Applied Industrial Technologies Inc (AIT) 2012 Q4 法說會逐字稿

Welcome to the fiscal 2012 fourth quarter and year-end earnings call for Applied Industrial Technologies.

My name is John, and I will be your operator for today's call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session.

Please note that this conference is being recorded.

I will now turn the call over to Julie Kho.

Julie, you may begin.

Thank you, John, and good afternoon, everyone.

On behalf of Applied Industrial Technologies, thank you for joining us on our fiscal 2012 fourth quarter and year-end investor conference call.

Our earnings release was issued this morning before the market opened.

If you haven't received it, you can retrieve it from our website at applied.com.

A replay of today's broadcast will be available for two weeks as noted in the press release.

Before we begin, I would like to remind everyone that we will discuss Applied's business outlook during the conference call and make statements that are considered 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 also with other filings made with the SEC.

Accordingly, actual results may differ materially from those expressed in the forward-looking statements.

In compliance with SEC Regulation FD, this teleconference is being made available to the media and the general public, as well as to analysts and investors.

Because the teleconference and its webcast are open to all constituents, and prior notification has been widely and unselectively disseminated, all content of the call will be considered fully disclosed.

Our speakers today include Neil Schrimsher, Chief Executive Officer of Applied who will provide an overview of the quarter and the year.

You'll also hear from Ben Mondics, our President and Chief Operating Officer, who will discuss operational activities, and Mark Eisele, Vice President and Chief Financial Officer, who will discuss our financial performance in detail.

At this time, I'll turn it over to Neil Schrimsher.

Thank you, Julie.

And, thanks to all of you for joining us today.

As we reported in our release this morning, our sales for the fiscal year were a record $2.4 billion, up 7.3% from 2011 sales.

Net income for the year increased to a record $108.8 million, or $2.54 per share, representing a 13.4% increase in earnings per share.

Now, sales for the quarter were $620 million, up 5.1% from the comparable quarter a year ago.

This marks 10 consecutive quarters of year-over-year growth.

Net income for the quarter was $32 million, or $0.75 per share, compared with $28.3 million, or $0.65 per share, in last year's fourth quarter.

We're pleased with our performance across the Company for both the quarter and the full year, we translated a 7% sales gain into strong earnings growth and cash flow, continuing our sound operating discipline and focus on operational excellence.

Our operating margin achievement of 7.1% for the year was solid especially when considering our ERP investment and when compared with 6.8% last year.

Now, last week we announced the completion of our acquisition of the SKF distribution businesses in Australia and New Zealand.

We're excited to expand our global reach with this strategic acquisition.

Australia and New Zealand are attractive markets with growing economies.

The acquisition expands our global capabilities, adding 29 service centers in Australia and 8 in New Zealand, supported by a central warehouse in each country.

The business is among the largest bearing suppliers in Australia and New Zealand and also supplies seals, lubrication products, and power transmission products.

This acquisition is an excellent fit for Applied considering the products offered, the vertical markets served, the operation capabilities, and the shared commitment to providing value added solutions to customers.

We see significant growth prospects through the addition of complementary product lines and solutions.

The annual sales run rate is approximately $83 million and the acquisition will be accretive in the first year.

In total, the business offers us a new foundation for growth.

I'll now turn the call over to Ben to talk about the details of our operating performance for the quarter.

Thanks, Neil.

Let me begin by providing a macro economic view of the industrial market.

Industrial production increased 0.4% in June after having declined 0.2% in May.

In the manufacturing sector, outputs advanced 0.7% in June, reversing a decline of 0.7% in May and increased at an annual rate of 1.4% in the second quarter.

In June, capacity utilization for manufacturing moved up 0.4% to 77.7%, a rate 13.9 percentage points above its trough in June of 2009.

But, still 1.1 percentage points below its long-run average.

In addition, the ISM purchasing managers index registered 49.8% in July, an increase of one-tenth of a point from June's reading of 49.7%.

The index is slightly below the neutral threshold of 50%.

Overall, these indices remained at healthy levels.

And, when combined with conversations with our customers and suppliers we are optimistic about our fiscal 2013 prospects.

Operationally, our fourth quarter gross profit was 27.9% as compared with 28.7% in the same quarter last year.

The year-over-year change is mainly due to the LIFO benefit in the prior year quarter.

Mark will provide additional detail.

Our SG&A as a percent of sales for the quarter was 19.8%, an improvement compared with 21.1% in the same quarter last year.

We achieved an after-tax return on assets of 13.3% for the quarter, as compared with 12.6% last year, evidence of our continued focus on effective asset management.

For the full year, gross profit was 27.6% compared with 27.7% the prior year, while SG&A as a percent of sales was 20.4% for the full year compared with 20.9% last year.

Our after-tax return on assets for the year improved to 11.8% as compared with 11.1% last year.

As for our ERP project, it is proceeding on schedule and we are pleased with our progress to date.

Our teams are busy building and planning for our first US deployment in the fourth quarter of the 2012 calendar year.

As we move into the new fiscal year, we are focused on and committed to expanding our value add with our customers and generating profitable growth.

I will now turn the call over to Mark for a discussion of the quarter's financial results.

Thanks, Ben.

Good afternoon, everyone.

I'll provide some additional insight regarding our fourth quarter fiscal 2012 financial performance.

Our sales per day during the quarter was $9.8 million, or 5.1% above the prior year quarter, with the same number of selling days in both the June 2012 and 2011 quarters.

Of the total quarterly sales increase, acquisitions contributed 0.8%, and, we believe the impact of vendor price increases was between 1% and 2%.

Unfavorable currency fluctuations during the quarter of $4.3 million reduced sales by 0.7%.

Our product mix in the quarter was 29.5% Fluid Power products and 70.5% Industrial products.

Fourth quarter sales in our Service Center-based distribution segment increased $26.9 million, or 5.7%.

1.1% of this increase was due to acquisitions.

And, sales at our Fluid Powered businesses segment increased $3.3 million, or 2.7% from the same in the prior year.

From a geographic perspective, sales in the fourth quarter from our US operations were up $27.1 million, or 5.5%.

Sales from our Canadian operations increased $1.6 million, or 2.1%.

This increase resulted from $4.7 million of acquisition sales partially offset by a $2.5 million reduction due to foreign currency fluctuations.

Our Mexican operation sales increased $1.4 million, or 8.1%, despite unfavorable foreign currency fluctuations of $1.8 million.

Our gross profit percentage for the quarter was 27.9%.

This was 20 basis points above our third quarter run rate although 80 basis points below our prior year's fourth quarter.

Our gross profit margin below prior year was due to the impact of a larger LIFO liquidation benefit in the prior year compared to the current year fourth quarter.

We have, however, continued to experience positive margin impacts as a result of higher supplier incentives.

Our selling, distribution, and administrative expenses as a percentage of sales was 19.8% for the quarter.

130 basis points below the prior year fourth quarter rate, and 90 basis points below the third quarter rate.

SD&A expense has decreased from the prior year in absolute dollars by $1.6 million, or 1.3%, compared to a sales increase of 5.1%.

The lower expenses were driven by the savings related to the SERP curtailment from earlier in the year, lower benefit costs accrued in the quarter versus prior year, and a general overall focus on operating cost control throughout our US and foreign subsidiaries.

Our cash expenditures for the ERP project that are included in SD&A was $4.8 billion in the fourth quarter, and $18.3 million a year-to-date.

Total capital expense related to ERP for the fourth quarter was $4.3 million, and $16.7 million year-to-date.

We expect ERP capital expenditures of about $4.5 million for 2013 as we continue to roll out the system across our operations.

Overall capital expenditures for fiscal 2013, including these ERP items, should range from $13 million to $14 million.

Cash expenditures included in SD&A expenses pertaining to the ERP project are estimated to be around $15 million for fiscal 2013.

Our effective tax rate for both the quarter and year-to-date was 34.8% down from our historical averages due to lower effective tax rates in our foreign operations.

We expect our tax rate for fiscal 2013 to be in the 34% to 35% range.

as we expect the impact of lower effective foreign tax rates to continue.

Our consolidated balance sheet remains strong with shareholders equity of $672.1 million.

Inventory has decreased slightly in the quarter.

Our annual inventory turns remain consistent with last quarter, and continue to be at all-time highs.

While we expect our inventory turnover to remain stable in fiscal 2013, we should see inventory dollars increase primarily due to our acquisitions and product expansion initiatives.

Overall, receivables DSO remained stable and we expect DSO's to continue at this level through fiscal 2013.

Cash generated from operations was $28.5 million for the quarter, and $90.4 million year-to-date, compared with $76.8 million in the prior fiscal year.

Expectations are for fiscal 2013 to be another solid year for generating cash from operations.

We purchased 333,100 shares of our stock in the open market during the June quarter, and, we continue to have Board authorization to buy our stock in the future.

We expect to stay active in share buybacks into fiscal 2013.

Looking forward to fiscal 2013, we do not expect to have any further LIFO layer liquidation benefits from inventory reductions as we have had in the prior two fiscal years.

Regarding SD&A levels in fiscal 2013, we expect our SD&A as a percentage of sales to be relatively consistent, or slightly up, with the overall annual fiscal 2012 levels.

While we do expect to see continuing improvements in our SD&A rate as a percentage of sales in our core operations, we are also investing in sales capabilities to drive our growth during 2013 and beyond, which will add to our SD&A burden.

In addition, our recent Australian acquisition operates at a relatively higher SD&A level than our traditional North American operations.

In summary, our fourth quarter and year-end financial performance provides us with a strong foundation to pursue our business objective in fiscal 2013.

Now, I'll turn the call back to Neil for some final comments.

All right, thanks, Mark.

As you've heard, we're pleased with the company's performance last year and, we're excited about the year ahead.

For fiscal 2013, we are forecasting earnings per share of $2.90 to $3.05.

This guidance assumes full year revenue growth of 9% to 13%.

Including the contribution of the SKF distribution acquisition.

Now, we remain proud of our past achievements and we are encouraged and energized by our future opportunities.

We have a shared belief among our management, our associates, and our suppliers that we can do even more to generate profitable growth.

Applied has strong capabilities, great potential, and room to grow.

Our long-range strategic plan to accelerate profitable growth includes numerous opportunities across our business and implementation is underway, including one, leveraging sales capabilities, marketing tools, and processes to expand our value add and reach new customers; two, strengthening our position in attractive vertical markets while growing in our core segments; three, expanding our products and solutions, growing our core bearings and power transmission business at a rate greater than the market along with focused product expansion, logical product extensions, and enhanced local capabilities.

Four, building on our fluid power market leadership via strength in products, solutions, and value-added services for OEMs and MRO customers, five, enhancing our operational excellence by capturing the full benefits of our ERP system and driving continuous improvement with customers, suppliers, and throughout our operations, and six, accelerating strategic acquisitions by leveraging our cash generation and strong financial position to extend into new markets.

As we look out over the three-year planning horizon, we've established strategic objectives including growing sales revenues to $3.5 billion, increasing our EBITDA margin to 9% to 10%, and improving our return on assets to over 13%.

So, nearly 90 years since our founding, we are well-positioned and committed to profitable growth organically, via acquisition, and through our technology investments.

We are in exciting times and we firmly believe our best days are ahead.

So, with that, we'll open up the lines for questions.

(Operator Instructions)

Jon Tanwanteng, CJS Securities.

Hi, guys, thanks for taking my call.

Hi, Jon.

If I'm doing my math right, given the midpoint of your guidance and approximately where run rate for SKF was, it looks like the organic growth for 2013 is basically flat from 2012.

Is there any upside to that or -- given what you just said on the strategic initiatives?

Or is the focus at this point to look for external opportunities for growth?

I think if you back out the SKF numbers, obviously we mentioned what those dollar amounts were, and if you look at them it's a little over 3% compared to our fiscal 2012 dollar amount on sales.

If you back that out of the 9% to 13%, that's -- we're talking 6% to 10% from, we'll just call it continuing operations that were in existence at June 2012.

Right, and then you were up 7.5%-ish this year?

Yes, a little over 7%.

I'm just wondering what do you think the upside from your, I guess, non-acquisition opportunities are?

Well, if we look at some of the economic outlook and such, right?

Many, many call GDP around 2%, maybe a little less.

I think the industrial economy is performing better at around 3%.

We think the growth initiatives, the strategic plans are what enables that growth at a multiple of what is going to be a base economy in doing that.

Then, as we talked about, the SKF contribution, that may be a little greater or right at the 3% mark.

Then, can you talk a little bit more about the trends that you've been seeing, the end markets?

What helped or hurt in the quarter and what excites you as we enter the back half of the year?

Okay, this is Ben.

Of the 30 industries we track, 24 were up in the quarter versus prior year.

We saw good growth in food and beverage, primary metals, durable goods, transportation equipment, petrochemical, and some segments of the mining industry.

We saw a little bit of weakness in segments of the [four] street products grouping.

We also had a good quarter in the government segment despite the headwinds and the budgetary constraints we see in the government.

Then, going forward?

Going forward, we, as Neil said, we see strength in the industrial economy.

From our conversations with customers and suppliers in the major industries that we serve they are still growing at a rate greater than the overall economy.

We feel good about the prospects for fiscal '13.

Matt Duncan, Stephens Inc.

Afternoon, guys.

Hi, Matt.

Ben, would you be willing to share with us what your sales trends looked like month-to-month in terms of the underlying growth rate in the business?

Was it pretty consistent through the quarter?

Did it move around on you?

Can you talk about that some?

Sure.

Over all for the June quarter the trend was good.

The June quarter, overall, was up 3.2% sequentially from the March quarter.

We had a nice sales increase from March to April.

The month of May we experienced a slight drop and then we bounced back in June.

Okay.

On the SAP install permit, you mention that you guys are on schedule with that.

It sounds like the US go live starts in the fourth quarter.

Remind us how long the go live process will be in the US?

Then, where are you guys against the budget on that process?

Matt, this is Neil.

I would say as far as the budget, we're on the budget.

Mark outlaid -- or outlined the '13 planned expense and capital on that.

In my opinion, that puts us on track.

We'll start in the fourth quarter with the phased deployments around our DCs.

We're committed to those good phased deployments.

We think it's right for the business as we march those across.

We'll start those in the fourth quarter of '13 -- of the calendar and continue those going across.

Calendar fourth quarter of 2012 we'll begin.

How long does that process take to get it installed in all the locations in the US?

We planned that would take us through the calendar '13.

Okay, so five quarters.

Okay, thanks.

Neil, looking at the growth plan you laid out a little bit, you talked about expanding products and strengthening in some verticals.

Would you care to expand on that a little bit?

What product categories are you looking at maybe trying to tangentially grow into and what verticals are you guys targeting?

Yes, hi, Matt.

On the products, let us run for them a while and further gain some traction.

I mean, these aren't really new to us.

You think about we've got 13, 14 really big product categories.

We've got position, we've got supplier relationships, they are in our offering.

We just think we can do better.

We picked a few of those to make the inventory around them, the product training around them, the supplier alliances around them that's really going to help us gain traction.

Then, what I like about it is once we further build the momentum category by category, adding the next one, were going to have some great know-how and capability.

Our customers are buying these products too.

We're transacting with them today.

That just builds our confidence.

We're out, we're active, we've been doing it, we're seeing some result.

We're please.

Okay.

The last thing for me, Neil, the organic growth rate deceled just a little bit again in the quarter.

It sounds like the growth plan is targeted at getting that backup.

I guess, if I'm doing my math right I think you guys said 6% to 10% if you back out SKF, there's a couple of other small acquisitions that are still flowing through.

I guess the two deals in Quebec.

Maybe total organic growth 5% to 9%.

It was around 4% in the quarter.

How quickly do you think you can start to accelerate that organic growth rate backup?

Hey, we have it for 6% to 10%.

We'll lay out the plan, maybe there is some as we think about the planned development in the year, it will ramp more in the back half of our fiscal year.

We're running hard into those targets right now.

Brett Lindsay, KeyBanc Capital Markets.

Hi, good afternoon, guys.

Neil, you gave some good color around the long-term targets.

Just in terms of the $3.5 billion sales goal, could you maybe parse out what you see as it relates to the organic and base business growth?

What comes from acquisitions?

Just a little bit of color there would be helpful.

Brett, it's a good question.

I would say organic to acquisition could be a 60%/40% ratio.

Could end up 50%/50%, it is three years out as we think about it.

In that 60% organic 40% potentially acquisition maybe it goes to 50%/50% but it's in that range.

Then, shifting gears to the SKF acquisition.

One, maybe an update there.

How's the integration tracking?

I know you guys said it was going to be accretive in year one.

Could you just talk about margins in that business?

Gross margins?

I know you said it carries a little bit higher run rate on the expense side.

Is it going to be diluted, additive, neutral?

Just a little bit of color there and any updates.

Yes, I'll start off on the overall that -- we're very excited about the business.

As we outlined in the comments, the economies, the vertical market, some common global customers.

We think we've got a real opportunity to expand the product mix and complementary products.

For us, as we think about it, it will come out from an acquisition standpoint it was in the mid-$30 millions.

It is that traditional multiple that we have paid in this space.

We are committed to continuing to be a disciplined strategic acquirer, that's not going to change.

The business will be accretive in this year going forward.

If I could sneak one more in here, just in terms of the M&A pipeline.

I mean, as you look at it today, is it more domestically focused?

Or are you going to use this SKF deal as more of a balancing off point and leverage that geography?

How should we think about the pipeline and where that's targeted?

Yes, I'd say the pipeline overall is good.

I'd characterize it as robust.

We're having a lot of good reviews and discussions.

There's good activity in North America.

We like Canada.

We think we've got prospects in the US and additionally in the Mexico, Latin America.

¶ With the SKF opportunity, we're not closed to the right global opportunity as well.

There's good, ample opportunities in that.

I think I've told -- and said a few times before we are going to remain a good strategic disciplined acquirer.

We know our business around core industrial distribution.

We think that can be defined rather -- or a little broadly.

We can have our end customers in mind and take good guidance and input from our supplier base as well.

Adam Uhlman, Cleveland Research.

Hi, good afternoon.

Hi, Adam.

First of all, a clarification.

I missed the figure, Neil you were quoting something about a $30 million or mid-$30 million for the targeted accretion for the SKF business?

What was that?

I think it was referring to our purchase price was in the mid-$30 million.

Then, longer-term, the $3.5 billion revenue goal with 50%, 60% of that, or 7% to 8% organic growth would be a big step up from what the company has done in the past.

I'm just wondering if you've done any work on how you build that up between the various sale initiatives that you outlined with a new product introduction?

Getting better at the core bearing businesses.

Is there anyway to detail all that out?

Well, we've worked on our three year strategic plan, broadly, with the leadership team.

Looked at it by the initiatives, looked at it on an annual planning basis and then the three year plan.

Going through the process of good goal deployment with the team.

Objectives tied around each one of those growth initiative that we want to have around our core sales capabilities, around vertical markets, around the product expansions, things that we believe we can do in fluid power.

We have each of the initiatives broke down into actions, good owners by leadership and we are deploying.

Has there been any change in comps to help drive that acceleration in growth?

No.

We think we've got the right compensation metrics that incent growth and serving our customers.

We've got a good foundation and culture to build on that with the associates.

I would say our associates believe, our management team believes, our suppliers believe that we can grow organically and serve and reach current customers and new ones.

Jason Rodgers, Great Lakes Review.

Hi, guys.

Hi, Jason.

Looking at your ERP costs that will be expensed for fiscal 2013.

You said $15 million, is that correct?

Yes.

Could you say how that's going to track for the fiscal year?

Is it more front end loaded or how should we be thinking about that?

I don't have a specific breakdown for that.

I think it's going to be spread throughout the year.

A lot of this expense is relating to the various go lives.

We're going out and training the people in the locations that are going live.

A big part of this is just some T&E expensive for that.

I think it's going to be relatively ratable throughout the year.

Do you have a rough guess on what expenses may be left over for fiscal '14?

I think we're looking at having this basically -- the system will be built and we will basically have this thing up and running fully during fiscal 2013.

Our view is at the end of fiscal 2013 we'll have a couple of other implementations to go, but basically it's a done system.

A lot that will be just through our normal 2014 budgetary process.

It will be the remaining rollouts after the US.

I'd say with it, right?

Obviously, you've got some ongoing maintenance expense of running the system.

We could add some T&E, T&L associated with the continuous improvement efforts of team members that we want to have going out.

My view is this is normal business, the capital spend in essence is done, we always have good IT projects that we look to run through the business for the -- what's the capital, what's the expense, what's the benefits and the returns that we'll do it.

Really, if you look at the long term on the business, though, we had good Applied associates come into this team that really weren't incremental expense to the business.

As we deploy and run and operate, the project team returns to various jobs with an enhanced skill set to really help us run and operate going forward.

Not a great incremental expense that way with those associates.

We may have classified that as project expense, but they will wave in and they will wave back into the business.

Have you seen any early benefits from the system in Canada?

As we operate in Canada, we're pleased with the performance and their metrics.

Not as large of a volume base.

I would say I am pleased with the efforts that we're going through to look at the various value drivers.

What were doing pre-system in our current processes to get continuous improvement.

Then, start to think about how the system, the business intelligence, the data can help us do that even better going forward.

Just like any business with continuous improvement, as we get focused in these areas, we're finding benefits that we can generate now, pre-system.

Then, as we deploy, we'll just use the system to help us do that.

Perhaps with a little bit more business intelligence, a little bit more efficiency that we can go faster and a little bit more speed.

Okay, sounds good.

Then, finally, does your guidance include any future share repurchases?

From the guidance perspective, we are trying to assume a stable share count, so that we would have some purchases during the year to eliminate any dilution that may happen through shares being issued for, let's say, compensation plans and things.

Brent Rakers, Wunderlich Securities.

Good afternoon.

Let me start - I have two housekeeping questions first.

Mark, could you spread out what the components of other expense were in the quarter?

Then, also, maybe give us a quarter ending headcount number?

Yes, the other expense was mainly related to some foreign currency fluctuations that had a run through our P&L for the Mexican currency for some.

There were virtually -- it's unrealized currency losses but losses nonetheless.

The accounting required us to push that through the P&L versus through the equity section for this portion of that.

That was what that related to.

What was your second part of the question?

The headcount?

Yes the quarter ending headcount.

With regards to the headcount, I don't have the exact number with me.

Mark and I looked at it earlier and net of acquisitions, we're flat year-over-year.

Great.

Then, just to try to again understand some of the revenue growth targets, it sounded, I guess my interpretation from the way you are talking about the revenue outlook organically for next year is you see a very similar rate of growth in the industrial economy and for you guys in fiscal 2013 that you saw last year?

Does that sound about fair?

Yes.

We would see an industrial economy maybe base around that 3% range in doing it.

That would be the base type input.

Okay, and then, in terms of -- there was talk about increasing investment spending for the year.

I believe there was also commentary on the SG&A, that SG&A as a percent of revenues would be roughly flat year-over-year.

Am I correct if my math that implies about $10 million of incremental investment spending?

Does that sound about right?

Well, Brent, I don't have the number of right in front of me right now.

When we look at investing and growth initiatives, we look at it at a very granular level.

By location, by initiative, and we build those things up.

Then, we summarize them.

I don't have a specific number here.

Okay.

I guess, again I'm just trying to reconcile some of the organic growth.

With the investments -- with this increase in investment spending, is that expected to transition to contributing to that organic growth number immediately this year?

Is that 1% to that organic growth incremental?

Is that 2%?

Can you sign a number in terms of targets there?

Brent, it's hard to put it into percentages right now.

As Mark said we've gone through in detail on both assets, inventory investments to fuel growth as well as some of the headcount side of things, customer facing personnel to increase our sales initiatives.

I don't have the numbers in a percentage as what it contributes to the sales.

Then, just last question, in terms of a historical perspective on this ramp up, or at least ramp up in growth related spending.

Could you maybe give us a sense for what this is going to be like this next year versus maybe some of the spending initiatives you've done, let's say, over the last five, six, seven years previous for the company?

Is this significantly more aggressive than the company has been in the past?

Or do you consider this just ordinary course of business?

Well, in some respects it's more aggressive and in some it's maybe a redeployment of assets too.

In some areas where we were not seeing the traction, we're redeploying into the areas where we see better opportunities.

Some of it is additional growth and probably greater than what we've done in the past.

Some of it's just redeployment.

Gregory Macosko, Lord, Abbett.

Yes, thank you.

Just to follow-up a little bit on Brent's question regarding SG&A and investments spending.

Did I hear you say in terms of the guidance that you suggested that the SG&A line as a percent of revenue would be basically flat for the year?

Did I hear that right or not?

Yes.

20.5% was the number last year.

Roughly that range for fiscal '13?

Yes.

Then, the discussion of taxes, I didn't quite follow that.

You said 34% to 35% for fiscal '13.

That's basically is what it was in fiscal '12 correct?

We ended up at 34.8% for fiscal 2012.

We try to put a range on the tax rates.

We're -- obviously if you look at that range, I mean, we think the preponderance of that range will go lower.

34% - in effect it's pretty close to where it was last year?

Correct.

Nothing huge, hugely different.

Then, finally, if I could ask, just so I understand the LIFO piece of things.

Basically, in - for all of fiscal '12 there was a - do I understand it correctly, that it was a $3.4 million benefit to the gross profit line?

Is that correct?

That would be correct.

That was the total dollar amount of the LIFO layer liquidation benefit.

That was basically flown through the income statement in our fourth quarter.

In essence, as we discussed in the press release today, that benefit resulted in the actual LIFO expense that we recorded for the quarter to be a benefit of $600,000.

The actual impact on the financials was for the fourth quarter we recorded a $600,000 benefit because of LIFO.

The way we look at it is that this $3.4 million benefit was just LIFO expense we were able to avoid.

Okay, but the point is you are not expecting any of that going forward.

That -- adjusting for that looking forward, the gross margin will relate to that number without that $3.4 million?

Correct.

Then, finally, maybe I didn't follow the SAP investment situation, but did you call out the -- or talk about the cost for implementation expectations for fiscal '12?

Well, the total fiscal 2012 cash expenditures that flew through our SD&A expense was around $18.3 million.

In fiscal 2013 we are estimating them to be upwards of $15 million.

Then, there was some flow through in '14.

You're saying the majority will be completed in this current year?

Correct.

(Operator Instructions)

Joe Mondillo, Sidoti & Company.

Hi, guys.

Hi, Joe.

Just one question.

Just wondered if you could give any detail on -- I don't know if this was asked or not, so I apologize if it was.

In terms of the SKF acquisition, if you could give any detail on what type of growth that business in that region has been experiencing?

What the profitability is like of the business compared to your business?

Yes, Joe, I don't have all of that in front.

We've got a good team coming on board, consistent management coming across from MD, finance, general management, and that.

We've got integration manager on the ground, teams over.

Perhaps on future calls or when we're out we'll be able to have a little bit more dialog.

It's a good running business today as you would expect with a company like SKF.

We just believe with the opportunity to bring added, complementary products it can further grow and be more valuable to the customers they serve in those markets.

Do you care to say or give an idea how accretive it would be this year?

I think we worked around that one before.

Sorry.

I guess, lastly, what is your plans in terms of other international region expansion?

We've said as we walk-through we think we have good opportunities from an acquisition standpoint in North America.

Obviously, Australia and New Zealand gives us some additional opportunities now.

I think, in time right, we work through them and see.

Where there are good common customers, attractive vertical markets, common supply lines, in and around this industrial distribution space there's going to be opportunities.

We're not coming in with a bias that we have to do so much or X% global.

Obviously were not going to shrink away from some of those good opportunities.

This Australia and New Zealand is very good, very attractive.

We're going to work that one very hard.

We're going to continue to work our opportunities up and down North America.

At this time I'm showing we have no further questions.

I will now turn the call over to Mr. Neil Schrimsher for any closing remarks.

All right, I want to thank everyone for joining us today, the ongoing investment, and interest in Applied.

We look forward to talking to you throughout the quarter.

Thanks, a lot.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you the participating.

You may now disconnect.