Applied Industrial Technologies Inc (AIT) 2014 Q4 法說會逐字稿

Welcome to the FY14 fourth-quarter and year-end earnings call for Applied Industrial Technologies.

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

(Operator Instructions)

Please note that this conference is being recorded.

I would now like to turn the call over to Julie Kho.

Julie, you may begin.

Thanks, Chris.

And good morning everyone.

On behalf of Applied Industrial Technologies, thank you for joining us on our FY14 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 www.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'll 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 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 performance of acquired businesses, the success of our various business strategies, and other risk factors identified in Applied's recent periodic report and other filings made with the SEC, which are available at the investor relations section of our website at www.applied.com.

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

The Company undertakes no obligation to update publicly or revise any forward-looking 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 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 net sales for the quarter were $654.6 million, up 2.2% from $640.5 million in the same period a year ago.

Net income was $29.7 million or $0.71 per share, compared with $32.3 million or $0.76 per share in last year's fourth quarter.

As a reminder, in our last year's fourth quarter we did have LIFO layer liquidation benefits which boosted prior-year earnings by $0.05.

Our full-year results were $2.46 billion, essentially flat compared to $2.462 billion last year.

Net income for our full FY14 was $112.8 million or $2.67 per share, compared with $118.1 million or $2.78 per share in FY13.

Our FY14 was a significant year of transition, further expanding our value-add for our customers, extending our global reach with added capabilities, and achieving significant milestones with our ERP deployments.

In FY14, we returned over $77 million to shareholders via dividends and share repurchases, while increasing shareholders equity to $800 million.

We also made a number of sizable accretive acquisitions over the past 12 months, including four since May.

This recent activity provides a great deal of momentum going into FY15, especially when considering the strong additions of Knox Oil Field Supply and Reliance Industrial Products.

We have significantly enhanced our capabilities to serve North American oil and gas markets and these acquisitions will add approximately $240 million of annual sales to our FY15 results.

Acquisitions remain a key part of our strategy and we will stay active in this area going forward, building on our capabilities and delivering the synergy plans.

Overall, the new fiscal year includes many opportunities to accelerate our growth and profitability, organically, via continued acquisition activity, and through our investments in technology and talent.

We have a strong foundation, expanding capabilities, and a straightforward strategic plan to execute, and we're energized about the year ahead.

Looking forward, we expect to see improvements in our service center operations and fluid power businesses, supported by an improving industrial economic environment.

For FY15, we are forecasting a sales increase of 13% to 16% and earnings per share in the range of $2.95 to $3.20 per share.

Included in these numbers are recent acquisitions, which will provide a boost of 10% sales increase in FY15, along with an expected EPS of $0.17 to $0.22 per share.

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

Thanks, Neil.

Good morning everyone.

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

Our sales per day rate during the quarter was $10.3 million per day, which is 3% above the prior-year quarter and 5.1% above our rate in the March quarter.

We had one half less selling day in the June 2014 quarter compared to the prior year.

Acquisitions had a positive impact on sales of 4.7% during the quarter and foreign currency translation decreased sales by 1.1%.

Therefore, overall core same store operations experienced a 1.4% decrease in sales compared to the prior year, or 0.6% on a sales per day basis.

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

Our product mix during the quarter was 28.2% fluid power products and 71.8% industrial products.

Fourth-quarter sales in our service center based distribution segment increased $8.1 million or 1.6%.

Acquisitions added 5.6%.

Foreign currency translation reduced sales 1.1%.

And core same store operations experienced a 2.9% decline.

The sales in our fluid power businesses segment increased $4.3 million or 3.5%.

Core same store operations increased 4.6%, offset by negative foreign currency translation impact of 1.1%.

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

Our Canadian operations, excluding acquisitions impact, experienced a sales decrease in local currency of 3.7% and had negative foreign currency translation impact of 6%, resulting in an overall sales decrease of $7.7 million.

Consolidated sales from our other country operations which include Mexico, Australia, and New Zealand had an overall sales increase in local currency of 2.6%, offset by unfavorable foreign currency translations of 5.6%, resulting in an overall sales decrease of $1.6 million.

Our gross profit percentage for the quarter was 27.9%, slightly under our expectations to be above the 28% level in the quarter.

We had no benefit from LIFO layer liquidations in the fourth quarter of FY14.

Our selling, distribution, and administrative expenses as a percentage of sales was 21% for the quarter.

On an absolute basis, SD&A increased $4.6 million in the quarter, or 3.5%.

Acquisitions added $7.8 million of SD&A in the quarter, of which $1.6 million pertained to intangible asset amortization.

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

Our effective tax rate for the fourth quarter was 33.9% and is at 32.1% for the whole year to date.

The low tax rate for the current year was due primarily to one-time tax benefits recorded in our third quarter that we have discussed and disclosed previously.

We expect our FY15 tax rate to return to around the 34.5% to 35.0% range.

This is higher than our FY14 rate as we perceive no further one-time tax benefits or tax accrual reversals occurring in FY15.

June 30 inventory balances increased $14.3 million from the March levels.

The Reliance acquisition added $24 million to inventory, so our core same store operations had a decrease of about $10 million in the quarter.

Combined with our $3.2 million decrease in inventories in the March quarter, we have decreased inventories around $13 million since December 31.

Our DSOs and past due receivables have been increasing in the US service center network throughout FY14.

To address this, we increased our receivables allowance by $2.2 million during the fourth quarter.

Now that all US service centers are on one receivables management system, we expect to see past dues and DSOs return to more normal levels during FY15.

We finished up a solid year of cash provided from operations, and our year-to-date amounts are basically the same as in the prior year.

We expect improved cash flows from operations in FY15 compared to 2014.

In addition, in May 2014, we purchased our 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 previously had been leasing our headquarters from the Cleveland port authority for the past 18 years.

As we approached the expiration of the lease, we determined it would be more cost advantageous for us to purchase the building versus entering into a new lease.

Our capital expenditure expectations for FY15 is in the range of $14 million to $16 million.

About $3 million of this relates to expansion activities at our recent acquisitions.

Our after tax return on assets was 10.2% in FY14 and 11.6% in FY13.

About a third of this decline is due to lower net income with the remainder due to higher operational assets in our core businesses coupled with the goodwill and intangible assets added from our recent acquisitions.

We purchased 264,900 shares of stock in the open market during the June quarter.

We expect to remain active in executing stock buybacks on a go-forward basis throughout FY15.

On July 1, 2014, we completed three acquisitions, with an overall purchase price of around $145 million.

As part of our funding for these acquisitions, on July 1, we borrowed $120 million under a private placement agreement with Prudential.

This is a long-term, fixed rate borrowing with a 3.19% interest rate.

Looking forward to our FY15, we are expecting to see a slight gross profit percent improvement throughout our organization; coupled with the higher gross profit levels at Reliance and Knox, we expect our overall gross profit percentage to increase by over 50 basis points.

We will continue to keep a focus on our selling, distribution, and administrative expenses in FY15, and expect SD&A at core same store operations to increase at a lower rate than sales.

As previously stated in our press release, with these expected operational improvements, coupled with our recent acquisitions, we expect EPS for FY15 to be in the $2.95 per share to $3.20 per share range.

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

Thanks, Mark.

To summarize, the operational investments and improvements we've made over the last several years are paving the way for us to realize our full potential.

Coming off our 90 year anniversary, we're excited about our business position and energized by opportunities to generate increased shareholder value and to win in the marketplace.

FY15 builds on our progress from the past year and maintains continuity in our five strategic plan elements: growing sales in our core business as well as in targeted industries, driving product expansion beyond our base offerings with opportunities across all our product groups, building upon our North American fluid power market leadership, enhancing operational excellence with continuous improvement across the business, and realizing the full potential from our ERP investments, and accelerating acquisitions with clear plans to deliver business synergies.

Our collective execution will propel us forward to achieving our three-year strategic objectives, reaching $3.7 billion in revenues through organic growth and acquisitions.

Our revenue objectives are higher, growing our international presence to 25% of revenues and improving our EBITDA profitability towards 10% through sales and margin expansion and with continued discipline on cost and operational controls.

All across Applied we're excited about FY15 and our long-range growth prospects, living our core values with an emphasis on customers, continuous improvement, accountability, and teamwork.

With that, we'll open up the lines for your questions.

(Operator Instructions)

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

Please go ahead.

Thank you.

Good morning.

Neil or Mark, either, with respect to the guidance and, Mark, to your breakdown of gross margin and SD&A, I was wondering could you kind of pull together how you see the contributions to those from both the core investments you made this year in FY14 as well as the recently closed acquisitions?

Because you've obviously given us some color on the revenue contributions and the profit and EPS contributions from those deals, and I was just wondering if you could aggregate that as to how you see 2015 with respect to the overall margins?

John, I'll start with that.

From the gross profit percentage, I think our perspective from the core operations is that we should see improvement in the gross profit percentage of, let's call it, 20 to 40 basis points.

And then the relatively higher levels of GP from the recent acquisitions compared to our core operations should show a similar number of an improvement.

That would be just how the math would work when those numbers are layered into our overall numbers.

RIght.

Obviously these deals are relatively recent, so does this change the long-term patterns or this is really more of as to Neil, to your point of getting you to those long-term goals that you have, is this pretty much consistent with where you want to be down the road?

Well we know they clearly help us get to the objectives.

As we talked before, the longer range ones, we don't think our ceilings are stopping points.

The right objectives for us to be pursuing on the acquisitions around the energy sectors, in one we're in month seven, we feel very good.

With Reliance, we closed month three, and are excited about our progress.

And then with three of the other acquisitions we just closed or completed month one with them.

And so we're very focused on those synergy plans and executing them.

And as we talked before, a lot of those are around the growth and the expansion prospects that they have.

Right.

So I mean, given that they're recently done, the long-term, the real stride for these acquisitions should come beyond FY15?

Yes, I think, John, our thought is we're going to continue to work these acquisitions in 2015 and we see opportunities for them to continue to improve in the future.

But also we're not taking our foot off the pedal regarding additional acquisitions, because when we look at our overall three-year goal from a revenue perspective, we think about half of that's going to come through additional acquisitions or acquisitions and the other half is going to come through organic growth.

Great.

Okay.

Thanks, Mark.

Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

Please go ahead.

Hey, good morning, guys.

Good morning, Jeff.

Good morning.

So just a couple kind of housekeeping items with these deals.

Can you speak to what you think your D&A run rate's going to be with these three latest in there?

And then also how are you thinking about interest expense for the year?

I'll talk about that, Jeff.

Regarding intangible asset amortization, obviously we're still on the early stages of that for the acquisitions we did July 1 but we do have estimates for that.

So within our numbers, I'll break out the intangible asset amortization that we expect from our core continuing operations, which would be about $12 million for FY15, and then from all of the acquisitions that we've done in the last couple of months, expecting $17 million from them.

So a total of $29 million of intangible asset amortization, which is a little over 1% of our expected sales in the sales range.

So we have a big step forward in having an over 1% impact of that expense on our operating profit, whereas in FY14 it was only about 50 basis points.

Regarding depreciation, the core same store go-forward projection is around $13.5 million in FY15.

Then we expect the acquisitions to add about $3.5 million or so.

So a total depreciation of about $17 million.

When I think about interest expense, we entered the new $120 million long-term facility at 3.19%, so the math on that has about $3.8 million of interest expense for the year.

The remainder of our debt is all variable debt.

So that interest rate changes based upon the changes in the overall interest rates.

Today, we've got about $200 million of borrowings under variable interest rate facilities, and today we're paying anywhere from 0.85% to 1.1% on those facilities.

And if you expect and project out interest for the whole fiscal year of -- pick your number, 1.5% or something like that, that would be around $3 million or so.

So combining those two numbers would be $6.8 million to $7 million is an estimate for debt from that perspective.

Hopefully that helps.

No, that's great.

Can you just talk about the long-term growth rates of Reliance and Knox?

And then as you look at cyclicality versus your base, how's that the same or different?

Well, we think we have moved from probably a little underweight around some of those energy segments to market weight.

We recognize they can have some cyclicality into them.

Right now we're doing well and excited about them.

But it becomes a market weight of our segments that may be 10% or so of our business.

We think we are a well-diversified industrial distributor participating in all of those segments.

So if one goes a little soft, obviously we're expecting and working others that are picking up.

In that regard, we think we're just fine.

Perhaps we weren't participating as much as we should have before and we've taken some steps obviously to improve that.

Okay.

And then just back to the long-term targets, I think quick math it's kind of a mid-teens kind of growth over the three years.

And Mark, you said half organic, half acquired.

That would be the general perspective is that around half of that we expect to --

I'd say, Jeff, whether it's 50/50, or acquisitions 60/40, we'd like to be as busy from an acquisition standpoint as we have been recently.

We still believe the space is highly fragmented.

We have our priorities.

We'll be working those along the way.

You never perfectly control the timing.

But as you think out over those three-year periods, we expect to be busy on acquisitions and also growing our core business.

So just on the core growth, because we've had a couple years of kind of flat to slightly down and now I think we're saying 3% to 6%.

Where do you get the outgrowth or should we start to think about kind of a lower organic growth rate?

For us, internally and clearly with the teams, I'm not thinking about a lower one.

If we look back at our last quarter that we closed, right, so April we had our largest go-live from an area deployment, our last in the US, and so we saw nice progression as expected from April to May, then on from May to June, and we see then that carry forward into the new fiscal year in July and maybe even the early few days of August.

So last year we had quarterly deployments.

This year we won.

Our area reviews and discussions are around customers and growth and not all about organizational change management and training as they needed to be in FY14.

So big year of transition.

We've done that.

And we're very focused on markets and customers and growing in those core business.

And we've been that way in fluid power, and we think we've demonstrated or show results in that.

And we're not finished there.

There's more we can do.

We expect that to pick up in our core US service centers.

We expect it to further pick up in maintenance, supplies, and solutions and the rest of those segments.

Okay.

Very helpful.

Thanks, guys.

Our next question comes from the line of Matt Duncan with Stephens Incorporated.

Please go ahead.

Hey, guys.

Just sticking on that last line of thought for a second.

Neil, in the locations where you guys did the SAP install earlier in FY14, can you talk a little bit about how organic growth trended at those locations through the year?

And in a quarter where you were installing SAP in a region, what was the growth like?

I'm just trying to see sort of as you recovered from the SAP install, what was growth like in those places versus where it was happening.

And I don't have it all in front.

I would say clearly as we move throughout the early part of the year or maybe just US deployments in general, as they move along, you always learn and they always get better.

But you start to see the distance from deployment.

They just get back to regular business.

We talked around the cutovers and the go-lives.

You get a little bit of swell of activity in an area before.

There's a natural lower activity during the cutover.

And it ramps from that.

So as we've done those phased deployments, those that are a little furthest away you see that growth.

Those that were the most recent in, they have a little bit of that lull to start out.

What I liked about each one of them is that they're less.

We get very good at getting focused on any variances and help those service centers that maybe need a little bit more attention along the way.

Our ramp through that has been good.

I'm pleased that we're not deploying this month as we go forward.

And so we've moved from building a system and deploying it, now, hey, the focus is now all on run and optimize and around customers in those market areas.

Neil, in the locations in the June quarter, in the locations where it was installed earlier in the fiscal year, did those locations grow in the June quarter?

I guess including -- or backing out the FX impact you were down 1.4% organic in the June quarter.

FX obviously more the global businesses and the foreign ops.

We had, in my feeling, growth at market in areas and locations that had been formed.

Obviously we had areas that grew stronger than market.

And then as you go through the transition, you're probably a little bit less than market.

So hey, I like the progress that we made through the quarter as we go through it and what we enter into coming into this fiscal year.

Okay.

And so let's come at this from a little different angle.

On the daily sales organic growth month to month, I guess the last install was in April.

Have you seen that growth rate improve since then, and what's it been like so far in the current quarter?

Matt, this is Mark.

Obviously we went live in early April with our largest area, what we call our midwest area.

And we've seen sequential improvements from that.

Their year-over-year sales for April were negative, and then that negative was still there in the month of May, but much smaller.

And then that became a positive as we looked into June and July.

If you want to just do the math and say, gee, all of that math is related to the cutover, that hangover was a 60-day situation for them and they've been positive in July and we see them starting to be positive again in August.

What about total company, though, Mark?

What's the organic growth looked like from the total company so far this quarter?

So far this quarter in the month of July and for the first week or so of August, we've seen similar trends as we saw in June.

So the month of June we accelerated for the whole company for -- let's specifically look at US service centers because we've been talking about that.

US service centers we saw progressively improved year-over-year sales results from April to May to June, and in the month of June we were positive, compared to the prior year June.

And we saw that continue in the month of July.

So also in the month of August.

That's helpful.

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

Energy's, obviously, as you guys alluded to in the press release and your prepared comments, has become a more meaningful end market for you through the Knox and Reliance deals.

Can you talk in a bit more detail about what products you're offering to that end market now, and how much of your energy exposure is more upstream oil and gas on the drilling and production side versus midstream and downstream energy?

I'd say our participation -- before we participated predominantly downstream in refineries which operated as plants.

I think now we have much better participation upstream as we think about in drilling, as we think about in completion, and then we think about in ongoing production in all those upstream segments.

I think for us, not so much in the midstream type in those products or in that portion of the market.

And then I think from a product standpoint, the encouraging part it's products that we have know-how and experience in.

It's bearings, it's power transmission, it's some added oil field supplies, but many regard some of those oil field supplies can be similar to general industrial or MRO supplies in other market segments as well.

So we have know-how and capability, obviously.

We've added some industry know-how and experience and some capable personnel in that.

And then I'd say the other segment that we'd look to do well in would just be around the whole fluid conveyance area.

We're sizable but that expands as we move a little bit more into this space.

Sure.

Okay.

Thanks.

(Operator Instructions)

Our next question comes from the line of Jon Tanwanteng with CJS Securities.

Please go ahead.

Good morning, Neil, Mark.

Good morning.

Just on the same track as the last couple guys, can you give us more color on just the sales per day numbers by month and what you've seen in July and August?

Well, what we're seeing in July is we saw continued good year-over-year sales results, similar to what we saw in the month of June.

So we said previously we saw April, May, June, we saw improvements April to May, May to June, we saw that June, I'll call it that improvement thing, continue into July and also continuing now into August with that information.

And so we're pleased about that.

Maybe to be more specific, did they improve sequentially as opposed to year over year?

Generally, yes.

I don't have all those figures in front of me, Jon, but yes.

For the total Company, our sales per day for June was better than May.

And then I will say for July we do and we have talked in the past about a little bit of a seasonality issue there with it stepping down a little bit in July and August.

We saw that seasonality in July much less than what we have in a traditional year.

So that tells us and shows us that, hey, we continue to see that improvement we saw from May to June into July and even continuing into August.

Okay.

Great.

And then just in terms of the guidance, have you included any synergies either from a cost or sales side in that outlook?

We have incorporated into our guidance with all the acquisitions our -- what I call our first-year plan for them that we developed during our acquisition and due diligence and preacquisition items.

And we viewed those things in here and put them in there basically at our base case, which we do have a lot of things in the base case of actions and activities that we're going to take during the year.

So those items are in there.

As we've said before, we also have what we call a synergy case out there that we're also working to and towards.

And so the synergy case items are blended into our numbers, because it just all doesn't happen immediately and it happens over time.

So as we march forward, those numbers become our -- what I call our plan and would then become our guidance and they are factored into our guidance right now for the first 12 months.

Okay.

Great.

And then finally, you mentioned $3 million of capital spend for the acquisitions.

Is that pure gross spend or more just getting them in line with how you run the businesses now?

I would call most of that growth spend.

These organizations that we acquired, they were on their own internal growth items and so we want to continue that and we want to fund that.

That's what we have.

That would be a combination of looking at locations and other capital investments that would support continued growth in those businesses.

Okay.

Thanks.

And finally, just a quick question on the buybacks.

You went through a significant portion of your repurchase program this year.

I'm just wondering what are your thoughts and the Board's thoughts on further buybacks beyond the current authorization?

We continue to have conversations with our Board for that.

And as we've said in the past, when we run out of shares in current buyback, we present to the Board a request for new authorization and they've always granted it in the past.

I can't guarantee what they're going to say in the future.

But I think they're going to grant it when we run out of shares this time too.

Our traditional ask has always been 1.5 million shares and then we work that down and we start a new one.

My expectation is that that will continue, and we will not miss any periods of having opportunities to buy during FY15.

Okay.

Thank you very much, guys.

Our next question comes from the line of Joe Mondillo with Sidoti & Company.

Please go ahead.

Hi, guys, good morning.

Hey, Joe.

Couple clarification questions just on the results, as well as the guidance.

First off, in terms of the quarter, so it was one of your most active quarters regarding acquisitions.

I was wondering if there's any sort of expenses that maybe were a little more inflated throughout the quarter related to due diligence and other acquisition-related expenses?

The short answer to that is, yes.

The fourth quarter, as well as our third quarter, had what I'll call those due diligence type expenses.

And it's hard for us to specifically quantify those, but for both quarters combined, we think it's a little bit north of $1.5 million, and you could just like say let's split that half in the third quarter, half in the fourth quarter, and that would be close.

So hopefully that helps.

Okay.

Yes.

Definitely helpful.

Also, was wondering if you could provide an EPS figure that contributed to the quarter related to acquisitions?

What we said in the last conference call is our thought for the Reliance acquisition for the months of May and June that it would basically be a push, and that was taking into account the one-time due diligence type expenses and things of that nature.

So they did a little bit better than that but it really wasn't a meaningful additive item.

Okay.

And then regarding the guidance, I believe I heard on your commentary, but I just wanted to make sure, that the SD&A outlook for the year, did you say that the total SD&A will grow slower than total revenue growth?

Our view is the SD&A from our core operations will grow slower than the revenue growth.

Okay.

Layering on the acquisitions, that's just -- that's going to continue.

Okay.

Yes, just wanted to clarify that.

And then I guess just lastly, sort of a bigger level question, I think a lot has been discussed, a lot on the organic growth and the acquisitions.

But in terms of acquisitions and I guess maybe your three-year picture, we have this service center part of the business and then we have sort of this other part of the business that you sort of describe in terms of expanding your capabilities, and Reliance is a perfect example of that, a very different business than maybe some of your other businesses.

Just wondering if you could talk about, Neil, maybe what your vision of the Company is through your service center business, complimenting sort of all these expanded capabilities that maybe such as Reliance brings to you.

So I think in our core service centers, a real focus is continued improvement around our core products, 84% of what we have sold have been bearings and power transmission and fluid power.

We think there's more we can do in each one of those.

And then outside of those, we have 13 other categories of products that flow through our distribution centers to our service centers, and we sell to our customers every day, including some of our largest ones, we will go 10, 12, 14 categories across.

Our view is we can do more of those categories with existing customers, and then combine some of these capabilities with Reliance and others to secure new customers, bring some of those product offerings to them.

So I expect us to be growing our core with existing customers and new customers, that we work product expansion with fluid power, both with OEM customers and MRO as we go across.

And then we continue to look for the right acquisitions that help us to those priorities, product priorities, business priorities, and geographic opportunities that we'd have.

Okay.

So in terms of Reliance, just taking that for an example, the biggest sort of synergy there is sort of just expanding your customer relations and benefiting the service center part of the business, benefiting from just that expanded customer reach, as well as benefiting from the strong organic growth that that type Company has?

So they would do a very good job in upstream oil and gas and around fluid conveyance and some fluid power products.

So naturally, there's opportunities with some of those customers and applications for bearings and power transmission.

So we can combine the two and do that going forward in places that they exist.

And obviously we exist in some other areas that that fluid conveyance capability and know-how can grow in existing kind of Applied-served markets and customers in existing geographies where we are today, but also some newer ones.

Okay.

And then just a last follow-up regarding this whole topic.

How much of the total business is standard or traditional service center versus how much is it like the Reliances or those type of businesses that really don't -- that's not a service center, it's sort of its own unique business?

I would say, Joe, that Reliance's locations, they still are a service center business but they're really just focused on one customer segment which is oil and gas.

Whereas in most of our service centers that we have are focused on all segments of the business.

So I don't necessarily think that we would say that they are that different.

It's just that they're really focused on one thing.

I think we see a lot of similarities in what they do and what we do in our day-to-day business.

So their product focus is starting with fluid conveyance which is like a hose shop, and then they've added these oil field supplies, which is general industrial distribution type items for their customer base over the years.

So we see a lot of opportunities.

Another potential synergy is with this hose capabilities that they have, focused on one customer segment, well, we can potentially use that in our core service center operations for some industrial utilizations of hose that maybe we don't play in today with our core operations.

Because the shop facilities that they have at Reliance are spectacular.

Okay.

Perfect.

Thanks a lot.

Our next question comes from the line of Jason Rodgers with Great Lakes Review.

Please go ahead.

Yes, would you provide some commentary on performance by industry for the quarter?

I think for us, out of our 30 industries, it's probably pretty consistent with what it that was in the prior quarter.

I think 13 up, energy, oil and gas, those being positive.

Others showing maybe some nice trends.

Probably the weaker areas of weakness, pulp, paper, perhaps wood products, and mining.

So I think those would be the ones on the weaker end of the scale.

And then what were the expense costs related to the ERP system in FY14?

And what is your estimate for FY15?

Jason, our thought is, during FY14, we really morphed our expenses from building the system to then deploying and running the system.

So the real change from FY15 versus FY14 will be that we don't have any more go-lives, and the go-lives we have a lot of travel expense and training expense and things of that nature that don't necessarily continue.

But it's $2 million.

It's not a huge number.

Because we will do training in FY15.

It's just a different kind of training.

It's not a training on how to use the system.

It will be more training on how to optimize the system and how we can use the data to optimize our business better.

Thank you.

And our final question comes from the line of Adam Uhlman with Cleveland Research Company.

Please go ahead.

Hi, Neil and Mark.

This is Courtney Killion on for Adam.

Just wondering if you guys could talk a little about the pricing environment, what you're seeing from suppliers, what kind of expectations you have in your FY15 guidance on the pricing side?

I think in our look going forward we've got just a really modest price in our plans.

If the environment changes, we'll adjust.

I think we've had good capability to do that.

Dialogue with our suppliers, I think they're kind of more modest, normal price increase activity that we get periodically throughout the year.

So I'd call it kind of a steady, stable pricing environment from our suppliers and on through.

Should we see any kind of benefits from the SAP roll-outs next year or do you think that's more of a much longer-term impact?

I think, Courtney, that's sort of the thought process we have in our gross profit percentage of the improvements that we expect to see there.

We expect to see those improvements in our core business, not just in FY15, but we're really building this so that we see them year after year after year.

Our expectation is that we should see this continue, and the FY15 is really the first step down that journey as we utilize the system to help us optimize our pricing so that the gross margins that we experience get to improve.

Okay.

Is there a sense in kind of that gross margin expansion guidance that you've given, how much is from the acquisitions and how much is from the SAP contribution?

Well, I think we're looking at SAP as just our -- that's how we do business now.

So all of the improvements in our core business that for the locations that are on SAP, that's the improvement.

And so like I said, I think I mentioned earlier in the call, we were thinking of anywhere 20 to 40 basis points improvement in the GP percent for that what I'll call the core same store operations.

That was just for core.

Yes.

Okay.

All right.

Thank you.

Okay.

Thanks.

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

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

Just want to thank everyone for joining us today.

We appreciate your interest and we'll look forward to talking with you throughout the quarter.

Thank you.

Ladies and gentlemen, that does conclude today's conference.

Thank you for participating.

You may now disconnect.