Applied Industrial Technologies Inc (AIT) 2014 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the FY14 third quarter earnings call for Applied Industrial Technologies.

My name is Elaine and I'll be your operator for today's call.

(Operator Instructions)

Please note this conference is being recorded.

I will now turn the call over to Julie Kho.

Julie, you may begin.

Thanks, Elaine, and good morning, everyone.

On behalf of Applied Industrial Technologies, thank you for joining us on our FY14 third-quarter investor conference call.

Our combined earnings release and acquisition announcement was issued this morning before the market opened.

If you have not 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 outlook 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 our various mark business strategies, and other risk factors identified in Applied's most recent 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 statement, 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 to the general public, as well as to analysts and investors.

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

Our speakers today include Neil Schrimsher, Applied's President and Chief Executive Officer, and Mark Eisele, our Chief Financial Officer.

At this time, I'll turn the call over to Neil.

Thank you, Julie, and good morning, everyone.

We appreciate you joining us today.

To recap the numbers from our release this morning, our sales for the third quarter were $618 million, down 0.6% from the prior year quarter.

Foreign currency exchange rates resulted in a negative 1.6% impact on our sales in the March 2014 quarter.

Net income was $30.4 million, or $0.72 per share, compared with $29.3 million or $0.69 per share in the prior year quarter.

We did face some market headwinds earlier in the quarter with weather a contributing factor.

We also had some nice progress with our ERP business transformation.

With our most recent Go Live in April, our entire US Service Center network is now operating on our new system.

Our teams have worked hard to get to this point, and I want to recognize their dedicated efforts and the outstanding teamwork on reaching this significant milestone.

We're also pleased to announce the acquisition of Reliance Industrial Products, a leading supplier to the upstream oil and gas industry.

Reliance currently operates with ten locations in western Canada and five locations in the United States, offering a full range of products and services, including hose and fittings, hydraulic and mechanical repair, and oil field supplies.

The business is well-positioned and well-equipped to serve the unique needs of the oil field drilling industry and has solid presence and experience in transportation, mining, and construction market segments.

Overall, we're excited about the opportunities for synergies across our businesses, given the strong capabilities and meaningful market presence of Reliance.

Combined with our Texas Oil Patch Services, or TOPS operation in Houston, we have a strong foundation for growth in these entities as well as our traditional Service Center network in the categories of bearings, power transmission, fluid power, fluid conveyance, and oil field supplies.

While Reliance will be neutral to our net income for FY14, the acquisition will provide incremental EPS of $0.12 to $0.15 for FY15.

Now with our fourth quarter M&A expenses and our current view of overall business activity, we are adjusting our sales and earnings guidance for our full fiscal year to EPS of $2.60 to $2.75 on sales of $2.45 billion to $2.48 billion.

With that, I'll turn the call over to Mark for additional detail on our financial results.

Thanks, Neil.

Good morning, everyone.

I'll provide some additional insight regarding our third quarter FY14 financial performance.

Any fourth quarter forward-looking comments in my commentary relate to our operations as of March 31, 2014, and do not have the Reliance acquisition factored in.

I will have some specific comments on Reliance at the end.

Our sales per day rate during the quarter was $9.8 million or 1.4% below the prior year quarter, and 4.5% above our rate in the December quarter.

We had an additional one-half selling day in the March 2014 quarter compared to the prior year.

Acquisitions had a positive impact on sales of 0.5% during the quarter, and foreign currency translation decreased sales by 1.6 %. Therefore, overall core same-store operations experienced a 0.5% increase 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 29.6% fluid power products and 70.4% industrial products.

Third quarter sales in our service center based distribution segment decreased $14 million or 2.8%.

Acquisitions did have a positive impact to our service center based distribution segment's quarterly sales of 0.7%.

The sales in our fluid power businesses segment increased $10.4 million, or 9.1%.

From a geographic perspective, sales in the third quarter from our overall US operations were up 0.9% compared to the prior year quarter and experienced the positive impact of $3.4 million or 0.7% from acquisitions.

Our Canadian operations experienced a sales increase in local currency of 1.8%, offset by an unfavorable currency translation impact of 9.7%, resulting in a net reportable decrease of $5.7 million.

Consolidated sales from our other country operations, which include Mexico, Australia and New Zealand, ended up with an overall sales increase in local currency of 0.6%, offset by unfavorable foreign currency translations of 8.5% resulting in a net reportable decrease of $2.8 million.

Our gross profit percentage for the quarter was 27.7%, 40 basis points below the prior year third quarter.

This decrease can primarily be attributable to our global operations.

Our selling, distribution, and administrative expenses, as a percentage of sales, was 21.2% for the quarter, 10 basis points above the prior year third quarter.

On an absolute basis, SD&A increased $0.1 million in the quarter or 0.1%.

Acquisitions added $0.5 million or 0.3% to our SD&A in the quarter.

Our core operational SD&A run rate was flat on a year-over-year comparison, resulting from ongoing cost containment actions.

Our effective tax rate for the third quarter was 25.1% and is at 31.5% year to date.

The low tax rate in the current quarter is due primarily to the reversal of a $2.8 million deferred tax liability related to undistributed earnings in Canada.

We now believe that all Canadian earnings will be permanently reinvested in Canada.

This conclusion is corroborated by our acquisition of Reliance, a Canadian-based entity.

This change in our income tax expense decreased the current quarter effective tax rate by approximately 6.9%.

In addition, certain other tax reserves in the US were no longer needed due to the statute of limitations expiring for certain previously filed tax returns.

These reserves totaled $1.1 million and were reversed in the quarter and decreased the effective tax rate by 2.7%.

Exclusive of these two items, our effective tax rate for the quarter and year to date would be 34.7%.

We expect our fourth quarter tax rate to be in the 34.5% to 35.0% range.

Our consolidated balance sheet remains strong, with shareholders equity of $781.1 million.

Our after tax return on assets so far in fiscal 2015 is 10.5%.

Inventory dollars remain above our June levels, primarily due to increases in our US Service Center operations related to certain strategic supplier programs and stocking levels in connection with our phased ERP deployments throughout the US Service Center network.

Also adding to the increase is our Texas Oil Patch Services acquisition, which added $3.4 million of inventory as of March 31, compared to our prior year end.

From December 31, 2013, to March 31, 2014, inventory decreased $3.4 million.

As we stated in our previous conference call, we expected a slight decrease in inventory levels in the March quarter and a somewhat larger decrease in the June quarter.

Inventory levels at June 30, 2014, exclusive of the impact of our fourth quarter acquisition, should be lower than our March levels by upwards of $20 million.

Cash generated from operations was $11.7 million for the quarter, compared to $40.2 million in the prior year quarter.

We expect improved cash flows from operations over the remainder of the fiscal year as inventory and DSO levels decline from their March levels.

This week, we also purchased our 144,000 square foot corporate headquarters facility in Cleveland, Ohio for approximately $10 million in cash and the assumption of a $2.3 million low interest loan from the state of Ohio.

We had been leasing our headquarters facility from the Greater Cleveland Port Authority and our purchase will eliminate the final two years of lease payments due under the lease.

Our overall SD&A expenses related to this facility will decline significantly as we move from lease expense to depreciation expense and some interest expense in the future.

This purchase will impact our overall property purchases for FY14.

Previously, we had estimated total property additions of approximately $10 million for the year, which did not contemplate the headquarters purchase.

Now, total cash spent on property additions will approximate $20 million.

We purchased 208,200 shares of stock in the open market during the March quarter, and we expect to remain active in executing stock buybacks on a go-forward basis.

Today, we purchased Reliance for $189 million in US dollars.

We funded $32 million through cash located in Canada and borrowed $136 million from our banks.

The bank borrowing was split, $36 million under our revolving credit facility and $100 million under a new five-year variable rate term loan with our bank group.

The interest rate under both of these debt facilities will be similar.

While these rates are variable going forward, we are paying around 1.1% interest on these initial borrowings.

The remaining amounts owed to the seller represent hold-backs from the purchase price for reps and warranties that are expected to be paid out over the next several years.

As stated in the press release, we do not expect Reliance to provide any boost to our net income in the fourth quarter due to one-time acquisition related expenses.

We do expect their impact on our next year's earnings per share to be additive in the $0.12 to $0.15 per share range.

We will build in these expected results for fiscal 2015 as part of the budgeting process and will incorporate that into our fiscal 2015 guidance to be provided in August.

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

Thanks, Mark.

To summarize, we are not satisfied with our base business results in the quarter.

However, we are very excited about our growth prospects, encouraged by our ERP transformation progress, and committed to executing our long-range strategy by generating organic growth and accelerating acquisitions for increased shareholder value.

We've been active on multiple business fronts, significantly enhancing our foundation with our technology investments and acquisition activity.

In addition, we're currently in our annual planning process.

Focused on closing our FY14, optimistic about the year ahead, and building momentum as we enter FY15.

We will have more information to share on our outlook in August, but for now we will open up the lines for your questions.

(Operator Instructions)

And now our first question is from the line of John Baliotti with Janney Capital Markets.

Please go ahead.

Your line is open.

Good morning, guys.

Good morning, John.

I was wondering, how did the -- we don't normally talk about month to month but obviously a lot of distributors have already talked about the progression, January being pretty tough.

Is there any color that you could give us on how the sort of the first four months of the year progressed?

Yes.

So I would say for us in the quarter, we saw good progression.

January to February, February to March.

And then I would say for us, our April really the results as expected.

We had our large or our largest Go Live on April 7, 90-plus locations, along with our largest DC.

So during that time, right, we deployed 190 associates to support those locations for one to two weeks on the ground.

You know, our super users are power users.

So the area is ramping nicely.

We're in our fourth week in doing it.

Those associates that came to help are back in their home locations, working on quotes and projects and their opportunities.

And the area that went live is ramping nicely.

Looking forward, we expect April, May to June to continue to improve.

And, Neil, just unrelated to that but given the acquisition of Reliance today, can you give us a sense of the complementary or the overlap in customers?

I would imagine you have run into these guys before and maybe just run up against them before in terms of customers using them and using you.

Just curious any color on that.

Yes.

So we think it's very complementary.

While there would be some common customers, really their strength in the areas of fluid conveyance, hose and fittings, there's going to be nice opportunities for bearing and power transmission products with their core customer base and strength.

And then I think on the Applied and the fluid power side, to have the reverse of those fluid conveyance products and their capabilities around design and services to be additive.

And also they're in some very attractive markets.

Obviously, well positioned with ten locations in western Canada.

That adds to our strength in western Canada.

And those five US markets are really in strong oil and gas plays, like Williston, like Greeley, like Midland, Texas, Shreveport, and so forth.

We think current landscape is good for us and really gives us more capability to build that out into some other markets as we move forward.

Great.

Thanks, Neil.

Thank you.

And our next question is from the line of Matt Duncan with Stephens Incorporated.

Please go ahead.

Your line is open.

Good morning, guys.

Good morning, Matt.

Hi, Matt.

First of all, congrats on the Reliance acquisition.

I applaud you for using the balance sheet.

Thank you.

Neil, first a couple questions on Reliance.

Is there anything that you can share with us on the profitability of that business?

I assuming based on the price you paid they must be a good bit more profitable than AIT from an EBITDA margin perspective.

Is that correct?

That would be correct.

It's accretive on margins and profitability.

They're a very well-run business.

Management team will continue to come over and operate.

We're excited about that.

And so additive as we go across.

And, you know, obviously more than our average size of acquisition looking back in the past, right, there's been maybe a $27 million, $28 million in revenue.

So more size and with that comes what we'd expect, something more than a traditional multiple, but we feel very comfortable with it.

I guess in the press release, you said it was $135 million in revenue.

What was their EBITDA in 2013?

We're not really going to disclose that, Matt.

They did quite well and they are expected to continue to do quite well.

When we came up with the numbers for the EPS projection for fiscal 2015, obviously we have some assumptions in there regarding the intangible asset amortization.

We're still in the process of finalizing the split between good will and identifiable intangibles for amortization.

But we have an estimate in there for those things.

We expect it to be accretive in year one and to continue to be positive even more so in future years.

Mark, any chance you could share with us the assumption on amortization to help us with modeling?

I don't have that number right here, Matt, but I would not hesitate to share that with you guys.

Okay.

Maybe we'll talk off line later.

Last thing for me and I'll hop back in the queue.

Going back to the first question on monthly sales trends.

Neil, some of your peers have been sharing with us the organic daily sales growth percentages just so we can kind of see how much things really did pick up when the weather cleared.

Would you mind sharing with us what your growth rate was like in March?

I think end of quarter, as we saw -- for total in the quarter on a sales per day rate, ours was around 4.5 % -- 4.5%.

We expect traditional improvement in seasonality as we move forward.

Just in April, we were also busy with a pretty significant Go Live in a lot of locations.

That's kind of in the middle of our April month right now.

Okay.

Thanks, guys.

Okay.

Thank you.

And now our next question is from the line of Jon Tanwanteng with CJS Securities.

Please go ahead.

Your line is open.

Good morning, guys.

Nice job on the acquisition.

Good morning, Jon.

Good morning.

Just wondering if you had any more detail on the expected synergies and the level of interest expense you've kind of included in your accretion outlook for fiscal 2015.

Right.

What we talked about on interest expense, I'll jump in on that right now, is we did state that we're at 1.1% for these initial borrowings for these numbers.

We did have an estimate for fiscal 2015 for the rates to go up very modestly from that level as we put it into our model.

So we don't expect interest rates to do anything crazy during the year.

But obviously, it will be what it will be, you know, for those things.

And on the synergies?

I would say just on the synergies, with our broad team that worked on this, with the Reliance team, we probably congratulated one another for about 30 seconds, and then we're getting busy at the task at hand of moving forward on the synergies and the integrations.

I talked to them about them generally on with key customers we think we have the opportunity to expand our product offering and services and solutions to them on kind of multiple fronts.

So that's additive in total.

We think in time, there's opportunities for us to be in more geographies together with those common capabilities.

That's going to be.

And so in our outlook, we will have a modest amount of those synergies in.

Obviously, we built a base case for this and we have a synergy case.

That's what we're getting after right now.

I would expect us to be talking more about that when we get together next time and giving our outlook for fiscal 2015.

Okay.

Got it.

And then just from a historical perspective, after you acquired SKF, the business was a little bit blindsided by a pretty big drop in demand.

I'm just wondering if you have a relative level of confidence in Reliance?

I think we do in Reliance and the marketplace overall.

They have a significant presence in energy and oil and gas, and, you know, we like the sector and want to continue to grow.

But they also do well in other segments.

And so we feel good about what we have modeled in going forward.

Okay.

And then one final one, just more broadly.

Just given the impact of weather in Q1, do you broadly see a kind of pent-up demand from customers?

I think we saw some obviously in the last quarter as it's moving forward.

I don't know if it's so much pent up demand but I would say the macro indicators on the economy are positive in the expansionary range.

Capacity utilization was highest since April 2008.

I think the economy keeps working to steadily get better, and our look going forward for the rest of calendar 2014 would be positive.

I think there's industry associations like MAPEI that are projecting over 3% growth for 2014 and greater than that thinking about into 2015.

So we're opportunistic that the economy continues to improve as we move throughout the year.

Okay.

Thank you very much.

You're welcome.

(Operator Instructions)

And now our next question is from the line of Jeff Hammond with KeyBanc Capital Markets.

Please go ahead.

Your line is open.

Hi, guys.

This is James Sturgill filling in for Jeff.

Okay.

Hey, James.

Just a question on your gross margins.

Could you give us an assessment of what the puts and takes were this quarter?

I know you mentioned global operations.

Just wondering if I could have some more detail.

Yes.

I think the challenge with gross margin is there's lots of pluses and minuses everywhere that add up to the grand total.

What we saw in certain of our foreign operations, we did see some competitive pricing pressures that helped us -- helped drive down margins at the point of sale.

We also saw in certain areas where the level of supplier support in the current year wasn't as big as we had in previous years.

And then we also had some general inventory adjustments in a couple of our operations that had a small impact on margins from a one-time perspective.

I think a lot of these things that we see or saw, we expect to be one- time type situations.

So while we fell under the 28% gross margin level where we have been at the prior four quarters, our expectation is we should be getting back to that level going forward.

James, I'll just add in my business reviews with the guys.

I think they align with Mark's comments.

I can understand some.

They're one times.

Some of the timing of some of the support or activities.

So our look going forward is at that 28% plus.

Great.

Appreciate the color.

And then for the fourth quarter one-time transaction-related expenses, can you sort of narrow in a range for what we can expect there?

Right.

We think that the total expenditures for these one-time things on the acquisitions will be in the $1 million to $1.5 million range in total.

Now granted, some of that happened in the third quarter because this all didn't occur in the month of April as we did this.

But I think there's a good -- it's probably an even split between third quarter and fourth quarter for the expense levels.

Great.

And then just a little final one here.

Demand in Australia and Canada, if you exclude FX, you know, both regions were fairly resilient.

What is the outlook there for the fourth quarter and maybe into calendar 2014?

I think we know we are going through the annual planning process now so I haven't seen all of it.

I just know when the dialogue with the teams and some of the early start to the planning sessions is that there's building confidence and kind of optimism in those.

Probably higher in Canada, around some of the energy markets and such.

And we'll be with the Australian team.

But I think it's building and I give them credit.

Australia working very well on the product expansion.

They're offering more products, more solutions to their industrial customers, and they're also working at growing into some other segments that are outside of resources and mining, which is helpful for us as well.

Appreciate it.

Thanks, guys.

Thank you.

And our next question is from the line of Greg Halter with Great Lakes Review.

Please go ahead.

Your line is open.

Yes.

Good morning.

Good morning.

I wonder if you could elaborate on the -- obviously the core business, which segments may have been the better performers and which ones weren't so good in the quarter.

Yes.

It's quite similar to us as last quarter.

I think of the ones we track, maybe 13 of the 30 were positive in that.

I'd say machinery, petroleum, some of the transportation equipment, I think can kind of continuing aggregate, lumber/wood products.

And we started to see a little strengthening maybe in the machinery manufacturer, which would be very good for us as we think about bearings and power transmission product consumption.

And probably the ones that have stayed a little lighter would be around electrical equipment and pulp and paper.

Okay.

And regarding price going forward, I think you mentioned it wasn't a whole lot of an impact there, but what do you see going forward?

I think it continues to be really a stable pricing environment.

You know, we would see modest price increase activity that could come from suppliers.

I still say the industry has good recognition of costs and cost to serve.

So I would say it's a modest pricing environment or stable pricing environment with kind of modest increases coming through.

Okay.

And relative to Reliance, what will that do, and I know it's early days, but what will that do to the Company's overall tax rate?

Any thoughts here?

Well, I do have a few thoughts that I can share with the group.

Obviously Reliance is headquartered in Canada and while they do have some US operations, the majority of their sales and profitability is in Canada, which does have a statutory tax rate that's a little bit lighter than here in the US.

We expect that to have an overall small decrease in our overall corporate effective tax rate.

But I don't have that all fully modeled in now, Greg.

We're going to be doing all of that through our fiscal 2015 budget process where we get into that in super detail.

Okay.

When you say majority of their sales, is that like around 75%, or is that too high?

I would say that they have more recently expanded into the US.

So the US locations, they have got five in the US, ten in Canada.

Those are the newer locations.

So they're still maturing.

So I would -- I don't have that exact split between Canada and the US, but I would say at least 75% of the sales are in Canada.

Okay.

And I know you gave the sales number.

I think $135 million.

What have they been growing over the past three to five years, let's say?

And will you continue their own expansion plans or will this be consolidated into what you guys are doing?

Yes.

They've had -- they've had very nice growth looking back.

And going forward, we expect that to continue and really look for opportunities to accelerate as we think about expanding those capabilities into other markets.

So, this one isn't one we're just going to look to hold at a current level.

It's a space we like and we think we can further build on and grow the platform.

And obviously the read is that they're specialists in oil field and so forth.

On a percentage of their business, is that up there in the 70% area or is it not that high?

I think it's over 50%.

I don't know exactly the split.

Okay.

And what kind of capital expenditure needs do you see with Reliance?

Is there anything big that will be needed here?

No.

I would say it will be our traditional type capital rates.

It's not -- it too is not a capital-intensive business.

Okay.

And this appears to be, if I look at the records we have, the largest or one of the largest if not the largest deal, at least since the Fluid Power Resource back in August of 2008, which I think was $166 million in terms of costs.

Any thoughts given your due diligence in the integration process here, if this is something that's, you know, going to be problematic for you guys or it just folds right in?

We think it's a very good business, very well run, and we're excited.

And I guess I'd say it's our largest to date.

But we're busy.

And so I've said before, you know, we wanted to be as busy as we were in 2012.

We continue to be active in M&A and have a good pipeline and we're going to continue to look at how we grow our business organically, but also accelerating acquisitions.

Will they be put on your ERP system?

We will be evaluating that in time.

You know, it was part of the assessment.

They operate on a very good platform today.

So it's not going to be, obviously, our day one work.

All right.

Thanks a lot.

You're welcome.

Thank you.

And now our next question is from the line of Adam Uhlman with Cleveland Research Company.

Please go ahead.

Your line is open.

This is Courtney on for Adam.

How are you?

Hi, Courtney.

Good morning.

Good morning.

Just wondering if you could give any detail on sales growth by product category.

I know you've been working hard to grow outside bearings, fluid power, and power transmission and curious if you could give any kind of update as to how that's going.

I would say what you saw or heard in our results right around fluid power.

So really nice progress.

And I would say on the OE side and how we are leveraging our value-added services that we provide to the customers, expanding our offering on current platforms that they have, and also working with our key customers on providing products and services on new platforms.

We're also translating that capability to our biggest and best MRO customers.

And we're utilizing fluid power specialists to help accelerate that as well on the MRO side of our business.

And so, you know, to me, nice progress on our fluid power side, both with OEMs and MRO, and we're going to look to continue that work.

We're making traction with our maintenance supplies and solutions business.

You know, class C consumables, we think that's another product offering that we can have with our best customers.

They're making nice progress and we're going to make -- have expansions in that coming up in our fiscal 2015 as we plan.

So we're having success now with key customers.

And we will be broadening that footprint as we go into fiscal 2015.

Great.

Thanks.

You're welcome.

Thank you.

And our next question is from the line of Barry Hanes with Sage Asset Management.

Please go ahead.

Your line is open.

Thanks.

I had a question -- two questions mainly.

One, what's the right way to think about what your overall cost increases may be this year?

And in fact, how much pricing you would need to just offset costs, you know, before incrementally dropping down to the bottom line?

And then secondly, I wanted to be clear, when you were talking about gross margins earlier, I think you mentioned some competitive pricing environment in foreign operations.

Is that just foreign?

You know, what are you seeing to [peddle] the rate domestically?

Thanks.

I'll jump in on this one, Barry.

I think from the competitive pricing, obviously all of our markets are very competitive.

We did see some extra competitiveness in certain of our markets, specifically in the Mexico area, for that is what we were referring to.

When you started your questions, you talked about pricing.

And as Neil mentioned earlier on the call, we're seeing modest price increases from our suppliers.

Our system that we have in determining our selling price to customers takes in supplier price increases immediately and reprices our product to our customers.

And so when we see an increase coming to us from a supplier, which is the vast majority of our cost is our cost to acquire the product and we have a mechanism to pass that along so that our bottom line impact from a gross profit margin, as well as an operating profit margin, are not hindered by those price increases.

That's a key thing for us as a distributor, to make sure that happens so that we don't have those margin pressures for that.

Thank you.

Was there a third part to the question?

I think I got most of what you wanted there.

I would just say in terms of outside of, you know, product cost, if you're just looking at, you know, all of the SG&A and other corporate expenses, if you will, what sort of percent increase might we be looking at for the year?

Thanks.

Oh, okay.

With SD&A, our key driver for that is people.

60% to 65% of our SD&A cost is related to our personnel within the organization, and managing SD&A costs deals with managing our headcount.

And our overall head count has been flat if you exclude the acquisitions.

And we expect to continue to manage the headcount so that our cost structure is consistent and commensurate with the revenues that we're getting.

We expect to continue to have improvement in the overall industrial economy.

We expect in the future that revenues will continue to improve.

We expect to be able to make sure that we have an appropriate system and structure to serve our customers in an appropriate way so that we can continue to add value to the customers and the shareholders.

But we don't see significant changes in our overall cost structure.

So if you think about it, SD&A really flat in the quarter.

We'll continue to look at making the right forward facing investments to help the business grow, and we'll maintain a cost focus and discipline in the other areas.

Obviously in the quarter, we had deployment expense associated with it and so those don't repeat.

I mean, we're moving from around the system from build and deploy to really run and optimize going forward, especially in the US with everyone on a common operating platform.

Thanks very much.

I appreciate the color.

(Operator Instructions)

And now our next question is from the line of Brent Rakers with Wunderlich Securities.

Please go ahead.

Your line is open.

I want to start with a couple housekeeping questions on the guidance.

The first was does the guidance include the tax benefit in the quarter?

And then also related to guidance, what is your LIFO benefit assumption for Q4?

Okay, Brent.

The earnings per share guidance is obviously our published earnings per share that will be coming out on our press releases and our financial results.

So it does incorporate the tax benefits that happened in the third quarter.

So as of March 31, we have EPS of $1.96, and our guidance as of June 30th for the full 12 months will be between the $2.60 and $2.75 range.

So if you just -- you bracket that into the fourth quarter, that would be $0.64 to $0.79 range of EPS in our Q4.

For the LIFO perspective, we have no LIFO layer liquidations planned, and there's nothing in the guidance for that.

And we don't expect it to happen.

Okay.

Great.

And then just I guess one housekeeping question before we get to some others.

What specific date did you close this acquisition?

We closed it this morning, 12:01 a.m.

Great.

I think earlier you said that roughly $0.5 million to $0.75 million of the initial costs related to acquisition were actually in the third quarter and the remainder, a similar amount will be in Q4.

Correct?

I don't have the exact numbers, Brent.

But we had some costs in Q3 and some will be in Q4.

Okay.

You've talked some about the synergies associated with the transaction.

You know, it seemed to be more concentrated with your comments on cross selling and related to sales synergies.

You know, are there SG&A synergies or some COG synergies that will be put to work maybe quicker than some of the revenue synergies?

Or how should we see this even when you think out, for example, to a fiscal 2016 accretion?

Is this something on the revenue side that will ramp up and make that more materially additive when you get out into the out years?

We think as we've gone to look at base case to synergy case, there are some cost opportunities or efficiencies that we will gain that could perhaps be or will be COGs benefits on it as well.

And then we also have the appropriate focus on the right growth synergies.

So we're not going to ignore those.

And some will occur quickly and then some will occur as we gain efficiencies moving forward.

Okay.

Great.

And then just two more questions.

You talked a little bit about -- I guess there's been a couple questions about the progression of sales during the quarter and the weather impact.

And then you've also talked about some of the -- I guess the distraction associated with the ERP launch in April.

Could you maybe try to quantify what that impact was in terms of a drag in April from what is called the distraction of going live on ERP?

Yes.

Brent, I don't know that I can quantify it in April.

If you look back, we deployed in January, we deployed in October.

We deployed in July.

And so we deployed in April.

What we're not going to do going forward 60 days from now, we're not going to have another deployment.

I don't know if I can look back and quantify April.

Teams are very focused.

They closed well in the area that went live.

And the focus is on the run up the rest of the way.

What I get encouraged about is our business reviews aren't around now systems and discussions, they're around customers and opportunities and business development.

And we really see that in the areas that have previously gone live, and we expect we will be there very quickly with our latest deployment.

But from a US standpoint, we're all on.

There's another phase deployment that will come 60 days from now.

Okay.

And then just final question again.

Just maybe elaborate on the gross margins.

I think Mark, you mentioned competitive pricing and supplier supports and then some inventory adjustments that occurred as well and then referenced those as all being one-time in nature.

Could you maybe talk through why each of those would be one-time in nature?

I clearly understand the inventory adjustment component.

Does the supplier support, does that reflect an accrual rebate adjustment relative to the first half?

Is that what is going on there and then how would the competitive pricing be more of a one-time factor?

Yes.

Regarding the rebates and the supplier support that we get, Brent, I think we were referring to something that we had just a tough comparable in one of our foreign operations this year compared to prior year.

In the prior year, they just had a one-time benefit that did not recur here.

And in the current quarter, we saw a little bit on the opposite of things for this quarter just ended that we don't expect to see continuing into the fourth quarter.

And then I'd say I think the commentary around the competitive environment, especially when we look at one of the countries, is a lot more related to a capital project.

I'd say on one of that, probably not totally unexpected in that.

So our real belief as we go through it, you could put circles around those and say these are not repeatable.

And that's our focus then with the management team and the operations of how we work this quarter and every quarter going forward that it's back to that level and improving.

That's what we believe.

Okay.

Great.

Thanks a lot for your help.

Sure.

Thank you.

And our next question is a follow-up question from the line of Matt Duncan with Stephens Incorporated.

Please go ahead.

Your line is open.

Hey, guys.

Just a couple points of clarification on the guidance.

First Mark, does the revenue guidance for this year, does it include the next couple of months of Reliance?

Yes, it does.

We did incorporate that into our numbers.

Okay.

And then on the $0.12 to $0.15 of earnings accretion next year, Neil, it does sound like your base case, which is what that $0.12 to $0.15 is, does include some cost synergies on that guide, correct?

I'll jump in on that one.

It is our base case scenario.

Obviously, when we model out acquisitions, we have several scenarios that we look at.

We're modeling out the base case; we're working towards the synergy case.

Okay, so Mark then, the base case would not include any benefit from cost synergies.

I don't want to say it doesn't include any benefit from cost synergies because I don't think that would be accurate.

I would say that we're looking at the synergy case, as we talked earlier, primarily for expansion things, from a sales perspective.

Got you.

That helps.

And then on the seasonality of their business, is it safe to assume that given the spring breakup in western Canada that the June quarter is probably their seasonally weakest revenue quarter of the year?

Yes.

I don't know if I conclude that that's the weakest quarter but definitely spring time is, yes, it's a challenge for them as things thaw out.

Okay.

Sure.

Until they dry out and then summer gets better and then they freeze again.

And then things get really good.

Yes.

Okay.

And then last thing.

I want to hone in on maybe a little bit on SAP now that you're done with the US install.

Are you in a position yet to be able to look at that new powerful tool that you guys now have to manage the business and start to think about what kind of margin opportunities there are out there as you've now got a strong tool to look for places to, you know, buy smarter or, you know, just manage the business more effectively?

How can we think about the benefit that you ought to get from having that tool now in place?

Matt, I'd say as we've gone through, we've got -- and we've been working on kind of the programs and identifying the value realization, who are the leaders, what the program, what the levers would be, and we talked before.

Some are system enabled.

Some are just good process.

Some are just good discipline.

Some are just good hard work as they go along.

We will include it in our outlook in August of what we expect in 2015 but we've got clear guidelines and expectations and we have them for 2016 and we have them for 2017 and going forward.

But I said before, they are hard to parse out.

What do they system enable and what's it from other efforts, good process, good hard work that you have going on.

We will be including it of what we expect in the total business in August going forward.

Okay.

Thanks.

Thank you.

And our final question is from the line of Jon Tanwanteng with CJS Securities.

Please go ahead.

Your line is open.

Hi, guys.

Just wondering if you feel like you've met your M&A goals for the year?

Or are you planning more in the near term or what does the pipeline look like?

We are busy and we want to stay active.

So, you know, it's not a one and done.

And we continue to execute to our priorities that we have for the business, a good pipeline that we're working through, and we expect to continue to stay active.

I've said before, right, you never control the -- you never control the timing.

But we're busy now and we expect to be that way really working them every month, every quarter.

Okay.

Great.

And also just remind us what the remaining amount is on your share repurchase authorization and how aggressive do you expect to be now that you have completed a large acquisition?

We continue to expect to be active in our share -- share purchasing.

Obviously there's not a definitive number we're running to on that for each quarter.

We expect to be active this quarter, next quarter, and into the foreseeable future from that.

I don't have the exact number of what's still available but I believe it's around 600,00 or 700,000 shares.

And when that number gets down to a lower number, we at that point in time would have a conversation with our Board and ask them to reauthorize that.

If you look back on our history over for many years, we always seem to authorize and ask for 1.5 million shares, work it down, and then ask for another one.

Okay.

Great.

Thanks again.

Okay.

Thank you.

And at this time, I'm showing we have no further questions.

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

All right.

I want to thank you for joining us today.

We're in an exciting times at Applied.

We're busy.

We're working on a lot of fronts to grow the business.

I want to thank you for your time today, your interest and investment in Applied.

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

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect your lines.