Applied Industrial Technologies Inc (AIT) 2015 Q1 法說會逐字稿

Welcome to the FY15 first quarter earrings call for Applied Industrial Technologies.

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

(Operator Instructions)

Please note that this conference is being recorded.

I will now turn the call over to Julie Kho.

Julie you may begin.

Thanks, Albert, and good morning, everyone.

Our earrings release was issued this morning before the market open.

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

A reply 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 this 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 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 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 our news release from this morning, our sales for the first quarter of FY15 grew 16% to $702.3 million from $605.3 million in the same quarter last year.

Net income for the quarter increased $29.1 million from $26.8 million, and earnings per share rose 10.5%, to $0.70 per share compared with $0.63 per share a year ago.

We're pleased to be off to a solid start to the fiscal year, with double-digit sales and earnings per share growth for the quarter.

From an overall business perspective, we've been busy integrating acquisitions and translating our strategic plans into action, including the addition of maintenance supplies and solutions inventory into our Southern California distribution center, relocating Texas oil patch services, or TOPS, into a new facility, and enhancing our collaboration with our leading suppliers to drive documented value-add with our customers and accelerated growth with our service center associates.

Operationally, our recent activities have centered on finalizing our financial systems, ERP deployment, and working capital improvements.

We've made progress fiscal year-to-date, and we are confident in achieving our annual plans.

In addition, our acquisition pipeline remains strong.

We completed several acquisitions in the past year and we are intent on continuing this level of activity into FY15, delivering on the business synergies and generating increased shareholder value.

In summary, momentum is building across all areas of our business, with many opportunities to enhance our growth and profitability, to expanding our value-add, extending our market reach, and enhancing our capabilities to serve our customers.

We see an industrial market that offers continued opportunities for growth and we are maintaining our full FY15 guidance for earnings per share between $2.95 and $3.20 per share on a sales increase of 13% to 16%.

I'll now turn the call over to Mark for more details on our financial results.

Thanks, Neil.

Good morning, everyone.

I'll provide some additional insight regarding our first quarter FY15 financial performance.

Our sales per day rate during the quarter was $11 million, which is 16% above the prior year quarter, and 6.7% above our rate in the June quarter.

We had 64 selling days in both the September 2014 and 2013 quarters.

Acquisitions had a positive impact on sales of 13.3% during the quarter, and foreign currency translation decreased sales by 0.5%.

Therefore, overall core same-store operations experienced a 3.2% 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 27.2% fluid power products and 72.8% industrial products.

First quarter sales in our service center-based distribution segment increased $83 million, or 16.9%.

Acquisitions added $80.5 million.

Foreign currency reduced sales 0.5%.

And core same-store operations experienced a 0.9% increase.

The sales in our fluid power businesses segment continued to have another great sales quarter, growing $14 million, or 12.4%, offset by negative foreign currency impact of 0.5%.

From a geographic perspective, sales in the first quarter from our overall US operations were up 12.1%, or $60.5 million compared to the prior year quarter, and experienced a positive impact of $46.8 million, or 9.3% from acquisitions.

Our Canadian operations benefited from $29.8 million of sales from acquisitions, experienced a sales increase in local currency of 3.1%, and had negative foreign currency impact of 4.1%, resulting in a combined sales increase of $29.4 million, or 42.2%.

Consolidated sales from our other country operations, which include Mexico, Australia, and New Zealand, hit an overall increase of $7.1 million, or 20.5%, which included acquisition benefits of $3.9 million, a sales increase in local currency of 10.4%, and negligible currency translation impact in the quarter.

Our gross profit percentage for the quarter was 27.8%, 30 basis points below the prior year's first quarter.

This decrease can be attributed to the timing of certain volume-based supplier support programs and increased scrap and obsolescence expense in the quarter.

Acquisitions, operating at gross margins above our traditional core business, increased our overall gross profit percentage by 40 basis points.

Going forward, we expect overall gross profit to exceed 28% for the remainder of FY15.

Our selling, distribution, and administrative expenses as a percentage of sales was 21.2% for the quarter, 30 basis points below the prior year first quarter.

On an absolute basis, SG&A increased $18.5 million in the quarter, or 14.2%.

Acquisitions added $19.1 million to our SG&A in the quarter.

Excluding these expenses from acquisitions, our core operational selling, distribution, and administrative expense was down $600,000 compared to the prior year.

Our effective tax rate for the first quarter was 34.2%.

We continued to believe our tax rate for FY15 will be between 34% to 34.5% for the entire year.

Our consolidated balance sheet remains strong, with shareholders equity of $790.7 million, and a conservative debt-to-total capitalization ratio of 28.9%.

Our after-tax return on assets for the first quarter was 8% versus 10.2% in the prior year comparable quarter due to the impact on our asset base of our recent acquisitions.

We expect our ROA to improve as we move through FY15, as net income continues to improve and average assets declined slightly due to working capital improvements and continued amortization of intangibles.

Inventory at September 30 is $31 million above our June levels, with $29.5 million related to the impact of our acquisitions.

Cash used in operating activities was $18.1 million for the quarter compared to cash generated from operations of $17 million in the prior year quarter.

We expect improved cash flows from operations over the remainder of the fiscal year.

We do experience some seasonality in our cash flows, with the first half of our fiscal year being lighter than the second half of our fiscal year.

Our expectation is the $59 million of cash used in support of working capital during the quarter will decline beginning in the December quarter through fiscal year-end by at least $40 million due to improved receivables collections, improved inventory turns, and extensions of payables.

Our traditional expectation is for cash provided from operations to mirror or be better than our annual net income amounts.

We expect this to hold true for FY15 as well.

We purchased 214,000 shares of stock for $10.4 million in the open market during the September quarter.

The Board authorized another 1.5 million share buyback, as the previous authorization had been almost fully used as of the end of September.

We expect to remain active in executing stock buybacks throughout our fiscal year.

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

Thanks, Mark.

In summary this morning and ahead of the Q&A, I would like to leave you with three thoughts.

Applied associates and our leadership teams are focused on and committed to, one, accelerating our core business performance, with sales growth, margin enhancement, and working capital improvements.

Two, integrating the recent acquisitions and delivering on the synergy plans, and three, staying active in acquisitions, building on our strong foundation and enhancing our shareholder value.

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

Thank you.

(Operator Instructions)

Our first question is from the line of Matt Duncan with Stephens.

Please go ahead.

Good morning, guys.

First question about the sales trend you're seeing.

You had a nice return to organic growth in the quarter.

Can you talk about what you saw on a month-to-month basis, including what you've seen through October so far?

Yes, Matt, we saw improvements as we progressed through the quarter, maybe it moderated a little slightly at the end of September.

October month-to-date is good.

Total sales exceeding the upper end of our annual guidance and kind of the core at the mid upper single-digits range, month to date.

Okay, good.

What do you think is driving that, Neil?

Are there any end markets in particular that are picking up?

Or is this just your effort sort of catching up and helping to drive better growth?

Well, I think the general industrial economy is good.

I mean, if you look at the major indices and the predictions, I think the industrial economy as we move into calendar 2015 kind of continues -- or will pull the general economy.

That's good for us.

But I also think we're performing better in some key markets where we've increased our presence and just in some of the core segments as well.

So I think it's a combination.

But we think the economy's going to help going forward and we're intent on helping ourselves also.

Sure.

Okay.

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

Just on the gross margin, Mark, what gives you guys confidence that you can get the gross margin up from here?

We've seen across your peer group that there's been a lot of gross margin pressures and I think it's been pretty consistent that it's largely from a lack of price inflation, and I think that still is obviously the case today.

So what's going to drive your gross margins up from where they were here in the first quarter?

I think that how we look at the impacts and the negativity that we saw in this quarter, or the slight decline that we experienced, we can sort of see that running away in our second quarter.

As we talked on the call, we had some scrap expense in the quarter.

And some of that relates to our updated policies and procedures and practices now that we're managing our inventory on one system.

Sure.

So that creates some of that expense relating to this transition to the system.

So our expectation is for the scrap expense, as it flows through the income statement for the year, to moderate as we go forward.

So that's part of the reason we expect to see some increase.

How much did that scrap hurt?

Well, I mean, it was -- I would say the scrap plus the impact of the supplier volume incentives was the entire decline, and it was the reason for the declines.

We did talked on the call about some of the increase that we had from our acquisitions.

That offset some things.

Besides that, it was those two items, were the things that related to it.

Okay.

So Matt, too, as we look at volume rebates, we're in the regular reviews on those monthly and quarterly, and from here I understand the timing of those into the quarter.

So, as we think going forward, scrap doesn't repeat at that level.

Volume rebate, timing works its way out.

Acquisitions help.

We help ourselves with product expansion, and as the service centers influence their customer mix and reduce some of that pricing variation and kind of that localized groups, that helps as well.

Neil, is there also an opportunity to help yourselves through SAP?

Does that perhaps give you a tool to find ways to drive greater gross margins as the year goes on and do you guys get a little smarter about how to use that new tool?

Yes, I think it's the real-time visibility of the information and then just looking at that pricing variation that can occur across customer groups or locations to reduce or tighten or eliminate that variation.

And the system obviously helps us, helps us do that.

Okay.

Thanks, guys.

You bet.

Our next question's from the line of John Baliotti, Janney Capital Market.

Good morning guys.

Neil or Mark any -- from an end market stand point there seems to be some news from other companies kind of some headwinds they're facing in certain areas that you're exposed to, but as you pointed out, this is a nice start to the year and revenues were obviously better than people might have expected, given that news.

So any color on maybe just some end markets or products within those end markets that -- just how they perform plus or minus?

Yes, so I don't have all of it.

I think we track 30 segments.

We're probably up in 14, maybe 15 of those.

We would have seen positive in lumber wood products, aggregate, kind of the paper side of the business.

Some of the base metals, oil and gas contributed in that as well.

I think mining improves off a lower base in doing it.

So -- and then I think the general economy keeps working to get better.

Customers, you know, those working on a kind of calendar cycle are either concluding their year and working on some projects, but those that I relate to or talk with are making their plans on their own productivity projects or capital projects, because they perform pretty well and they have those moneys and investing in their own businesses are a good thing.

So I think most of the dialogue with end customers would be -- they're looking positive as they go into 2015.

It seems -- because we track some of the macro indicators.

And durables have been pretty good for quite a while.

It's been frustrating that some of the distributors haven't seen that pull-through in terms of usage.

It's certainly nice to see this for you, that as you pointed out, economy is generally doing fairly well and it seems like you're getting a better pull-through right now or better inelasticity to that.

I just was wondering, maybe your customers are feeling a bit better.

It could be market share gains, a little bit of everything.

But it seems like your growth is now much more aligned with what we're seeing in terms of the health of durables and capacity utilization in a broader end markets.

I would agree.

So, hey, last year we rolled out new ERP in a lot of phase deployments.

Obviously, we're not doing that this year.

So our focus is on running and optimizing the system that we have and focused on our end customers and fulfilling more of their needs.

I still believe fundamentally our end customers are looking to do business with fewer, better suppliers that can fulfill more of their needs and that's what we're working on.

Sure.

We're certainly hoping for that, too.

Mark, just a quick -- you made a couple comments about working capital on the balance sheet.

Obviously, you did a number of acquisitions of relative -- pretty good size relative to AIT.

So it's understandable that the balance sheet would be impacted by that.

So you feel it's pretty much a work-through in terms of turns and so on, it's not a different level that the Company's going to operate going forward?

It's just a matter of digesting the balance sheets that you acquired?

I think that's some of that.

Obviously, we want to continue to work on our accounts receivable for all of our units, not just the acquisitions, to improve our DSOs.

And we expect to have those numbers come down throughout FY15 because they are higher now than what they have been historically.

Right.

And so those are tasks for us to do.

Same thing with our inventory turns.

It's not just with the acquisitions, but it's looking at all the operations in our core business, and we see where we can make steps forward during the year.

So I think our expectation is we should continue to see those as we march throughout FY15 and that should help with changing how the impact is on the balance sheet and making the cash from operations positive and we think it will be positive, just like our theory that we've talked about in the past.

Hey, when we make a dollar on the income statement on net income, that reports to a dollar-plus on our cash provided from operations.

So that's our expectation again this year.

So the investments you made really, your goal is to set the bar higher for the whole company, not just the acquisitions, but the whole -- the aggregate company.

I would agree.

Okay, great.

Yes, yes.

Okay.

Thanks very much.

(Operator Instructions)

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

Please proceed with your question.

Good morning, guys.

Good morning.

Wonder if you could talk about potential acquisition opportunities that you're seeing, if you're seeing any as far as larger size, like RIP and NOx, as well as by geography, if you're seeing more overseas versus domestic?

You know, I would characterize our M&A pipeline as robust.

We're busy.

We're active every month, the team -- me personally in doing it.

I think looking back, we have raised, or increased our activity.

We've raised our sights on targets.

And we want to be that busy really every year going forward.

And we're intent on continuing that and, you know, we expect to make progress on that this coming quarter.

And then looking at the ERP system, would you just go over if that system is meeting your expectations as far as optimizing it and if there's a way to quantify any of the benefits that you are seeing or are expected to see from it.

I would say, hey, it's meeting them.

We know any ERP transition, it's work.

And so we worked it from building.

We worked it through deployment.

We're working it now to running and optimizing.

It's going to serve us well.

It will be a foundation for a couple of decades as we go through, you know, parsing out, as we said before, trying to parse out benefits of what it does versus what we did before or what our own associates and processes do.

You know, that's hard.

So I mean, we'll stick to talking about the business in total and not attributing a piece or a benefit just to the system.

And just finally, you mentioned some positive industries out of the 30 that you're under.

Which ones didn't perform as well?

I don't have the list in front.

So I would say really no glaring ones that would pop out.

Thank you very much.

Okay.

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

Please go ahead.

Good morning, guys.

Nice job on the top line growth.

You've increased your energy exposure pretty significantly in the last quarter, last year with the acquisitions.

Is there a point where you would worry about pressure from lower oil prices or would that be mostly offset by strength in all the end markets as they get the benefit of lower energy costs?

So I like the progress that we've made in building our energy and upstream oil and gas capabilities, you know, with TOPS maybe 10 months ago and kind of the drilling side, we have presence and participation in completion, and then serving ongoing production.

My view is we're just entering into kind of an equal weight of end market participation in those.

It's still less than 10% of our end markets from a coverage or participation standpoint.

I think the overall fundamentals around energy and oil and gas remain very good.

US drive towards energy independence, the participation in some of these formations like Eagle Ford or the Permian Basin, and even the outlook on rig counts for the coming year.

I think all of that is solid.

So we're glad to be participating in that segment.

With that said, we're just not going to grow in oil and gas.

We're active in working our fluid power business, active in growing our bearing and power transmission business and other industrial segments as well.

Okay, thanks.

And then just regarding the use of cash on the quarter and the share repurchase program, do you expect to fund that with positive cash flow just down the line, or would you potentially look for external financing there?

Well, obviously, John, we're in a net borrowing position as a total corporation right now.

So depending upon how you look at it, you could say we're funding it through borrowing as we speak today.

I think our view is that we believe giving money back to the shareholders and adding value that way is important.

So our view on dividends and potential dividend increases is still the same.

And our view on share buybacks is very similar, too.

We want to make sure that we keep the share count, you know, flattish when it relates to equity award programs, but also then tip it to a slightly downward tilt for the overall share count looking forward.

So we're going to continue to be opportunistic in the market with our buy and we purchased a little over $10 million in the quarter that just ended, and I would expect we would be around that in the quarter we're in right now.

Okay.

Thank you.

(Operator Instructions)

And we have another question from the line of Joe Mondillo with Sidoti & Company.

Please go ahead.

Good morning, guys.

Good morning, Joe.

Just a question -- a couple questions.

So one, the SD&A as a percent of sales, I was wondering if you could just comment on that, just given the acquisitions.

I know there's a lot of amortization that came with those, but going back into FY14, you know, that SD&A as a percent of sales did pick up in that FY14.

How are you looking at that and sort of I guess if we can look at the 21.2% that you saw this quarter?

How are you looking at that going forward?

Joe, obviously we look at SD&A from a multifaceted approach.

One of the approaches that we do try to look at it as a run rate approach, as to what the expenses that we had in this quarter running forward into the next couple of quarters, as well as looking at it as a percentage of sales.

When you have the percentage of sales, it does take into -- it changes things because of the acquisitions, as you layer them on.

The acquisitions that we've completed, they do have a higher gross profit percent profile, but they also do have a higher SD&A percent profile as well, which is layering in there, too.

So we're trying to manage all of these pieces going forward.

I would say expense control is one thing that we will not keep -- we'll not take our eye off of.

We will keep our eye right on that ball to make sure that we are as efficient and effective as possible with SD&A.

And I think that if you look at our overall SD&A levels in this current quarter, all of our acquisitions were in to the full three months during this quarter, so that's, I would say that's a decent proxy for looking at that on a go-forward run rate perspective, too.

Okay, great.

And then in terms of the acquisitions, I was wondering if -- obviously we can back in how much revenue was contributed to the quarter, but was wondering if you could tell us how accretive the acquisitions were in the quarter, in terms of EPS.

We previously stated in our earlier press releases that we thought the acquisitions for the whole year would be in the $0.17 to $0.22 of EPS accretion and they were solidly in that range, meeting our expectations for those results.

Okay, and in terms of earnings, how do those acquisitions change, if at all, the seasonality on a quarter-to-quarter basis of your earnings?

I'm not sure how to respond to that question, Joe.

In other words, is the strong seasonal quarters within the companies that you bought, are they June and September?

Or are they more smoothed out throughout the year?

Just wondering how they affect the seasonality, or how does it affect the seasonality of your earnings on a quarter-to-quarter basis?

I think they do have a little bit of an impact.

I would say that impact really relates to Reliance probably a little bit more.

And we talked about this, I think, on one of our last calls because Reliance operates up in Canada a lot more.

And so the spring thaw has an impact.

So I would say the seasonality that Reliance sees is the their June quarter, that April/May time period is generally their slowest in sales.

So that's different than our core traditional operations.

So I don't know on an overall basis if it really changes things, but that's the one thing that I would say these acquisitions would have an impact on, is that.

And then as we talked about earlier, with the energy exposure, when the New Orleans gas exposure, we expect their operations and their sales to continue in a solid way going forward.

I would say with the other ones, no real --

No big thing.

No real seasonality.

Yes.

Okay, and then just going back lastly for me, the accretion of the $0.17 to $0.22, obviously the top line came in much better than expected and I know obviously you turn the organic growth in terms of the core business, but it seems like, you know, some better than expected growth in terms of the historical financials of those two businesses that you acquired were probably maybe better than expected.

Is -- given the strength that you're seeing within those businesses, does that -- is there some upside to that accretion estimate that you have provided?

I would say, I would say obviously the answer is yes.

If they perform well from a top line perspective, that will flow down to the bottom line, too.

And I would say right now, we think the integration in for the early months on the recent ones are very good.

We're focused on the synergy plans, and as they relate, we're excited about the opportunities around customers, some expanding products and services to those common customers, getting some new ones, and we'll look at having those capabilities in some new geographies, too, which creates, you know, a nice synergy opportunity as we think broadly across the Applied footprint.

Okay, great.

Thanks a lot.

Okay.

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 everyone for joining us today, and we look forward to talking with you throughout the quarter.

Thanks a lot.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.