases at or below the rate increases.

Our fourth quarter operating margins were consistent at 7.3%, same as in the prior year's fourth quarter. This represents the fifth consecutive quarter our operating margins surpassed to 7% level. The effective tax rate for the year came in at 7.1%, slightly below our projection of 37.2%. Our balance sheet remains solid with shareholder's equity at $502 million. Our pre-tax return on assets for the quarter was stable at 20.1% compared to last year. For the full fiscal year, we achieved a return on assets of 19.5% versus 18.1% for the prior year. Our June 2008 inventory balances were $10.8 million higher than last year's June 30 levels, primarily due to the impact of our acquisitions. Accounts receivable and days sales outstanding of approximately 40 days improved over the prior year but are not currently at our internal targets.

Cash provided from operations for the quarter was a solid $49.4 million compared to $38.2 million in the prior year fourth quarter. In each of the last four years, our ratio of cash provided from operations to net income ranged from the low of 0.828 to a high of 1.4621, demonstrating our strong cash generating characteristics. Our cash position will be impacted by the previously announced acquisition of FPR for purchase price of approximately $169 million. We plan to fund this through a combination of drawing down our existing committed bank revolving credit facility and from our available cash. We expect to continue to be active with additional acquisitions and further stock buybacks in fiscal 2009 even after we complete the FPR deal. Since we have not yet closed on the FPR acquisition, we have not incorporated them into any of our fiscal 2009 forward-looking information. All guidance and forward-looking information reflects Applied as an entity today. Once we close the FPR acquisition, we will revise our guidance as appropriate. We provided annual financial guidance for fiscal 2009 in this morning's press release for sales increasing between 2% and 7% to approximately 2.13 to $2.24 billion, with earnings per share in the range of $2.20 to $2.40 per share. We are not forecasting any gains on sales of property or other non-operating events for fiscal 2009. We expect fiscal 2009 gross profit levels to remain comparable to the fiscal 2008 annual rate of 27.2%.

The rate of supplier price increases is uncertain at this point, and additional escalations could impact our ability to pass these along to our customers. We expect to realize purchasing incentives from suppliers at a rate similar to those achieved in 2008. We will continue to work our initiatives to improve pricing and freight recovery throughout 2009. While our aim is to keep a continued tight control on our selling distribution and administrative expense growth in 2009, our expectation is that will grow at the same rate as sales. Therefore, we are anticipating a stable annual rate of SD&A expenses as a percent of sales when comparing fiscal '09 to 2008. The overall growth in SG&A is being influenced by continued investments in initiatives that will help us build future profitable growth such as our initiatives to expand sales to government entities.

For fiscal 2009, interest expense net of interest income should be flat compared to fiscal 2008. We also expect our overall tax rate for 2009 to be in the 37.0 to 37.5% range. Depreciation expense should remain in the 12.5 to $13.5 million range for 2009 also. Due to our recent Mexican acquisitions, we expect fiscal 2009 amortization of intangible assets to increase to approximately $3.1 million. From a cash planning perspective, we expect property additions to be in the computer and information technology area with total additions in the 10 to $12 million range. We plan to continue to purchase stock for treasury periodically throughout the year, depending on market conditions and we'll continue to monitoring our quarterly dividend rate for consideration of further increases.

We will also continue to pursue acquisitions that match our stated growth strategy of growing profitably in North America with our current product domain. Now here's is Dave for some final comments.

Thanks Mark and Ben and that's pretty much it. Solid performance, solid forecast for next year. We feel like we have the management structure in place to get us room for each challenging market that's going to be out there. So at this point, we'll open the floor for questions. Michelle, please take it.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Jeff Hammond.

Good afternoon, guys.

Hi Jeff.

I guess first I was wondering if you can give us more color -- besides just the transport and the forest product weakness, it sounded of your top 30 end markets or SIC codes that you are seeing kind of broader weakness. Can you just talk about some of the other markets that you are starting to see slow down?

Jeff, those are the two markets that we saw the deep downturn and maybe even like in the lumber wood products area, we actually saw an acceleration and the downturn where we started to see it slow down around the December quarter, the slow down accelerated through March and June, which was difficult to predict, and we probably had six quarters now where that market segment has been down. Automotive is a struggle also. The others are slight variations from -- throughout the year and the quarters, December, March and June quarters. So nothing really significant, but probably about half of the top 30 industries we serve were down, and the other half were flat to up.

So is it fair to say that the deceleration on a growth rate, March quarter to June, it's further acceleration in those two end markets?

From all the data we have and everything we look at, that's best we can tell. We are still struggling in western Canada in the forest products area and anything related to housing and light vehicles. So that's what we attribute it to.

Okay. And just on the guidance, I think at the midpoint you are calling for 4.5% growth, which is a slight acceleration from what you just put up, and it just seems like the macro cross currents are getting broader versus narrower and I want to understand what you think, gets worse what gets better, how to get comfortable with that range of growth rates.

We are seeing some markets showing signs of life. As a matter of fact, in the drilling area in Canada, we are seeing some improvement there. Still some challenges there with wage pressures and such, but we are seeing some improvement. And then some of it really -- if you look at the full year, we are expecting some improvement as the year goes on, especially in housing, should be better as we go throughout the year. In addition, built into our numbers, we have additional government growth. We are looking for growth from a dollar standpoint in '09 similar to what we had in '08, and then we also have our two Mexican acquisitions in the numbers also.

Okay. So in terms of the makeup of the growth rate, you would expect some acceleration in the back half of the year?

Yes.

Okay. And then final question. I know the deal hasn't closed but can you put parameters around this fluid -- this new Fluid Power Acquisition in terms of what you are initially thinking in terms of accretion, et cetera?

Jeff, this is Mark. We are really not prepared to talk about that now, and as we stated in our press release in mid July when we announced this, we do expect it to be accretive to us and that is our expectation. But we don't have anything that we can really hang our hat on right now.

When do you expect that to close?

We are working hard with the owners to try to get that closed as soon as possible. As you may or may not know, we did file for Hart Scott Rodino, mid July, and the government has given us an okay for that, and so we are working with them now to finalize the final deal points at this point in time, and we are working hard to try to close it as soon as possible.

Okay. Thanks guys.

Your next question comes from the line of Matt Duncan of Stephens Inc.

Hey guys.

Hi Matt.

The first question I've got is last quarter you mentioned that you saw a dramatic slowdown in sales to industrial machinery equipment. That SIC code. Did that continue this quarter?

Still down, slightly down a little bit more than the March quarter.

What's kind of behind that softness?

We see that as a macroeconomic indicator. It's a very general category.

So I guess kind of built into your guidance, would you expect that -- that's a big category for you guys. Do you expect that to pick up as the year goes on then?

Yes.

Fair enough. Mark, can you address the impact of supplier price increases on gross margin this quarter. I know we've heard from other distributors that weigh on gross margin a bit, maybe more than normal price increases. Have you seen the same thing?

A little bit. What we talked about in the conference call is up to about 2 percentage points we thought it was from supplier price increases. If you go back and look at our previous conference calls this fiscal year, that amount is higher. So as we March through the I am year the impact from from a low of 0.5 percentage point in our first quarter and last quarter was I think around 1 to 1.5 percentage points and now we are up to 2 percentage points. So we are seeing a slight marching forward of that and we would expect that the rate that we saw in the fourth quarter which was up to 2 percentage points impact, may be the rate that we continue walking into fiscal 2009 with, as we'll start to see things continue maybe have small impacts as the inflationary drivers of the energy as well as raw material costs continue to impact our suppliers and the amount of price increases that they pass along through the distribution channels.

Matt, with regard to your comment on its impact on margins, you are totally correct. Typically it does have a downward impact on margins in the short-term. To the credit of our guys that we have mitigated that somewhat during the quarter. I think the plans we put in place did a good job to manage that versus historical precedent.

Okay. If I'm hearing you then you think these price increases will continue -- there's a little bit of drag on gross margin but it Ges better as the year goes on?

I think that is fair. The more price increases you have, the more the potential drag there is on margins because of the tougher it gets to continue to pass these along to our customers although that is our number one priority is to pass things along.

Okay. From a competitive point of view you look at the growth rate that some of your bigger competitors are putting up right now, they are growing faster at the top line. I'm curious if you have any sense is that end market differences or do you feel like you might be losing a little bit of share?

Matt, our belief is that we are not losing market share. If we look at the contractual agreements, we are ahead more so than the remainder of the business. So the accounts that we can identify and the contractual business we look good. Looking at it by geographical area, looking at it by industry, looking at it by customer size, all we do not believe we are losing any share and it's really as I've said earlier, more of a case of mix of industries that we serve where we are strong, and we are not going to be able to turn on a dime, but we have actions in place to redeploy assets as we are doing with the government piece to grow in areas that we see is good growth for the midterm and long term and some industries where we are not strong right now over time we'll be stronger. But it doesn't turn around quickly at times, not quick enough for us.

A few more things here. First on the SG&A line, you guys basically had flat sales sequentially and you were able to cut another roughly $2 million out of that line. Did you have any branch closings? Was that just small stuff that resulted in that decrease?

We did not have any branch closings. It's really the traditional stuff, and watching our expenses, headcount through attrition, possibly and looking at those market areas that are suffering and adjusting our cost in line with that, watching the assets, discretionary spending and also at the same time, making sure that we are investing for the future and like I said with government as a great example, we continue to invest in the government arena. We have not pulled back on that at all. So any of those areas where we see that we can see revenue increase, we are continuing to invest. Those areas that are weak right now, we are watching the expenses.

Okay. Mark, have you said what the annual sales are?

I don't know if we disclosed that. The Enol sales they'll start in fiscal '09 but from the combined perspective of Enol and Vycmex for the apples to oranges '09 to '08, that's going to add 1.5 percentage points to our sales.

Okay. Then last thing here and I'll jump back in queue. Can you give us a little bit of insight into your fluid power business, and talk about your position in that marketplace? How many of your locations have fluid power? What's your sales growth been now that you guys bought FPR and it's becoming a larger piece of your business? If you can just address that, I would appreciate it. Thanks.

Okay. I'll go first here. First of all, it is obviously becoming a larger part of our business, but still very, very fragmented, and we continue to expand our product portfolio, continue to expand our geographic footprint but still a tremendous amount of room for growth there. Mark, anything you want to add to that?

I think from the fluid power perspective we continue to see growth in sales of fluid power components through our normal service channels as well as the separate business channel and with this acquisition that we are still working on for FPR, it will give us more and more opportunities to continue to take advantage of the marketplace.

Okay. Thanks.

Thank you.

Your next question comes from the line of Brent Rakers of Morgan Keegan.

Good afternoon. I wanted to follow up on the market share question, and I understand that the national account customers, the revenue from those is up year-over-year but I'd like to take that a different way. Can we get some sort of indication in terms of the number of national account customers, what the wins, the new customers there might be versus customer losses on that front over the last six to nine months?

Without getting into any specifics, Brent, you can look at it two ways. You can look at the national account business and look at the current business we have and how that's doing. So you can have current customers that are doing well or doing poorly. That's one way. The other way is to recent wins and losses and we look at it both ways. Comments are to cover both viewpoints and looking at wins and losses within the current quarter, within the last six months to 12 months, we are winning more than we are losing.

To expand on that, would that be roughly in dollar terms too so your wins are the size of customers that are offsetting the size of the customers of the losses?

Yes.

Great. And then just to clarify, again I think I'm like some of the other questioners trying to understand the differentials between your growth rates in the last couple of quarters and some of your peers. Could you expand upon the size of some of your end markets that are weak particularly the forest products business and also the auto sector? It doesn't seem down double digits 10 to 15% kind of number would drag the overall sales growth down as much below your peers numbers as it is.

I think Brent, from the overall sales perspective and the total forest products arena, that is about 15% of our sales. And in the transportation arena, which is basically the automotive and light trucks, that's about 4% of our sales. So combining those, I guess 19%.

And then Mark could you remind me, you said down double digits for example in forest products. Can we put more color? Is that down 25, 30% double digits, are we talking 10 to 15?

Low double digits.

But we have had five quarters of decline there.

Okay. And then I guess last question on the supplier price increases, it seems to me that the announced price increases from the majority of your suppliers have averaged in the 5 to 10% range for anywhere from July 1 to August 1. Obviously, there is typically some push back on that, but it would seem to me that your inflation targets of 1 to 2% similarly levels going forward seem very low. Is there something different that may be implied in your revenue guidance for the year?

No. I don't think so. When we look at the impact the supplier price increases on our sales, we have to look at that from a couple of ways and how I view those things is that generally about one half -- under one half of the announced supplier price increase is he top end of what we can expect to see within our arena for what we are selling compared to the prior year. So when I see those numbers of the price increase percentages, I go back and I look at what is the weighted average impact on the actual products that we sell because those increases from the suppliers, they are painting a broad brush and we don't see those increases on all of the products we sell. Some are more modest. Some are bigger and it depends how much we sell of each product as to what the impact is for us. So we see a smaller impact of those things and then of course we then fight the battle of passing along 100 percent of that price increase to all of our customers from a margin perspective too.

Mark, maybe one follow up to that. Obviously different industries, but similar metal content and petroleum based products and some your suppliers but you look at your MSE and your fastenols seeing 5, 6, 7% collective price increases and you are seeing only a couple percentage points. I'm confused about the disconnect there.

A couple percentage points is really what we realize in our sales, and I think as Mark alluded to, it's a very complicated analysis to see what we realize as opposed to what is announced.

Okay. Great. Thank you very much.

Your next question comes from Richard Marshall of Longbow Research.

Good afternoon.

Hi Richard.

Hi. I have a question about your operating margins. Do you think the 7.3% number is sustainable looking out into '09?

Yes. I think that is exactly what we have in the concepts that we have in our projections and guidance that we have going forward.

Very good. And seems like your comments about the government business has been up beat. I'm curious about what you see the impact of the change in administration having on your government business?

We are not going to make any political statement, but no matter which party wins, we see tremendous opportunity in the government arena.

So basically no impact depending on --?

We have such a large opportunity for growth, that it shouldn't have an impact on our plans.

Okay. Now looking a little bit at your acquisition strategy, from a geographic standpoint are you targeting North America versus Mexico at this point or can you flush that out a little bit?

We have opportunities in all geographic areas. We are looking at both fluid power and the bearing and PT side. Some of it is proactive, some of it is reactive. We have geographic holes we need to fill and our business is still so fragmented that we have a lot of opportunities and we are looking at what matches well with our company culture and meeting our parameters for where we are looking to grow.

All right. And just the last thing. You mentioned that you expect to continue to repurchase shares. Is that just to counter shape creep or do you expect to fulfill the remaining shares that remain on your current authorization?

A little bit of both. We'll be opportunistic out in the marketplace and we'll see how things are going with that. But one of the core objectives is to try counter the share creep but we are looking out there to be active in the marketplace and if and when we would use a lot of those million shares buy back thing, we would then ask the board for considering another reauthorization.

All right. Great. That's all I have. Thank you very much.

Thank you.

Your next question comes from the line of [Brian Kaufman of Atlantic Investments].

Hi guys. Thanks for taking my questions. I wanted to ask you a little bit about the authorization for NSK that you mentioned. How did you come to distribute for NSK and how were they doing it previously? What is the opportunity that you see with that product line?

Interesting question. We have to be careful how we talk about this, but we talked to NSK for quite a while with regard whether it makes sense for the two of us to get together and we felt the timing is right. As we continue to look at global expansion for ourselves, they are a global supplier. This has nothing to do or negative comments about our current suppliers. But we want to make sure we are at parity at least at parity with what competition is offering in the marketplace, and we'll utilize that accordingly.

Would the NSK product line have the same kind of margins you have?

We don't comment on margin with regard to products and suppliers.

But I think it would be fair to state that we don't expect any significant changes in the overall margins because of NSK being part of the team here.

I think overall to use a financial term, we look at the authorization as being accretive to sales and earnings.

And just to go back to the question, can you talk to us about how they did it before? Are they still going to continue to distribute the way they did it before and also through AIT or are they giving up some distribution to be with AIT?

No. They operate very similarly to our other suppliers, and they have other distributors for their products.

Okay. Great. Thank you. That's all I had.

Thank you.

Your next question comes from Jeff Hammond of KeyBanc Capital.

I wanted to come back to the sales guidance. I know you said in the past historically you guys correlate pretty well to capacity utilization which has been been stagnant to coming in, so I guess it just seems things on the margin are getting more challenging so I'm struggling to understand the reacceleration. Is it optimism into the second half, or do we indeed see some better pricing dynamics into fiscal '09? I want to understand those dynamics better.

It's a combination of things. If you look at the chart for PMI and MCU and looking out into the future, they are relatively flat. So if we look at a relatively flat market with some positive signs for improvement and you put in some price appreciation, you look at some of our initiatives like the government and look at our acquisitions in Mexico, you can come up with some numbers in that 2 to 7 range pretty quickly.

Okay. And then just back on the price increases. Given I guess a flatter environment, more challenged environment, are you finding that it is becoming more difficult to fully pass along these price increases?

It's always a challenge, and our team has done a great job of continuing to provide the value that we provide, and customers see the value that we provide. So I don't think it's any more challenging today than it's been over the years.

Okay. Thanks guys.

Thank you.

Your next question comes from the line of Matt Duncan from Stephens Inc.

Hey guys. I wanted to clarify all of this guidance you gave us is all excluding FPR so once that deal closes, you would have clearly much higher D&A after that deal than you are guiding today?

That's correct.

I wanted to make sure I have that right. So if I look at their business on one other front, do their margins look relatively similar to yours in terms of SD&A as a percent of sales, and gross margin or are there differences in the business?

I'd say on an overall basis, their businesses are looking similar to our businesses, although once we acquire them, we will be having a significant dollar amount of intangible assets that we'll be putting on the books that will then require a significant amount of intangible asset amortization on our books. So when you are looking at operating margin and operating profits that they'll be generating for us, it will need to look at the EBITDA margins for them in looking at the benefits that they'll be providing that way. And it's similar to what we are getting with our businesses today.

So your EBITDA margin after you close this deal is going to be pretty close to what has been in the past but your operating margins will be lower because of the D and A that they are bringing with them?

Correct.

Thank you.

Your next question comes from the line of Holden Lewis with BB&T Capital Markets.

Good afternoon. Thank you.

Hi.

Throughout most of this year you did a really good job obviously on the SD&A containment and boosting the SG&A to revenue ratio. This quarter revenue is a little bit flat and the SG&A in terms of sales numbers were up 10 basis points, flattish a little bit up. What happens going forward? You've done a great job limiting the expenses but do you have many triggers to pull to sort of pull expenses meaningfully lower so that even if you get 1 or 2% down revenues, that you can avoid deleveraging the P&L, or at this point are you running pretty lean and therefore with revenues went negative, that would be exacerbated at the bottom line by deleverage?

Holden, looking at a couple of different ways I guess first of all, we continue to see opportunities to control our expenses every day, and the challenge we have is as you stated is to make sure that we are not concentrated on cost control, and we make sure that we are investing properly for the top line. The good news is we believe that our SD&A now is best in class, and we can compete in whatever arena we need to where it makes sense, but we are going to look at making sure that we are balancing the margin with the expenses that it takes to service that business. So we have a good control on the total picture, but our low SD&A gives us the opportunity to be more aggressive if we choose to be.

Okay. Coming out of the last downturn, during the last downturn, you did a lot of stuff in terms of closing branches, head count. You had a lot of stuff that you could or needed to work on to sort of improve the profitability, all of which comes to roost here as the cycle played out. My question is do you have those similar things this time, or are you at such a level like you say of pretty lean SG&A that you really -- there's no more cutting to be done and therefore you just kind of have to weather the volume stuff however it comes?

Obviously we are not in the same position we were back in 2000 or so, and we are running leaner than we were then. But I think as evidenced by our latest quarterly results with flat sales, we maintained and actually grew our operating margin above 7%. So we are confident that we can continue to control in the right places without losing operating margin.

Obviously it makes it harder without the sales increase, there's no question about that. But we are going to continue to focus on these things, but we also want to make sure that we are investing in the business to make sure we have -- we capture the growth opportunities that are there.

To ask it another way, when revenues were growing, your goal was to limit SG&A increases to I think half or less of the revenue growth. Do you have any similar rule of thumb as it relates to revenues coming down?

The short answer is no, but we do have the disciplines in place to manage the costs. And I think as you referred to back in the last downturn, I view that as the time period where we were putting in the disciplines and working the disciplines, and now we continue to work them on an ongoing basis and I would expect us to continue to work them even if the sales levels remain at a low increase amount. So we are going to work hard on it.

And then can you just lastly comment on trends thus far in July and August, you're almost halfway through the current quarter I think.

As we talked about earlier in the conference call, we expect the first six months of our fiscal '09 to be slower than the last six months. We have not seen a big ramp-up in our sales per day so far through July, and we are managing close to our expectations for our budget and our plan at this point in time from a top line perspective.

Okay. Thanks guys.

Thank you.

Your next question comes from Adam Uhlman of Cleveland Research Company.

Good afternoon. Just to follow up on that last question, Mark how should we think about seasonality of earnings this year? Should we think of earnings declining for the first two quarters of the year? And then ramping back up or how would you characterize the year progressing?

Adam, that is a good question. We really don't give quarterly guidance as to how we think each quarter is going to be. I think if you would look backwards on our quarterly results for fiscal '08 and even prior years, you would see more of a smoothing of the actual results and that each quarter seems very comparable as to what we were able to provide on earnings per share based upon sales dollars and that you don't see large swings in that seasonality. If you go back many years, you see large swings where we were getting a large percentage of our annual earnings from our last two fiscal quarters versus our first two. Those days are gone, and it's a much more stable basis from an earning perspective.

Maybe earnings growth within your 0 to 10% growth range consistent through the fiscal year?

Sure. And each quarter when we announce our results we'll be updating the guidance whether it's appropriate plus or minus.

Great. And then Dave just a couple of high level questions for you. It's been some time since we talked about the potential China opportunity and building a distribution presence there. Could you update us on your thoughts with regards to that?

That is still in our sights. We have no current plans to make any moves in China at this point in time.

Okay. And that's still under evaluation?

It is. And will be until there's some deal breaker that says you shouldn't go there.

Okay. And then could you also talk about your acquisition appetite with FPR coming into the fold hopefully soon, with the emphasis shift back to smaller deals or would there still be some sights on some larger opportunities?

Depends on what is out there. We will not shy away from larger opportunities. We have credit facilities in place to allow us to do that. We'll just see what comes with this but we certainly expect the FPR acquisition to give us some additional opportunity to do some tag ons to that to make it -- to grow that one out. So we feel we are still on the aggressive path with regard to acquisitions and we are fully capable of handling those.

Okay. Great. And then Mark, last question for you. How should we think of working capital this year? Do you have any internal goals of where you want inventories and receivables?

Right. I think that our inventory level should be comparable in fiscal '09 versus '08. They'll grow some through just in the normal inflationary perspectives, but we do not expect to have a major inventory increase or decrease during fiscal '09. Same thing for receivable. We've been managing our collections and our DSOes very well the last several years, and each year we've seen our DSOes go down from the prior year. We don't expect to see any big change in that in fiscal '09. We've had great experience with our collections and the quality of our receivables and we expect that to continue.

Could you talk about bad debt trends?

Yes. In fiscal '08, the overall bad debts that we experienced as a company were right around our normal levels that we had experienced. We did have one large bankruptcy over the winter time that really impacted that negatively. So for the whole year total bad debt expense in fiscal '08 is greater than what it was in fiscal '07. Our expectations looking into fiscal '09 is we've looked at the overall economy and look at how we view that and we said that we may see a small increase in bad debt expense in fiscal '09 versus '08, but nothing significant so we've incorporated that into our plans.

Okay. Great. Thanks. Very helpful.

Sure.

Your next question comes from the line of Brent Rakers of Morgan Keegan.

A couple of follow ups. I think Mark you mentioned amortization in 2009 of $3.1 million?

Yes.

Is that a total number? Is that just the number for the acquisition that is still pending or --?

That would be the total number for how we are right now. Before the FPR acquisition. So that includes the increases due to the Mexican acquisitions that we completed during fiscal '08, but their amortization was not fully in the numbers yet. So they will be in fiscal '09 for 12 months. That really is the same line item on our cash flow statement in the press release, which shows $1.663 million for fiscal '08 amortization. That's the line item that we are saying well that should be $3.1 million next year and when we close FPR and when we talk about that acquisition and the actual results upon closing, we will then give another number for the additional for that.

And then your depreciation in the quarter was up about $700,000 sequentially. Can you comment on that?

Our expectation is for depreciation expense for the year for fiscal '09 to be right around $13 million, 12.5 to 13.5. I don't have specifically anything on the sequential for each of our quarters this year, but we did end up the year lower than last year and our expectation is when we look at the what we have on the books as well as our potential acquisitions of capital expenditures, we don't expect depreciation expense to change much but it will be up a little bit.

Last question. Within SG&A, any sort of year end true ups or adjustments to bonus compensation or anything like that that would positively or negatively affect that number?

Obviously we always have year end true ups with all the accounts that we have, Brent and we do have we make our estimates throughout the years, throughout the quarters for what we have accomplished within the numbers for the fourth quarter, the year end true ups did provide us a small benefit compared to what we've done in the past for this quarter, as the fourth quarter this year, we are very comparable to what they were last year. Whereas in last year, the fourth quarter earnings were significantly better than fourth quarter fiscal '06. So we didn't experience that same thing for that for the incentive compensation throughout the organization. So from a comparable basis it was a slight benefit.

And this ties to the fourth quarter numbers coming into closer to the lower to midpoint of the range than the high end above the range?

That's correct.

Thank you, Mark.

Okay.

There are no further questions at this time. I will now turn the call back to Mr. Pugh for any closing remarks.

Thanks for being with us today, looking forward to giving a solid year in 2009 so we will be with you in October. Thanks a bunch.

This concludes today's conference call. You may now disconnect.