Applied Industrial Technologies Inc (AIT) 2013 Q4 法說會逐字稿

Welcome to the fiscal 2013 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 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.

Thanks John, and good morning everyone.

Welcome to the Applied Industrial Technologies fiscal 2013 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 the next two weeks, as noted in the press release.

Before we begin, I would like to remind everyone that we will discuss Applied's 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 as 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 our various business strategies, and other risk factors identified in Applied's most periodic report and other filings made with the SEC, which are available at the Investor Relations section of our website at 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, this teleconference is being made available to the media and general public, as well as to analysts and investors.

Because the teleconference and this 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, Applied's Chief Executive Officer, and Mark Eisele, our Chief Financial Officer.

At this time, I would like to turn the call over to Neil.

Thank you Julie, and good morning everyone.

We appreciate you joining us today.

As we reported in our release this morning, sales for the 2013 fiscal year were a record $2.46 billion, up 3.7% from fiscal 2012.

Net income for the year increased to a record $118.1 million, or $2.78 per share, representing a 9.4% increase in earnings per share compared with fiscal 2012.

Our full year results were driven by our operational efficiencies and disciplined cost controls.

With the macroeconomic headwinds moderating sales growth, we were able to translate a modest sales gain into solid earnings and cash flow, and we expanded our operating margin to 7.2%, up from 7.1% last year.

For the quarter, sales were $640.5 million, up 3.3% from $620 million in the same period a year ago.

Net income was $32.3 million, or $0.76 per share, compared with $32 million, or $0.75 per share, in last year's fourth quarter.

We are pleased with our ability to increase our full year operating margin over the prior year, while devoting significant resources to the implementation of our new ERP system.

Across the business, our dedicated associates have been fully engaged throughout the design, development, and deployments.

We will continue the phased rollouts across the US service center network, and we will be fully operational in the US by the end of fiscal 2014.

Our business transformation is well underway, standardizing and simplifying our processes, enhancing real-time visibility into the business, amplifying our continuous improvement initiatives, and generating value add for years to come.

In addition, we have been introducing new selling tools to help our sales associates be more effective, efficient, and accountable.

A consistent selling process across the organization is helping convert more sales opportunities into greater results.

These tools, combined with Applied's knowledge about our customers and their equipment, our predictive maintenance offerings, and our fluid power, service, and repair capabilities are all enhancing our ability to address customers' immediate product needs and their future requirements.

Customers continue to focus on reducing transactional cost and consolidating their purchases with fewer and best suppliers.

And we are well equipped and fully prepared to meet their needs with our comprehensive product offering, operations in new geographies, and multiple channels to market, including our service centers, fluid power sales and service facilities, full-line product catalog, applied.com, and the new Applied maintenance supplies and solutions.

We have outstanding capabilities to address customer needs and productively reach all industrial end markets.

Looking ahead, we are optimistic about the general industrial economy for the balance of 2013, and anticipate further economic improvements in calendar 2014.

With the most recent industrial production and capacity utilization indices remaining at historical healthy levels, we know how to operate in this environment.

For Applied's fiscal 2014, we are forecasting a sales increase of 4% to 6%, and earnings per share in the range of $2.90 to $3.15 per share.

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

Thanks, Neil.

Good morning, everyone.

I will provide some additional insight regarding our fourth quarter fiscal 2013 financial performance.

Our sales per day rate during the quarter was $10 million, or 2.5% above the prior-year quarter, and 0.6% above our rate in the March quarter.

We had an additional 0.5 day selling day in the June 2013 quarter compared to the prior year.

On an overall basis, sales increased 3.3%.

Of this overall increase, acquisitions added 4.8% to sales, and foreign currency fluctuations decreased sales by 0.5%.

Overall core same-store operations experienced a 1% decline in sales compared to the prior year.

In addition, we believe the impact of vendor price increases was minimal during the quarter.

Our product mix during the quarter was 28.5% fluid power products and 71.5% industrial products.

Fourth quarter sales in our service center-based distribution segment increased $24.9 million, or 5%, all of which related to acquisitions.

The sales in our fluid power businesses segment decreased $2.4 million, or 1.9%, from the same period in the prior year.

From a geographic perspective, sales in the fourth quarter from our US operations were 0.9% higher compared to the prior year quarter.

Our Canadian operations, while benefiting from $2 million of sales from acquisitions during the quarter, still experienced a sales decrease of $1.1 million, or 1.2%.

Consolidated sales from our other country operations, which include Mexico, Australia, and New Zealand, were $18 million above the prior year, with all of this increase from our Australia and New Zealand acquisitions.

Our gross profit percentage for the quarter was 28.3%, 40 basis points above prior year's fourth quarter.

This increase can be attributed to the impact of a larger LIFO layer liquidation benefit in our bearing product pool compared to the benefit achieved in the prior year, as well as the positive impact of recent acquisitions operating at gross margins above our traditional core business.

Looking forward to fiscal 2014, we expect our overall gross profit percentage to be comparable to the 28.3% rate we experienced in the June quarter.

Our selling, distribution, and administrative expenses as a percentage of sales was 20.8% for the quarter, 100 basis points above the prior year fourth quarter.

On an absolute basis, our SD&A increased $10.2 million in the quarter, or 8.3%.

Acquisitions added $11.1 million to our SD&A, so our core operational SD&A run rate was basically flat on a year-over-year comparison.

During the quarter we also recorded $800,000 of severance for some minor restructuring and personnel moves.

We continue to have a tight focus on our operating expense, and expect our levels of expense in fiscal 2014 to be comparable to what we experienced in the June quarter.

Our effective tax rate for the fourth quarter was 32.1%, due to a favorable resolution of a prior year IRS examination.

Overall, our tax rate for all of fiscal 2013 ended at 33.5%.

As this reflects these fourth quarter one-time tax benefits that are not expected to repeat, we believe our tax rate for fiscal 2014 will be around 34.0% to 34.5% for the entire year.

Our consolidated balance sheet remains strong, with shareholders' equity of $759.6 million.

Our after-tax return on assets for the fourth quarter was 12.3%, and was 11.6% for the full year.

Inventory at June 30 is consistent with our March levels, and we expect inventory turns in fiscal 2014 to be comparable to our current rate.

Cash generated from operations was $42.3 million for the quarter, compared to $28.5 million in the prior year quarter.

We generated $111.4 million from operations for all of fiscal 2013, versus $90.4 million for fiscal 2012.

We expect improved cash flows from operations to continue into fiscal 2014.

Our capital expenditure expectation for fiscal 2014 is in the range of $9 million to $12 million, and primarily relates to information technology and infrastructure investments.

While we did purchase 1,300 shares of stock in the open market during the June quarter, we do expect to be more active with share repurchases in fiscal 2014.

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

Thanks, Mark.

To sum up, fiscal 2013 was a milestone year, as we achieved record sales and earnings, and celebrated 90 years of strength in distribution.

While we are proud of our past and our recent accomplishments, we are not satisfied.

Applied has a strong foundation, and we have solid momentum heading into fiscal 2014.

Entering our 10th decade, we are committed to executing our long-range strategic plan to accelerate growth.

Our strategy remains simple and straightforward with five fundamental elements.

Growing sales in our core businesses, as well as in targeted industries; expanding our value add with existing customers, and reaching new customers; driving product expansion beyond our base offerings, with opportunities across all our product groups; building upon our North American fluid power leadership with OEM customers, and gaining increased share of MRO end users; enhancing operational excellence with continuous improvement across the business, and realizing the full potential of our ERP investments; and finally, utilizing our strong financial position to accelerate acquisitions.

As we look ahead, we are confident that we are driving the right actions and making the appropriate investments to generate profitable growth and shareholder value.

Now, at this time we will open up the lines for questions.

Thank you.

Now begin the question-and-answer session.

(Operator Instructions)

Matt Duncan from Stephens.

Good morning guys.

Good morning Matt.

Before I get into questions on the quarter and the guidance, can you just touch real quickly on Ben's departure?

I think this is the first call you've held since the news came that he was leaving AIT.

What was behind that?

Yes, sure, Matt.

I'd say first of all, I would like to acknowledge Ben, who retires later this week, capping a 19-year career with Applied.

Ben has done well professionally and personally, and we wish him all the best.

And then from a business standpoint, there is really no better time if you are going to have a change than to do it around the closeout of a fiscal year and the start, or the beginning of a new one.

If you think back on the fiscal '13, we have welcomed some new members to the team, and we've got a new VP of Maintenance Supplies and Solutions.

We've got a new Global Supply Chain Leader, and then most recently, a Chief Commercial Officer.

And so there, I think about Carl's responsibilities, those are going to include driving the sales strategy, that execution, commercial excellence as we think about the forward-facing side of our operations.

And then sales execution with our US service centers and our Fluid Power business.

I think there we believe we've got a real opportunity to achieve more in each segment, and then collectively working together with them.

Okay.

So Neil, are you going to fill that COO chair, or the people that you just referenced essentially how you're filling that position?

Yes, we are not going to fill the COO chair in that.

Okay.

All right, I appreciate the insight.

Moving onto sort of the results from the quarter.

What sort of month-to-month sales trend did you guys experience?

Have you seen any acceleration in the business?

I noticed that the drop in organic sales is a little bit less this quarter than it was last quarter.

So things appear to maybe have bottomed, but what does that trend look like?

I would say, Matt, so I'd say throughout -- fourth quarter was kind of similar to the fiscal Q3.

Within the quarter, we saw month-over-month increases in sales per day in our US service centers and our Fluid Power business.

We talked on the external demand indicators.

Still generally at historical favorable levels in that, and then from a seasonal perspective, July sales started slower when compared to June.

I would say not really a surprise, especially when we consider plant shutdowns with our customers' vacation periods, but we expect the continued seasonality going through our first quarter to start, but then steady improvements throughout the fiscal year.

Okay, and then on the guidance, last thing.

Just if you could help us sort of understand some of the inputs there on that 4% to 6% sales growth.

Are you guys assuming any benefit from price?

It sounds like you didn't have one in the quarter, so maybe you are not assuming one going forward.

Is there any benefit from pricing?

Remind us how much of your sales growth in FY '14 ought to come from the acquisitions you've already made.

Sure.

So if I break it down, right, the 4% to 6%.

We'll get 1% from prior acquisitions, so it's a 3% to 5% without the acquisitions.

I would say at the low end of the range, we'd look at the market at 2%, and while the core businesses have modest growth at the upper end of the range, perhaps the market improves to the 2.5%, 3% as it progresses into calendar '14, and then along with core business traction and execution.

And there is not future acquisitions in the numbers, but I would say, we would like to be as active in the fiscal year as we were in calendar 2012.

And I think on the price side, and Mark can comment, I'd say no real strong favorable pricing numbers built in.

That is our view right now.

Then are the SAP costs that are flowing through the P&L similar FY '14 versus FY '13?

I think from the ERP cost, like we have talked in the last couple of calls, those are all being absorbed by the day-to-day business.

And so how I would characterize it is that we have incorporated our costs for running the SAP ERP system into our core operations.

Obviously, we still have some deployments to go within the US and things of that nature, but we are just viewing this as all core business.

Our run rate on the total expenditures for running this thing, while similar to what they were in fiscal '13, they are a little bit less.

I appreciate it.

Thanks, guys.

Yes.

Jeff Hammond from KeyBanc.

Good morning, guys.

Hey, Jeff.

This year, I think, was one of good cost control in a sluggish environment, and I'm just wondering if we do see kind of a continuation of that through the year, and it is tough to find organic growth, what are some of the levers you think you can pull to kind of hold the line on margins, or does that become more difficult, just given that it'd be kind of a second year in a row of that more sluggish environment?

I would say Jeff on a couple fronts, I would say we still believe we have the opportunity to operate more productively and efficiently looking forward.

And so, we will continue with those actions, initiatives, and efforts.

Then as we think about margins and opportunity, for us there is benefit with product mix.

As we expand product categories with maintenance supplies and solutions, some of the C class MRO consumables, some of the other product lines that we have, those add favorability and then businesses that we have acquired and continue to operate, those have contributed favorably on margins.

Okay, great.

And then you mentioned being more active in buyback this year versus next.

Can you frame that order of magnitude?

And then I think you said on M&A pipeline, you had hoped to be as active as you were last year, but it still seems like you are at a net cash position, and kind of a suboptimal balance sheet leverage.

Maybe just update us versus when you first came in where you think the optimal capital structure is, and what the path is to get there?

Jeff, I will start out and talk a little bit about the share buybacks.

I think we expect to be active throughout the year of fiscal 2014 on share buybacks.

And I think we will get closer to the levels that we were at in fiscal 2012 where we've bought back about $30 million worth of stock.

Obviously, we're looking at the market everyday and determining our levels of buybacks as we go through the year.

And we don't know what is going to happen in the future, but we expect to be active basically throughout fiscal 2014 at varying levels per day as we move forward.

And then, as I think about the capital allocation, we will continue to look at strategic investments in the business, especially those that help serve our customers more productively and efficiently.

We're not so capital-intensive, so we obviously can do that.

We will continue with the dividends.

We will continue to look, as Mark talked about on share repurchase.

And then on the acquisitions front, I have seen some of the firm's recaps on M&A deal activity.

Maybe a little weaker in the first half of '13, and no broad-based recovery.

For us, with that said, we are busy.

We've got a strong pipeline.

We do want to be as active in '12, really every year as we think about it.

We've got clear priorities that we work on.

We're looking to kind of raise our sights on the prospect size as well.

I think looking back, our historical deal size has been around $30 million in revenues.

We would like to be adding to that average, and we know we've got the financial capability, but also the operating know-how to bring in and integrate businesses.

The pipeline is good, we work it, we will be reviewing it again later this week, and we will look for more activity going forward.

It sounds like you're a little more optimistic about your pipeline than maybe the broader peer group?

I don't know if I can comment on the broader peer group.

How about relative to entering fiscal '13?

When we began into fiscal '13, we did five acquisitions in the first half of fiscal '13 for that.

And I think our pipeline didn't really shrink in the last half of fiscal '13.

We didn't close any acquisitions in the last half, but we continue to look and talk and evaluate organizations, but we really haven't seen a change in that.

We do expect during fiscal '14 we will get a few of those to closure.

As Neil mentioned, we are trying to shoot for bigger targets, too.

Okay great, and then just last question.

You have talked more about this maintenance supplies and solutions business.

I think you mentioned a new head of that business, and you have done some deals there.

Can you just frame how big that business is, and how you see the market opportunity, and your opportunity within that market?

Right, Jeff.

We had purchased the PAI in December of 2012.

They've been in our stable of organizations for the past six months.

And that is the second company within this category that we have purchased 2.5 years ago, or I guess maybe it's 3 years ago now, and we purchased another company called UZ Engineered Products.

So those two are starting our core for this as we try to expand out.

And as we mentioned before, the PAI annual revenue run rate was around $30 million a year.

So these were relatively smaller organizations, but as we bring them together and we look at opportunities to grow and expand within their core business, as well as synergizing with the contacts, within the traditional business that we've had through our service center network, we see great opportunities for this during fiscal '14 and into the future.

And so Jeff, as I think about it too, right, we will operate the business, the combined business, out of one of our distribution centers and then their own facility that they had had previously.

So if I look at the opportunity moving forward, we have the product lines, we have the access, we have sales associates that work just at vendor-managed inventory utilizing the electronic handheld devices, so they are incising customers.

So we think there's a lot we can do with our existing customers to help them manage those Class C MRO-type consumables and add value, and plus there is a lot of new customers in that, just like industrial distribution.

It is a big fragmented space.

You could draw the market easily as big as $25 billion itself.

There are a few large players in that, but it is also very, very fragmented.

Okay.

Thanks guys.

John Tanwanteng from CJS Securities.

Good morning, guys.

Thanks for taking my questions.

Can you just give a little bit more color, if you will, on the potential for M&A over the next six months?

I know you've been wanting to get more aggressive, both in scale and amount, but we haven't seen much since December of last year.

Are you kind of encountering any obstacles, either in scarcity or evaluation or anything else regarding potential targets?

John, I would say really no obstacles.

We say we can't perfectly control the timing.

We are going to stay a disciplined strategic acquirer.

We do expect activity to translate into acquisitions, but we want them to work, they've got to fit into our priorities.

We do not, or we will not, operate as a holding company just to acquire.

And to the earlier question, I think about the pipeline today versus even coming into '13, I think it is robust, I think the quality of it is good.

And so we will continue.

So again, we won't perfectly control the timing, but I like the work and the effort that is going on, and we'll believe we will translate that into appropriate closures.

Okay, and do you see more opportunity or potential in local US markets versus international on the M&A front?

I would say, obviously we feel like if you look at the landscape, there are good US-based opportunities, and then I would say within our operating framework outside of the US, there is also opportunities, as well.

We won't stay just focused on the US, but there is good opportunities.

And then outside, obviously we are not closed to those opportunities, and we think we can strengthen each of our businesses in those operating markets we are in.

Got it.

And then Mark, maybe for you.

You guys said that you expect SG&A to remain relatively constant going into next year.

But where can we expect that to settle out, once the ERP upgrade is complete and you bring your operating expenses of your acquired businesses more in line with the corporate average?

I think some of the acquired businesses that we have, they are a different model with maintenance solutions and supplies.

I don't think the view for them is to bring them into our acquired business SG&A rate is.

It's just to manage them so that we take the most advantage of their sales and convert that to an operating profit percentage.

So we're looking at the SD&A obviously very closely.

We're scrubbing those numbers as close as we can, and our view is that when we look at our fourth quarter run rate for SD&A, that is going to be very comparable to the rate that we see going forward into fiscal 2014.

Obviously, we continue to look for opportunities to change things, and we do believe from the short-term and the long-term that SAP implementation will raise opportunities for us to make further changes to help us now and in the future.

Great, thank you very much.

John Baliotti from Janney Capital Markets.

Good morning, guys.

We are seeing, it's not a lot of data yet, but we have seen some positive changes in durable backlogs and new orders out of June, and if that continues in July, obviously that's a good trend.

If we couple that with what appeared to be a pretty broad destocking starting in December of last year, I was just curious if you're getting any sense from customers where their inventory levels are?

How they feel about that, or what sense you are seeing from any patterns that might reflect their inventory levels?

John, I would come at it a couple of ways.

I'd say one is, we look at the indices, they typically have for us, I don't know, a four- to six-month lag.

Those tics are positive and encouraging, I think, to all of us.

If we look at our products and our customers' applications, a lot of our items are not deeply stocked items for those.

I don't think we experience the benefits of stocking up with our industrial customers or any destocking as it goes on in those environments, right?

Capacity utilization is probably a bigger driver, capital goods, durable goods as they purchased them or have products is probably a bigger driver.

I think we are less sensitive to any kind of ups and downs.

I think more consumables, and maybe other categories around electrical or something else, maybe there is a little bit more movement, but I would say less for us.

So we don't have that type of exposure, and probably any other comments to give you.

It seems like that this was the first month where even though we had pretty healthy new order rates and shipments, that backlog started to grow.

So, obviously, if that has a positive impact on capacity utilization, you would expect that you'd see that.

Yes, we do.

And so for our Service Center business, right, it is heavily a break/fix MRO, and so we're responding to the customer's requirements in a very timely fashion.

In our Fluid Power business, we do see orders, we do carry backlog, and I would say, hey, those would probably mirror some of that broader macroeconomic.

Those have been positive, looking at those.

And you talked about inventory levels and the consistency of those.

How about from your suppliers, are you getting any sense from what the competitors are doing?

Are they able to keep inventory, or has this sluggishness been so persistent that -- any sense their inventory levels are lower, or not able to hold those?

I don't have a good sense on competitors' inventories.

I think on our own focus, we continue to look at how we can productively manage our inventories, look at what we carry, look at the cycle time, and work with our suppliers.

Many of them, right, they are going through their continuous improvement initiatives, lean, they are reducing cycle times, and so I think it gives us all an opportunity to take a little waste out of the channel, become more efficient.

For us that probably means we can lower some safety stock, especially on very high velocity A type items, and then use our inventory dollars more productively for our customers around B and C inventory class items.

I think that's going to be our focus on how we efficiently run.

I think it's good for our shareholders and good for our customers as we do that.

And we work closely with our suppliers.

I can't speak to any competitors' plans.

Yes, I mean, it seems that as everyone focuses on being leaner and more efficient with their assets, that that could be a healthy relationship with them, if you've got a more strategic balance in what you are carrying.

Right.

Great, thank you.

Joe Mondillo from Sidoti & Company.

Good morning, guys.

I have two questions.

First off, the gross margin.

If you exclude the LIFO liquidation and the scrap costs that were there, it seems like the gross margin declined sequentially.

Just wondering what sort of pressures you are seeing there, what your rebates look like, and looking at the guidance of the 28.3% that you said could be consistent for '14, what your assumptions are to getting to that, and if there is any further opportunity of liquidation of the inventory?

Sure, I will talk to that, Joe.

I think that for the fourth quarter, we did see some other decreases within some of the core operations.

Obviously, there's large moving parts back-and-forth when you are coming up with the overall gross profit percent, but we did see some weaknesses with supplier purchase incentives in this quarter that impacted the overall gross profit percent.

I think when we look forward for fiscal 2014, and the thought process regarding additional LIFO layer liquidation benefits, when I look back at our operations, for the last four years we have had LIFO layer liquidation benefits, that is all related to us managing our inventory in an efficient and effective manner.

We believe we have opportunities to continue to manage our inventory, like Neil was mentioning earlier, in an efficient and effective manner to see further improvements as we look at June of 2014.

Can we call that number exactly?

No.

Can things happen during the year that could change our view and perspectives?

You bet.

But as of now, we still expect to see improved inventory management that can result in some layer liquidation benefits in fiscal 2014 that would help with the gross profit percentage as we move forward.

Just to follow up on that, just to be clear.

In fiscal '13, we saw a pretty big ramp in gross margin from the first quarter to the fourth quarter.

Is it fair to say that the first and second quarter you may see a drop-off from the fourth quarter and then a ramp-up in the back half?

Obviously that can happen a little bit.

But we're looking at 28%-plus is our gross profit run rate.

Obviously, you do have fluctuations quarter-by-quarter for things that happen, but our view is our run rate is in the 28%-plus arena.

On a quarter-to-quarter basis?

Yes.

Okay.

And then the last question, just trying to understand the effects from the ERP implementation and the expenses there, and I don't know if you can actually quantify the expenses that are falling off from '13 to '14, or if you can just maybe address a little clearer on how significant to the guidance, the EPS guidance that you are putting out there, how significant the fall-off of some of those ERP expenses are?

I will talk about that.

The significance isn't that much, because a lot of the expenses, we are repurposing our people that were working on the development of this system to running the system, and then keeping that system working efficiently and effectively as we move forward.

A lot of it is repurposing.

But obviously a lot of the outside consultants and integrator assistance that we had, we did have some of that during fiscal '13.

So that is basically going away.

So there are fewer dollars in certain areas of the spending in fiscal '13 that do not continue into '14.

It is not a huge step backwards from what we experienced in '13 to '14.

Okay, great.

Thanks a lot.

Adam Uhlman from Cleveland Research.

This is Courtney on for Adam.

Thanks for taking my question.

Just wondering if you could talk a little bit about any differences you are seeing by end market, government customers versus OEM.

And any color you could give on the product categories.

Are you seeing growth in that underlying MRO piece that you've trying to expand out, and just being offset by declines elsewhere?

Any more color on that would be great.

Courtney, I think we see probably strength in areas that you would expect.

Things connected to housing, transportation, industries around the -- industry around the consumers, differences around some of the machinery manufacturers, maybe electrical machinery in that, and I think those are perhaps customers that are relying more on global and exports-type markets in that, and have a longer cycle on their production and building those.

I would say those would be the type of differences that we would see.

And then product, I would say no big variation to talk about.

Okay, great.

Then just one other quick question.

Any update on your long-term goals that you laid out a year ago?

If you are thinking about that any differently today than you were 12 months ago.

I would say no real differences we think.

So for us on a long-term standpoint, we would look to continue to achieve $3.5 billion in sales with roughly half the growth coming from acquisitions and half organically by 2016.

Improve our EBITDA margins to the 9% to 10% range, and then return on assets, have it approach 13%.

And if I think about the year, we feel good about our progress around ERP transformation and the long-term opportunities.

We extended our reach to Australia and New Zealand and some other acquisitions.

I think we've expanded some capabilities, including around maintenance supplies and solutions and some of the other product expansion.

We strengthened Fluid Power with some acquisitions, with some investments, and some resources.

And probably most importantly, I think we stayed connected with our customers in providing solutions and then working with our suppliers on growth and operational initiatives.

But as I said earlier, we are not satisfied.

We are focused on building on that, translating all of that into greater profitable growth.

Okay, thanks.

Greg Halter from Great Lakes Review.

Good morning, guys.

Good morning, Greg.

I wanted to comment on a couple of -- ask a question on a couple of the balance sheet categories.

Receivables up 7% year-over-year, inventory 23%, and payables 13%.

Can you talk about those levels, and then what they may have been excluding acquisitions?

Yes, Greg.

For the acquisitions on inventories, the acquisitions added -- almost $30 million of our inventory increase was due to our acquisitions during the year.

So that was the majority of the increase, but not all of it.

And what we've talked about on the last several conference calls is that we did put some strategic inventory into our service centers for drive products, as well as certain products from the catalog, to help drive sales growth opportunities.

I would say the remaining inventory increase that we had was much more targeted in trying to address our strategic plan opportunities to seed inventory for sales growth going forward.

Regarding receivables, I don't have the specific number of how much the receivables were from the acquisitions, but obviously it was a good portion of that, as well.

And we continue to work hard on collecting our receivables and having a good DSO, and that is something that we look forward to for our conversion to the SAP system, as that gives us additional tools and capabilities to manage our receivables with our customers.

As we look out long term, while we don't see huge improvement opportunities in our DSOs, we definitely do see opportunities available to us.

Okay, and what was your split for geographic sales between US and outside the US for fiscal '13, and where do you anticipate that going into the future?

In fiscal '13, the US provided just about 80% of our sales, and then Canada was right around 12%, 13% of our sales, the rest of the world was around 6% or 7%.

I hope that adds up to 100%, or close to 100%.

And so, that is really where we ended up for fiscal 2013.

As we look into fiscal 2014, we think the split is going to be very similar.

The rest of world area, with the Australia, New Zealand acquisition, we had that in fiscal '13 for 11 months.

So there's only going to be one additional month in for that.

So we think that will be very similar as we go into fiscal '14 split.

We want them both bigger, right?

Okay, and can you go over the SD&A comments that you had in the prepared remarks?

I just want to make sure I'm clear there, when you talked about the different components, and then where do you expect fiscal '14 to come in at.

Right, what we talked about in the prepared remarks was we looked at the change in the SD&A for the current quarter versus a year ago, and virtually all of that change related to the new acquisitions that we had purchased.

So that when you look at the core same-store operations, their SD&A rate was flat, it was actually a little bit down, but in essence it was flattish.

So when we look at going forward for fiscal 2014, we just look at the -- one of the things we look at is the run rate of what we had in the June quarter as to that moving forward.

And so we think our rate in absolute dollars, as well as a percentage of sales, should be comparable into fiscal 2014.

Okay, that is clear, and obviously there would be some seasonality in there with July and so forth.

It's going to float up and down a little bit quarter-by-quarter for certain things, too.

Okay, thank you.

Okay.

Holden Lewis from BB&T.

Thank you, good morning.

Good morning.

A couple of housekeeping items.

Do you have the days for fiscal '14, the quarterly days?

Holden, I do not have them with me.

I don't have them, so I can't respond.

Okay, [take that offline].

And then you talked about sort of the LIFO benefit.

I may have missed the size of the true-up in Q4.

So if you could re-cover that if you haven't already, and then did you have any true-up with regards to rebates in the quarter?

No, not really.

The rebate levels that we got in the quarter were basically very directly tied to the purchases that we had in the quarter, and as those purchases are rolling into the income statement from that benefit, because of course you don't record the rebate benefit directly to income.

It is when the inventory is sold is that it gets onto the income statement.

It was very stable.

So no big true-ups that would have adjusted things.

Okay.

On your other question on the LIFO, the layer liquidation benefit for the quarter was $6.3 million.

We also recorded some additional scrap expense in the quarter for about $3 million above our normal rates, and so those were the two unusual things that we did call out.

Okay.

And then I guess getting to the long-term goals that you guys have put out there.

I guess the first thing is, I think you mentioned 2016 now.

You didn't change any of the long-term goals, but if I remember correctly, they were three-year goals with '12 being the base.

Have you sort of pushed that out a year?

Yes, so so, Holden.

Fair.

As we look at it, we plan on our strategic side in three year, and so we set our goals internally that way and we communicated them externally in that.

So we have not changed, and summarized earlier, hey, there are things we feel good about, the progress, and establishing the foundation, not satisfied.

And we're going to keep working all of those.

I think the elements are the right fundamentals to be driving.

We will look at taking on more in time, but I believe we get to our goals doing those things in the three years.

From using now fiscal '13 as your base?

Yes.

Okay.

And then sort of along those lines, you are doing a great job on the acquisition side.

Your margins certainly look like they are on track to get where you want them to get to.

The one question I have, I guess, is on the core gross where I think in the original model it was probably looking at sort of 5% to 10% type core growth.

Obviously, market is not helping, but I guess when I look at your organic DSRs, they just don't look a lot different from the overall market that you are facing to me.

And I guess what I'm curious about is, at year-end are you -- we have expected to see more market share gains or above market growth because of cross-selling, or do we feel that maybe sort of the cross-selling effort maybe hasn't developed as quickly as expected, and maybe we need to make some tweaks to that?

How do I view that organic piece?

I would say we are making progress in cross-selling.

I think we are giving our selling teams more tools.

I think about we have gone from manual efforts to more electronic mobile tools around account profiles, sales planning, opportunity management.

I think we're linking well with our best suppliers on plans and execution.

If I look across our 14 product groups, we are making progress at a customer level in those.

Do we want to do more?

Yes.

Do we believe we can do more?

Yes.

We are also working at visibility with our teams on active accounts, and what they have and how they add prospects and turn them into new customers.

I would say look back, good year progress, and we're going to build on that momentum.

I can almost draw our performance in a bell curve.

Obviously, you get an upper quartile that is doing very well, perhaps you have a lower quartile that needs help.

And I think our real potential is when that mid-50 group keeps taking steps forward, that really moves the mass and the numbers.

And I go back, interest our line, our guys win as they do this, but it also fits customers.

As I am out with customers, they are looking at ways to reduce their transactional costs and do more with suppliers that can meet more of their needs and requirements.

Hey, not just me, we've got a broad leadership team that believes we can do that in more than one or two categories for our customers.

Okay.

So what it sounds like you are describing is just sort of the concept of buy-in.

Whenever this changes, you obviously had some people who buy in, others who take longer, and I guess that gets sort of the SAP question.

Whether it is regarding pricing discipline, buying into the cross-selling, the sourcing, I mean, it always seems like the SAP system and the visibility it affords should help.

You have made it clear that you're sort of getting to the point where the costs have peaked out.

But when would you expect to see the SAP business driving meaningful operational improvement?

Is that a fiscal year '14, or is this a transition from implementation to learning curve, and then '15 is where it hits?

How do we think about the operational benefits of it?

I would say the operational side of that, obviously we get more benefit when all our US service centers are on.

So I would say in that timing, '15.

Now with that, we talk to our teams regularly on expectations around progress and benefits, where we have deployed, and candidly, we get -- we identify opportunities ahead of cut-over, just on things you do.

We've talked about it before, right?

SAP doesn't do all of this for you.

Some of it is your management tools and attention, and then your enterprise system probably helps you to do it a little better or a little faster with its visibility in that.

I would say we will continue to make progress this fiscal year as we deploy, and then I think those big lifts and benefits, '15, '16, those type.

Okay, thank you.

Garo Norian from Palisade Capital Management.

Garo, how are you?

I'm doing all right.

Going to just tie back a little bit to something that was asked earlier as far as the margin goals.

It looked like this year you guys kind of had a 10-basis point improvement in the margin, and just trying to get a little more understanding around the drivers, and what level of improvement you might see next year.

Garo, we do expect to see some overall improvement in the operating margin percentage next year.

We think a lot of that is going to be driven from the gross profit percent, and we see opportunities in our gross profit percent, both with point of sale pricing to our customers, reducing the variability with that and having more control over those, as well as discussions and negotiations with our suppliers for various purchasing incentives, so to speak.

I think that is going to be one of the main areas.

We also see opportunities within SD&A, but as we mentioned on the call, we think we are going to be relatively stable on those, and be able to grow without adding a lot of costs.

Got you.

And then if I just think about the high and the low for the EPS guidance, is that really kind of the function of the top line and the flow-through you get, or is there anything else that's material to that?

I think those are definitely the number one linkages for that.

Obviously, there are lots of things in the mix where pluses and minuses that could impact where you fall in that area.

But if we hit the top end of the sales guidance, it will be a lot easier for us to hit the top end of the EPS guidance, and those are just logical things to look at.

And so yes, there's nothing else unusual in the numbers.

It's just core business.

Great, thanks.

Thank you.

At this time, we will be taking our last question from Gregory Macosko from Lord Abbett.

Last question.

Great to have you on, Greg.

Okay, just fine.

Most of the sales side asked all the questions I had, but just with regard to the SAP.

Basically what we are saying is, is that the cost there is pretty much at a run rate basis in fiscal '14, particularly as the year progresses, I guess, right?

Correct.

And how has the implementation gone, or what is your, I know there was some discussion there about sales and the like, but just looking at it, after the Canadian situation and now you're rolling out some of the American locations, how is it running relative to your expectations?

From my side, it has gone really well.

We have had dedicated associates, I talked about it earlier, work through the build, the development, and now the deployments.

And I think each one continues to improve.

The teams, their focus, the training environments that we are giving them to operate in early is really helping.

Tools that were helping even to be faster, better in cut-over preparation and managing that kind of shrinking.

While it's worked, it is shrinking the amount of time they are doing it in cut-over weekend inside.

Hey, there is work ahead of us, I am encouraged by how it keeps building.

I appreciate the work and the job that has been done, and what I get most excited about is teams that are on are seeing kind of the real potential that we can have to improve the business, and as I said earlier, for years to come.

Okay, good.

And then just with regard to the LIFO, we've had discussion there.

From a layman's standpoint, just looking at it, is it the fact, you mentioned bearings as being the area where, I guess, most of it was realized.

Does that mean that basically there's some layers of inventory of older products that maybe don't turn as much, and so in looking at those layers you say, well gee, we don't need as much of this, and so you eliminate that, and because you go down into LIFO layers, you take a gain?

You've explained the math, which is technically correct with that.

You're basically -- a layer liquidation, how it flows into your income statement is basically selling products on the -- and having the cost of goods sold on those products to be a prior, older year cost of goods sold versus a current replacement cost, cost of goods solds.

That is exactly what's happening.

Basically what that means is, in our inventory management perspective, we can manage certain buckets of inventory better, and that rolls through the mathematical calculations in a good way.

We have five LIFO pools that we are separately calculating, and bearing products is one of those LIFO pools.

That's where we have been experiencing these layer liquidation benefits over the last several years.

But it's not necessarily from faster turns, either?

Correct.

Right.

You are basically analyzing those pieces of those pools better than you have in the past, and you are able to say, we can cut this or that, right?

Yes, and repurpose inventory have different levels and different products and different amounts.

Is the scrap combined with that analysis, too?

Is that why the scrap was up a little bit?

Obviously our scrap objective is to make sure that we scrap things timely and take care of that inventory so that we have -- we want to just make sure we have inventory on the shelves that is salable.

And I would say that the scrap expense we had in the fourth quarter, that was above and beyond our normal expectations.

It was just a timing thing as to when that hit this time.

Okay, good.

Thanks very much.

Thanks, Greg.

All the best, Greg.

I will turn it back over to you, Mr. Schrimsher, for any closing remarks.

Hey, at this point, I will just thank everyone for joining us today, and we look forward to talking with you throughout the quarter.

Thanks.

Thank you, ladies and gentlemen.

This concludes today's call.

Thank you for participating.

You may now disconnect.