Applied Industrial Technologies Inc (AIT) 2013 Q3 法說會逐字稿

Welcome to the fiscal 2013 third-quarter earnings call for Applied Industrial Technologies, Inc.

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

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

Later, we'll conduct a question-and-answer session.

Please note that the conference is being recorded.

I will turn the call over to Julie Kho.

You may begin.

Thank you.

Welcome to the Applied Industrial Technologies, Inc.

fiscal 2013 third-quarter 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 www.applied.com.

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

Before I begin -- before we begin, I would like to remind everyone that we'll discuss Applied business outlooks during the conference call and make statements that are considered forward-looking.

All forward-looking statements, including those made during the question-and-answer portion, speak only of the date hereof, and are based on current expectations that are subject to certain risks.

Including trends in the industrial sector of the economy, the success of the various business strategies, and other risk factors identified in Applied's most recent periodic report and the other filings made with the SEC available at the Investor Relations section of our website at www.applied.com.

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

The Company undertakes no obligation to update publicly or revise any forward-looking statements whether due to new information or events or otherwise.

In compliance with SEC Regulation FD, the teleconference is being made available to the media and to the general public.

As well as to analysts and to investors.

The teleconference and the webcast are open to 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, Applied's Chief Executive Officer; Ben Mondics, our President and Chief Operating Officer; and Mark Eisele, our Chief Financial Officer.

At this time, I will turn will call over to Neil.

Thank you, Julie.

Good morning, everyone.

We appreciate you joining us today.

Our release this morning shows our sales for the quarter are $621.7 million, up 2.7% over the prior-year quarter.

Net income for the quarter was $29.3 million or $0.69 per share.

Basically flat as compared with the third quarter of 2012.

Despite some economic uncertainty in the quarter and the modest sales growth, we achieved solid earnings.

Benefiting from our business investments, efficiency gains, and disciplined cost controls.

We are confident that we are driving the right actions per shareholder value, and we are committed to our long-range strategy generating growth and profitability across our business.

Let me share a few examples that demonstrate the ongoing work and targeted development that is occurring.

Across our sales teams, we have seen a ramp-up in the utilization of new selling tools that are helping to make our sales associates more effective, efficient, and accountable for their activities.

A consistent selling process across our organization is converting greater sales opportunities into results.

Also, our commitment to expanding our products and solutions is visible with many of our best customers.

Featured products and predictive maintenance offerings add to the discussions we are having with customers while addressing the current needs and delivering immediate product requirements.

By leveraging our knowledge of the customers, their equipment, and their operations, we gain opportunities to serve greater requirements.

Our recent acquisition of Parts Associates or PAI, builds on our Maintenance Supplies and Solutions offering.

That is an area that is generating excitement with our associates and interest among our customers.

Good progress is made in the integration as well as partnering opportunities with our service centers.

Maintenance Supplies and Solutions will continue to gain momentum going forward.

Additionally, we are more fully leveraging our service capabilities and delivering value-added solutions throughout our fluid power business.

We are strengthening existing customer relationships, building content on new platforms, and gaining new customers.

All serving to enhance our leadership position in the marketplace.

We benefit greatly from having one of the largest teams of certified specialists, mechanics, and technicians providing problem-solving, system building, and trouble shooting for our customers.

Our continued development of these business opportunities and others combined with our debt-free position, strong balance sheet, and a shared determination to realize our potential positions us to profitably grow our business -- organically, via acquisitions, and through our technology investments.

We are building on our 90-year legacy of strength and distribution, and we are well-positioned in the industrial marketplace.

We remain optimistic about the industrial economy for the 2013 calendar year and over our strategic planning horizon.

For the fiscal year, we are maintaining our earnings guidance of $2.70 to $2.90 per share on sales growth expectations of 4% to 7%.

I will turn now it over to Ben for some comments on our operating performance for the quarter.

Thanks, Neil.

Let me begin by providing an overview of the industrial market and specifically the indices we follow as they are typically a good indicator of the future manufacturing environment.

Industrial production increased 0.4% in March.

This follows a 1.1% increase in February.

For the March quarter overall, industrial production moved up at an annual rate of 5%.

Its largest gain since the first quarter of 2012.

For the three major industry groups, manufacturing output rose at an annual rate of 5.3%.

The output at utilities also rose 5.3% and mining was down slightly in the quarter.

In March, manufacturing capacity utilization edged down 0.2 point to 76.4%.

A rate that is 12.4 percentage points above its trough in June of 2009, but still 2.3 percentage points below its long-run average.

The ISM manufacturing index fell to 50.7 in April, its second consecutive monthly decline.

The March and April readings were weaker than expected, but still above the expansionary threshold of 50.

The index averaged 52.9 in the March quarter compared with 50.6 in the final three months of 2012.

For the March quarter, the leading indicators were generally positive sequentially and year-over-year.

However, the indices weakened in March and that weakness seems to be carrying over into April, although we are currently seeing some softness in the industrial markets, we believe that the industrial economy will gradually strengthen throughout the calendar year.

As Neil indicated, the activity and hard work continues as we prepare to close the final quarter of our fiscal year.

I am encouraged by the daily actions of our dedicated associates that help us generate success for our customers and value for our shareholders.

We remain committed to executing on our strategies for growth and profitability across our business today and over a strategic planning horizon.

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

Thanks, Ben.

Good morning, everyone.

I will provide additional insight regarding our third-quarter fiscal 2013 financial performance.

Our sales per day during the quarter was $9.9 million or 5.1% above the prior year quarter.

We had 1.5 fewer selling days in the March 2013 quarter compared to the prior year.

On an overall basis, sales increased 2.7%.

Acquisitions added 5.5% to sales and favorable foreign currency fluctuations increased sales by 0.3%.

In addition, we believe the impact of vendor price increases was less than 1% during the quarter.

Our product mix during the quarter was 27.4% fluid power products and 72.6% industrial products.

Third quarter sales in our service center-based distribution segment increased $19.9 million or 4.1%.

All of this increase was due to acquisitions.

The sales in our fluid power businesses segment decreased $3.7 million or 3.1% from the same period in the prior year.

From a geographic perspective, sales in the third quarter from our US operations were down 1.5% compared to the prior-year quarter.

Our sales increased from our Canadian operations was $5.2 million or 7.9%.

All related to recent acquisitions.

Consolidated sales from our other country operations, which include Mexico, Australia, and New Zealand, were $18.9 million above the prior year with virtually all of this increase from our Australian-New Zealand acquisition.

Our gross profit percentage for the quarter was 28.1%, 40 basis points above prior-year's third quarter.

This was due to the recent impact of acquisitions operating at gross margins above our traditional core businesses.

Our selling, distribution and administrative expenses as a percentage of sales was 21.1% for the quarter.

40 basis points above the prior year third quarter.

On an absolute basis, SD&A increased $5.3 million or 4.2%, compared to the prior-year on a sales increase of 2.7%.

Acquisitions added around 9% to our SD&A footprint and our core operations had a year-over-year decline of around 4% in SD&A expenses.

We continue to have a tight focus on our operating expense.

ERP spending in fiscal 2013 continues to be in line with our expectations.

Our effective tax rate has been stable throughout fiscal 2013 at 34%.

We expect our tax rate for all of fiscal '13 to remain around 34%.

Our consolidated balance sheet remains strong with shareholders' equity of $738 million.

Our after tax return on assets for the quarter was 11.3%.

Inventory has decreased from our December levels due to the sale of strategic purchases that were made prior to calendar year-end.

We believe our inventory levels should continue to decline slightly between now and June year-end.

Cash generated from operations was $40.2 million for the quarter, compared to $31.8 million in the prior year quarter.

Expectations are for solid cash generation for the rest of our fiscal year, consistent with our traditional cash cycle.

While we did not purchase any shares of our stock in the open market during the March quarter, we have made small purchases in the month of April.

In summary, our third-quarter financial performance continued to reflect a slightly softer sales environment than our original estimates, although we were able to post solid bottom line results.

We feel that we are well-positioned and focused on executing our strategy to produce solid results for the remainder of the fiscal year and into fiscal 2014.

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

Thanks, Mark.

To conclude, we are working on closing our fiscal year and executing our long-range strategic plan, including leveraging ourselves and marketing capabilities to expand our value-add with existing customers, and to reach new customers.

Driving product expansion beyond our core offerings, building upon our fluid power leadership, extending our geographic reach, and generating continuous improvement across the business.

While work remains, we are excited about the growth prospects and we are fully committed to generating shareholder value.

At this time, we'll open up the lines for questions.

Operator.

We will now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from John Tanwanteng from CJS Securities.

Please go ahead.

Hi, guys.

Thank you for taking the time.

Just on the M&A front.

On the last call, you said that you were setting the bids a bit higher and there have been a couple of deals since then.

At least one of your peers in the distribution space apparently was very willing to buy at, I assume, high valuations.

Can you give us an update in terms of the pipeline, time frames and size and potential prices you may or may not be willing to pay?

From our standpoint, John, we are active from an M&A front, that the pipeline is productive.

We continue to have good reviews and good dialogues.

We do not always control the timing.

I said before, you know, we were active last year, both in number and in dollars, and we want to be as active in 2013.

I will not comment on others' activities than that, but we are going to continue to be a good, disciplined strategic acquirer, and we think that there is a lot of prospects and targets in this fragmented space that fits the priorities that we have.

Okay.

Got it.

And then I guess on the gross margin side, you had a nice improvement there.

What percent was actually due to the acquisitions and how can we expect that, the trend going forward?

John, really, the increase in our gross margin percentage was really driven all because of our acquisitions, and they were at higher gross margin levels than, let's say, our core business.

I would say our core business gross profit percentage was relatively stable in the quarter.

Okay.

Got it.

Finally, on the SD&A side, do you expect that to turn down as a percent of the revenue given the acquisitions that you have now?

That is hard to say.

Obviously, we are going to keep a tight control on expenses, but, you know, the acquisitions, while they have help with our gross profit percent, some have a higher level of expenses that deliver that gross profit percent, but we are always looking to try to make those as most efficient as possible.

We'll see.

Okay.

Thank you very much, guys.

Sure.

Our next question comes from Matt Duncan from Stephens Incorporated, please go ahead.

The first question I have got is a month-to-month sales trends and how things looked into April.

Sounds like you saw improvement, like you said in the fluid power business through the quarter.

Was that the case across the whole business as well?

Like we said in the press release, we saw throughout the quarter for the US service centers, as well as the US power groups, we saw improving sales per day, you know, trends and run rates throughout the quarter, and I would say as we, you know, March through April, we saw rates that were stable compared to March.

And Mark, if things reach the point now where your organic sales are growing year-over-year.

Has it improved enough over the quarter to get to that point or are you seeing year-over-year organic declines?

I know you have to be close to flipping the growth here.

These quarters are our most strong sales quarters from the seasonal perspective; the March quarter and June quarter.

So these improvements in our sales per day run rates, while they're nice to see, they were improving at a large percentage last year at the same time as well.

So, at this point in time, we continue to run slightly below our sales per day run rate from a year ago, and we continue to expect to see improvements throughout even the June quarter.

Okay.

And, Ben, you made the comment that, obviously, the economy has been choppy here, but your expectation is still for some slight improvement as we move to through calendar '13.

I hope can you give us insight into what you seeing and hearing from your customer base and from the end market that gives you the confidence that will play out that way?

Yes.

We are, we are very fortunate that we serve a broad base of customers in many different markets, and we are constantly, you know, daily talking to our customers, both at the local level and our larger strategic accounts at the corporate level.

And, I think, we are hearing what everyone's hearing.

There is caution, there is uncertainty, but at the same time, there is somewhat of an optimistic undertone.

Our customers want to expand.

They want to invest in their business, but they are uncertain about the direction of the macro economy.

So, regardless of the economic environment, we continue to see tremendous opportunities out there and then these uncertain times our customers are challenged to find ways to reduce their cost of operations, increase their productivity, and looking to run their equipment longer before replacing.

So that makes our role more important than ever, and we are focused on providing that support to our customers and their operations and to help them to be competitive in a challenging environment.

But, overall, caution, uncertainty, but with the undertone of optimism about the future.

Okay and the last thing and I will hop back in queue.

You have two months now left in your year.

The guidance range is still fairly wide at this point.

Is there any help you can give us sort of where in that range you feel things are tracking, based what you're seeing now, or would you rather leave the range out there and leave that on to our imaginations?

Well, Matt, you have great imaginations out there.

But our view is, you know, that we expect to fall within the range that we provided.

And from a EPS perspective as well as from a sales perspective, obviously, our quarterly sales numbers, you know, for the last several quarters have been on the -- near the lower end of the sales range than the higher end, and I would expect that to continue in the fourth quarter as well, but we didn't feel compelled that we should really change anything because we thought, well, we are going to be in the range and we think that is okay.

Okay.

That is helpful color.

Thank you, Mark.

Our next question comes from Adam Uhlman from Cleveland Research.

Please go ahead.

Hey Ben, I was wondering if you could go through some of the changes by customer category of demand trends this quarter as it progresses and the different codes which attract.

Okay, Adam.

For the end markets we serve, there are really two areas that stand out as being strong right now.

First of all, the industry's related to the resurgence in the housing industry are doing well, mainly lumber and Wood products, but also cement, concrete, and related industries.

Secondly, transportation equipment, automotive, mainly, and the related industries like fabricated metal are doing well.

And the ones this stand out as struggling are mining, both coal mining and metal mining, and also the machinery manufacturing sector is having some challenges that are on the equipment build side of the business.

So, generally automotive, housing doing well.

Mining, and manufacturing are having their struggles.

Okay.

And then the, you know, the piece of the business that had that OEM exposure in the machinery.

Are you see anything, or hearing of any improving trends from those customers, you know, in terms of any kind of order and visibility and into that second quarter or further.

That is a broad based category.

Everything from agricultural equipment to coal mining equipment, to high-tech.

So, each one is very different and what we are seeing in our customer base is similar to what you're hearing and reading about in the news.

Okay.

Got you.

And then, Neil, you had mentioned that you have given the sales guys more selling tools.

They've got a little more product to work with and was wondering if you could expand a little bit about some of the changes that you have made on that front and then relate it to that, if can you talk about your hiring expectations for adding feet on the street, you know, over the next year or so.

Yes, I would say overall from a tool standpoint, some were making them electronic and available to them so faster access for quicker reviews.

Others doing it, we would take potential down to a customer level and look at our performance in total against the potential and across the categories.

So, just the added visibility helps us focus in and what products and solutions that we have looked to expand on and I think from a head count standpoint, I do not think that we expect great increases.

We are just driving focus in some areas that we think we get good returns on.

So many areas that can be a redeployment of resources and that.

We will look market back to see where there is opportunities to make further investments and in some geographic markets.

I think the thing in the model, right?

Those, the service centers and the areas, they run the income statement and look at the investments as well.

we are not constraining it, but they look at where we are going to get return and we pick some areas to do it around fluid power, around maintenance supplies and some of the others, and we will continue to do that.

I think from the macro head count standpoint, I would not expect a great swelling in the numbers.

Got you.

Thank you very much.

We now have John Baliotti on line from Janney Capital Markets.

Please go ahead.

Good morning.

Neil, or maybe Ben, you guys talked about the machinery side and OEM side, obviously, they seeing some softness.

I think that is consistent with what we are hearing about capital, large capital projects and the related businesses.

What are you seeing from the, their behavior, those customers.

Are they still stocking?

Are they operating hand-to-mouth or what kind of -- has there been any change in behavior over the last, you know, three to six months?

You know, maybe I will start it.

We get exposure to them in a couple ways and get exposure in fluid power and those can be in segments also in AG, maybe construction and some of those and those are still looking productive as they build solutions.

How we drive or increase our content on some of the programs that they have.

Also new programs that they may be developing.

How we would expand our content.

And on our MRO side.

That is a big catch-all category that would look and kind of a mix of medium and small-type customers in that area, and maybe some of the smaller ones are just looking at buying their most immediate requirements in that area.

But I think the mid- or larger size, you know, they will continue to run their business and run their operations.

And then I would say outside of that category, If I can say the customers in general, you know, I would still say some of the larger sides, the productivity investments that they can make in their businesses generate some of the largest returns.

So, when they kind of not in the macro news but in their business, you know, you kind of see that continued planning going on, which gives us, you know, some optimism as we think about the rest of '13 and really going in to '14.

So you feel like the, they going work down number of distributors to try to find some efficiency there as well?

I think broadly and kind of all categories.

I think customers are looking to buy from the better, fewer suppliers to consolidate their spend and manage that transactional cost in doing it.

I think that goes across really all of the segments.

What about on the fluid repair site?

Are you seeing in the service area, are you seeing any changes in trends there?

I don't know that I am seeing changes in trends.

It's a good segment of our business.

Right.

We would like to see it grow.

When we are connected with a customer on service and repair, obviously, it makes us closer to them.

Gives us a chance to do greater business, and service and repair, the repair work tells a story.

Tells a story on the operations, what is going on, what may could be improved in that area, so we like being connected on the service side because we think we can bring solutions across other pieces of equipment that may not yet be needing service.

That operation, as we do the repair and do the diagnostics, may be pointing us toward it.

So we like that involvement.

That is what I was wondering.

You mentioned earlier that customers are trying to do, you know, keep their equipment longer and make it last longer and for equipment machinery, that means more service MRO work and, obviously, you have at margin tradeoff versus large projects.

It seems like that would be a nice tradeoff for you for the time being.

I am sure you would love to see the other business surge, but it seems like that is a nice place to be in the meantime.

I think it's a good tradeoff for us.

More so, right, it's a good tradeoff for the customers.

Some will run to failure and others will be looking for solutions.

Even when you have run to failure, if you can help them on some other pieces of the equipment, they will look at it.

So, I think it's great for our customers and we are happy to participate.

Great.

Thank you very much.

Our next question comes from Brett Linzay from Keybanc.

Please go ahead.

Good morning, guys.

Back to the question regarding new products and solutions, I guess as we, you have talked about that a lot over the last couple of quarters because we look into your fiscal '14.

How should we think about those opportunities adding to revenue, you know, outside of underlying market activity?

We are just going through our refresh or update of our strategy, our look over the kind of three-year Horizon, and I think in a lot of areas, we will continue product expansion work and categories that we pick.

Further that development continued the bring tools for our selling teams, work with those suppliers in so many regards.

We will continue those.

In time, you know, we say we represent 14 broad categories and we want to keep pushing and expanding that out.

For us, probably adding on to that is more in the back half of our '14 or into maybe into '15.

We are looking at being more focused on execution right now.

Okay.

That is helpful.

And then, I guess, just on the pricing environment, what are you seeing, hearing from customers in terms of, you know, price?

Sounds like realization in the quarter was a little below one.

What are your expectations as we look out, you know, over the next 12 months or so?

I would say, you know, that has been consistent in the expectation.

I mean I described the overall environment as a pretty stable and pricing environment, the normal activities we would see with the start of the calendar year and I think that is really going to continue.

I think there is some supplier activity, modest in doing it, and we still believe we have the ability to pass those along as they come in to our customer base.

So, I would expect price kind of stays in the area that it's at.

Okay.

And as it relates to the service in the fluid power comments, the sequential trends you have seen and the improvements there.

I guess what is driving that source of outgrowth.

Is it share gains, is it what you are doing in the marketplace?

Any color there would be helpful.

I think the fluid power market is not bad overall.

Maybe a little bit of a decline.

Perhaps we are performing a little bit better with the footprint and the capability that we have.

I think a few of our subsidiaries are doing well and we think in a couple of those segments that have been maybe a little more challenged previously, they will get a little better as we go forward and contribute to that.

we are making there some investments to be in more facilities, more operations and we just think that is going to continue.

I think overall, that is a big space and maybe nearly $6 billion fluid power market that is distributor served.

There is a lot of opportunity that is out there.

Okay.

Great.

That is helpful.

Thanks a lot.

Thank you, the next question comes from Vineet Khanna from BB&T Capital Markets.

Please go ahead.

First question.

In regards to gross margin, I know you said all of the contribution was from M&A and the core business was stable.

Was there no benefit from the strategic purchases that you guys did at the end of the calendar year?

Some of the strategic purchases we did, obviously, did help with some of our supplier incentives for that.

But from a year-over-year perspective, you know, we did not see improvement from that and the benefits we get from our purchasing initiatives are relatively stable throughout the year, for the quarters, and we didn't see a real change for that to help push up our overall gross profit percentage for the quarter.

Okay.

And I guess kind of related in regards to the gross margin, can you speak to the sustainability going forward?

Do you think, you know, this two-way is a level.

I know this is your seasonal high, but moving forward, where do you see gross margin going?

We continue to work hard on our gross profit percentage, and we continue to see opportunities to improve our gross profit percentage, now as well as into the future.

we are looking at this to continue.

I cannot guarantee it's going to continue, but we are going to work hard at it.

Okay, and then I guess for fiscal fourth quarter, do you have any idea what acquired revenues should look like?

Give or take?

Correct.

This past quarter we wrapped up was 5.5%.

Okay.

We did have a year ago in the March quarter two acquisitions in Eastern Canada rolling off for that, so it will be a smaller number in the fourth quarter compared to the third quarter, and I think it will be in probably the 4.5% to 5% range.

Okay.

And can you speak to the uses of cash?

You had great cash for this quarter with no buybacks.

I know you said you did a few this quarter.

Are you just sort of more focused on building cash for M&A or?

I say we look at those all in a balance.

Last quarter, we increased our dividend rate.

Okay.

For shareholders and we want to continue to look at share buybacks throughout the time period, but also as we talked before, we have a lot of M&A opportunities and we have a lot of dry powder available for those to do M&A so we are not necessarily not doing one of those, to save money for another, we are trying to maximize our use of cash in each of those areas.

Okay.

And the last quick question, in regards to the other income line, could you just kind of break that out what the components of that were?

In other income, there is a couple of items on that regarding some foreign currency items, as well as some gains on assets within our various deferred compensation plans.

And I do not have that -- should have that handy here.

Here, I got that right here.

I have to find it.

Most of those are from gains on assets held in [rami] trusts, was about $600,000 for this quarter.

A year ago, it was much larger for those gains.

And so that is why we saw this small decrease in the gains that we see for the quarter.

Okay.

All right, well, thank you guys.

Okay.

Thanks.

Our next question comes from Greg Halter from Great Lakes Review, please go ahead.

Yes, I wonder if you could discuss the receivables and inventories levels, if you could strip out the acquisitions on a core basis.

Yes.

From the inventory levels, we have done a bunch of inventory acquisitions so far during this fiscal year and that is added approximately $25 million of inventory from those acquisitions.

And sort of the rest of the inventory from June 30 to March is through additional property or inventory additions for growth initiatives and from a receivables perspective, you know the receivable amounts that we have added from acquisitions is probably a little bit south of $10 million and so the rest of the receivables change relates to our core operations.

Okay.

Regarding your capital spending for the year, it's obviously down significantly from last year at this point so far.

What are your thoughts for the full-year '13 and any early guesstimate for fiscal '14?

Right.

We are on track for our overall capital spend over the summer.

I believe we talked about what our perspective was and what we would spend for the full year.

I do not recall the numbers but I believe it was in the $12 million to $14 million range of total CapEx.

We think we will still fall within that range.

The decreases we have, you know, lower amounts of assets being capitalized in relationship to our ERP project.

As far as fiscal 2014 goes, we are in the beginning stages of our overall budget process for that, and I would not want to hazard a guess for this, but my perspective is that it should be relatively comparable to what our numbers coming up for fiscal 2013.

Okay.

That is a good segue into the ERP system where do you stand in on that in terms of implementation and what kind of problems have you encountered so far?

We continue the phase deployments around our distribution center, so most recently had one and really, our plans are to continue those phase deployments around our distribution centers throughout calendar 2013.

And I am glad the answer to the second question was none.

There you go.

That is what we like to hear.

When we met a while back, we were in the throws of visiting the regions and the centers and so forth.

There are 32 or so.

Have you made it through all of those?

What is your impressions now that you have been there for some time?

I continue to be impressed around our business, our position, the quality of our associates and when we get deep with customers, we are adding real value and we have opportunities to continue to build on that.

So that is encouraging in the US, spending time with our Canadian teams, fluid power groups and even Australia and we will see those guys again here very shortly in the coming weeks.

All right.

Thank you.

Our next question comes from Derek Jose from Longbow Research, please go ahead.

Hi, I was wondering what the average manufacturer's price increase was at the beginning of calendar 2013?

Boy, Derek, I do not have that off of the top of our head.

All manufacturers do not necessarily have calendar year-end price increases but many do.

Yes.

And I would say the average increase that we probably saw was anywhere from 2% to 4% on average.

On their book of business.

Okay, with the price realization, you know, correct me if I am wrong, of 1%, is price currently a headwind for gross margin until you can do price increases in your new fiscal new year?

The reason that our impact of price increases is lower than what the average manufacturer has is that with the number of SKUs that we carry and the randomness of customer demand, that often times, they were selling an SKUs in the current quarter that didn't sell in the prior-year.

So what is the impact of the price increase on that SKU?

That is almost indeterminable.

So what we see is for the SKUs that we are selling year-over-year, you know, the average increase for those averages out to under 1% but that does not mean we are not passing along the 2% to 4% price increase for everything that we do sell.

So we are not absorbing those, they are getting pushed through.

Okay, because your other public competitors the other day, basically said they have been having trouble passing through the price increases from the beginning of the year, so you're saying that you're not having trouble?

Let me say no customer ever likes a price increase and so it's obviously a challenge.

It's work - to push them through and our systems, generally, automatically push the increases through at the time of increase and so that we have that in front of the customers on that day.

So our sales reps have conversations with the customers in preparation of those increases and that is just the way we do business.

And half of what we sell would go one time a year.

Oftentimes it's in a [break-fix] environment.

I will go back to the pricing environment.

It's stable for us and that is our character situation.

Okay.

And we are looking out through the next quarter and through the next year.

The demand right now is not obviously what you want it to be and you have a very wide range.

If we are looking at you getting price increases going forward and what does demand have to pick up for you to be able to seamlessly pass through your own price increases for your fiscal '14?

I think our model is that with demand even being relatively flat, we'll be able to pass through the price increases that our suppliers are passing through to us and we will take opportunistic opportunities for margin enhancement to improve our gross margin perspective on sales as well and through that period.

We see opportunities there.

And then just lastly, with the ERP system, one of the advantages you talked about in the past is kind of getting a better feel of being able to accurately price each individual customer.

When do you think you will start being able to see maybe a little bit of contribution to gross margin from the ERP system right now as you're getting full growth of gross margin from the acquisitions?

Derek, I would say that the potential is with the visibility for real time pricing, some of the analytics to help to have guidelines and an adherence to those, especially in that random product environment, and we expect as we continue to deploy out, that we have the opportunity for those benefits.

Some of the work that we do in preparation really has us updating price guides and files and just the readiness work helps us be faster and better response and then the system's going to give us some visibility for more realtime review and visibility to pricing and an opportunity to coach or to re-enforce going forward.

So, as we deploy out around our distribution centers in the environments, we'll have more and more of that opportunity.

Okay.

Well, you have enough resources deployed to see an effect by the first half of fiscal '14?

First half of '14.

Again, with the volume we have, we expect pricing and we expect our margins to continue to improve as we go along and that is what we work at and the price will be one part of that contribution.

Thank you.

Yes.

The last question comes from Brent Rakers from Wunderlich Securities.

Please go ahead.

Yes.

Good morning.

I think I'm the first to get a follow up on some of the ERP questions.

I think can you remind me if I am incorrect.

Has Applied given any sort of cost savings benefits from ERP or gross margin target benefits?

This is Neil, and I would say that we haven't.

As I said before, it's hard to parse out, right, what is the benefit from ERP.

What is the benefit of readiness actions.

What is the benefit of other continuous improvement projects and what we say, we will talk about our business benefits overall and the improvements we are making and trying to attribute what is due to an ERP or what's from some other action in our business.

We are probably not that good to do that.

Okay, so no plans obviously to do that even upon completion?

Agreed.

Yes.

Okay.

And just for clarity, some of Mark's numbers on the acquisitions with the different geographies, could you give a better sense, in particular what the Australian business did in the quarter in terms of revenue?

I would say we had around $18 million to $20 million was revenue increase due to Austraila/New Zealand.

I do not have that number right in front of me here.

Okay.

And we did say and we'll say in the 10-Q, and I will say in the other country revenue that all of the increase that you're seeing in that disclosure is Australia/New Zealand and we are basically doubling that information in there.

Okay.

And again, just another point of clarity and on some of your gross margin comments.

If I am backing into the numbers correctly, you saying that the collective, and I think there are five different acquisitions that flow through the numbers this period.

Does that income to a mid-30s gross margin in those businesses?

I do not have that number in front of me, but it's at a higher rate than our traditional rate, which was in the 27.5% range and enabled us to show the 28.1% for this quarter.

Yes, they're virtually all of them higher.

Okay.

And two other questions, I think.

When you initially made the SKS acquisition, there was comments that it would be, a general comment they would be accretive.

When you walk through the gross margin and SG&A disclosures, the acquisitions net out to pretty neutral to EPS.

Could you maybe address how SKS is performing and if the other acquisitions are diluted, that may be dragging down the overall appearance of the SKS accretion benefit?

I will talk to Australia-New Zealand.

I think the team continues to perform very well and there is obviously characterizations of that economy being two-speed economy.

All the resource related parts of the market and the all other with the resource markets traditionally being the strongest.

Obviously, they're not immune to some of the activity in mining and some of the other and for us, we are excited about the opportunities that we have there and acquired in the August timeframe.

The work that has gone on is some in integration, but really all the readiness work on product expansion.

So you have got a real nice opportunity to continue to build out that power transmission platform there and some other product categories in time.

So there is probably eight going on and what I categorize more as phase I. And there is work accelerating already on phase II.

So we are going have more products and more solutions to be taken to good customers in that environment.

Now some is in the face of a little less demand, but we -- and into maybe the core products.

Now, we are bringing much broader solutions to those customers and we are liking the businesses very much.

Okay, and a final question, and I am not sure if it relates to competitiveness or error end-markets or what have you, but seems like if you look at your December organic numbers and you look at your March organic numbers and your three other public peers, your numbers look significantly stronger than all of your peers.

Any comment as to what might be driving that?

Any Company's specific initiatives?

We know the bigger picture initiatives.

And maybe even more color on end markets, particularly with regards to the lumber force products, maybe the magnitude and strength in that business?

I am not too sure that it's just any market driven in doing it.

Hey, we like our initiatives and they're based around fundamentals and execution in that.

I would say, too, right, these are big markets with fragmented distribution and so there is opportunities for growth via acquisitions to consolidate.

But it's a big space out there.

So, it's, you know, we do not look just at one, two, three companies doing it.

We are probably more focused on the customers and those opportunities.

Okay.

Great.

Thank you.

Thank you, I will new turn the call back over to Neil Schrimsher for closing remarks.

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

And we look forward to talking with you throughout the quarter.