Applied Industrial Technologies Inc (AIT) 2015 Q2 法說會逐字稿

Welcome to the FY15 second-quarter earnings call for Applied Industrial Technologies.

My name is Julian, 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.

Thank you, Julian, and good morning, everyone.

Our earnings release 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 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, Chief Financial Officer.

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

Thank you, Julie, and good morning, everyone.

We appreciate you joining us today.

As noted in our release this morning, we are pleased with the continued sales and earnings growth in our FY15 second quarter.

Our net sales of $691.7 million reflect a 19% increase from the prior-year quarter and our earnings per share of $0.72 are up 18% as compared to the same period last year.

Our efforts reflect a recurring theme across Applied to realize our full potential.

We continue to focus on growing sales with existing customers and winning new business, strengthening our product expansion, including our maintenance supplies and solutions offering, leveraging our fluid power capabilities in the value-added services, enhancing our operational excellence and continuous improvement activities, and lastly, accelerating acquisitions, including delivery of the synergy plans.

During the quarter, we completed the acquisition of Ira Pump and Supply.

Ira is an experienced supplier to the upstream production segment for the oil and gas industry in west Texas.

They are well positioned to service the Midland and Cline shale plays in the Permian Basin.

We are active in the integration process and we remained encouraged about the mid- to long-term opportunities across our oil and gas businesses.

Looking forward, we see an industrial economic environment that continues to present opportunities for organic and acquired growth.

While the recent decline in oil prices creates some challenges, we are fully engaged in executing our acquisition integration plans as well as our broader industrial growth initiatives across our industrial served markets.

Entering the second half of FY15, we are narrowing our full-year guidance range for earnings per share to between $2.95 and $3.10 per share on a sales increase of 13% to 15%.

In this morning's release, we also announced that the Company's Board of Directors declared a $0.02 or 8% increase in the quarterly cash dividend to $0.27 per common share.

This is our sixth dividend increase since 2010, representing a cumulative increase of 80% in the quarterly dividend over this five-year period.

We were also active in share repurchases during the quarter, with the purchase of 249,900 shares of common stock for $11.5 million.

These actions further demonstrate our confidence in our business position and our commitment to generating increased shareholder value.

I will now turn the call over to Mark for some more detail on our financial results.

Thanks, Neil.

Good morning, everyone.

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

Our sales per day rate during the quarter was $11.2 million, 18.9% above the prior-year quarter and 1.7% above our rate in the September quarter.

We had 62 selling days in both the December 2014 and 2013 quarters.

Acquisitions had a positive impact on sales of 15.8% during the quarter.

Foreign currency impacts decreased sales by 1.4%.

Therefore, overall core same-store operations experienced a 4.5% increase in sales compared to the prior year.

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

Our product mix during the quarter was 25.9% fluid power products and 74.1% industrial products.

Second-quarter sales in our service center based distribution segment increased $104.1 million or 22.1%.

All of the $91.7 million of acquisition impact on sales is within the service center based distribution segment.

The remaining increase in this segment was driven by our US service centers, which experienced a 2% sales increase in the quarter.

The sales in our fluid power businesses segment increased $6.3 million or 5.5%.

This increase was focused within our US fluid power operations.

From a geographic perspective, sales in the second quarter from our overall US operations were 14.7% higher compared to the prior-year quarter and experienced a positive impact of $53.7 million, or 11.2%, from acquisitions.

Our Canadian operations benefited from $33.6 million of sales from acquisitions during the quarter.

The core Canadian operations experienced a sales increase in local currency of 10.2% and had negative foreign currency translation impact of 8.6% resulting in a combined sales increase of $35.8 million or 52.8%.

Consolidated sales from our other country operations, which include Mexico, Australia, and New Zealand, hit an overall increase of $3.7 million, or 10.6%, which included sales from acquisitions of $4.3 million and a negative foreign currency impact of $2.3 million.

Our gross profit percentage for the quarter was 28.3%, 20 basis points above the prior year's second quarter and 50 basis points above our run rate in the September quarter.

This increase from prior year is attributed to the positive impact of recent acquisitions operating at gross margins above our traditional core business.

The sequential improvement in our run rate compared to the September quarter pertains to better core US-based businesses gross profit percentages.

Our selling, distribution and administrative expenses as a percentage of sales was 21.5% for the quarter, 30 basis points above the prior-year second quarter.

On an absolute basis, SD&A increased $25.4 million in the quarter or 20.5%.

Acquisitions added $21 million to our SD&A.

Excluding SD&A incurred by our acquired businesses, our core operational SD&A was 3.5% higher on a year-over-year comparison.

Our effective tax rate for the second quarter was 33.2%.

This lower rate is due to some discrete items during the quarter which are not expected to repeat.

We believe our tax rate for the remaining two quarters of FY15 will be around 34% to 34.5%.

The end result for the quarter is that EPS improved 18% to $0.72 per share compared to the prior-year quarter.

Our consolidated balance sheet remains strong with shareholders' equity of $781.7 million compared to $800.3 million at June 30.

This slight decrease in equity is due to stock repurchases and the translation of our non-US entities balance sheets into US dollars due to the strengthening of the dollar compared to foreign currencies.

Our after-tax return on assets for the second quarter was 8% versus 9.8% in the prior-year comparable quarter due to our acquisitions impact on our asset base.

We expect our ROA to improve by around 0.5% for the full year of FY15 as net income improves throughout the year and average assets decline somewhat due to working capital improvements and intangible asset amortization.

Inventory at December 31 is $65.7 million above our June levels.

$41.7 million of this increase relates to the impact of our acquisitions.

The remaining increase pertains to temporary inventory investments within our US service center operations related to calendar year-end programs with certain strategic suppliers.

We expect the majority of these temporary inventory investments to burn off by June 30.

We had $349.3 million of debt outstanding at December 31.

During the quarter, we entered into a 3.21% fixed rate private placement borrowing with a seven year average life.

We now have $170 million of fixed-rate borrowings with a 3.2% weighted-average interest rate.

Our remaining debt is at variable rates, which currently have interest rates of around 1.1%.

We expect the total overall interest expense in our March quarter to be similar to what we experienced in the December quarter.

Cash generated from operating activities was $19.3 million for the second quarter compared to $15.7 million in the prior-year quarter.

Year to date, cash generation still remains short of our prior-year amounts.

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

Traditionally, we experience some seasonality in our cash flows with the first half of the year being lighter than the second half.

We expect the $80 million of cash used to support working capital, shown on our December 31 cash flow statement in today's press release, to decline by about $50 million by fiscal year end due to improved receivables collections, reduced inventory levels, and further extension of payables.

We expect FY15 cash provided from operating activities to be greater than our annual net income amount.

As Neil stated, we purchased 249,900 shares of stock for $11.5 million in the open market during the December quarter.

We expect to remain active in executing stock buybacks now and into the future.

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

Thanks, Mark.

Just a few points in closing.

First, we have seen momentum in executing our strategic plan across the business since the start of the fiscal year, and we are committed to accelerated progress in the second half.

Second, we remain a broad-based value-added industrial distributor serving a wide range of customers in virtually every industry.

While energy markets contract in the near term, many other industrial segments are growing.

Third, we remain committed to generating shareholder value through our capital allocation, through our business execution, and through our strategic investments, specifically around technology and acquisitions.

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

Thank you.

(Operator Instructions)

Our first question comes from the line of John Baliotti from Janney Capital Markets.

Your line is open, please proceed with your question.

Thank you.

Good morning, guys.

Neil, I was curious, I think this might be the strongest core growth quarter you've had since toward the end of 2012.

If I'm right, is there any particular sector or vertical that positively surprised you?

I do not know that any that positively stands out.

For the segments, we track, we're probably up in, I think, 16 of 30 of those, segments like food, forest products paper, auto, transportation, maybe mining off a lower base, those all contributed.

I really just think it is a continued gaining of traction and working our growth strategies and plans across our US service centers, our fluid power businesses and our other segments.

Okay.

There is obviously been a lot of negative news coming out in terms of oil and in terms of just some of the related markets.

It seems like you have managed, probably for your own internal strategy, you have managed to outgrow that, some of those headwinds, in these verticals.

Is that how you would categorize it?

I really like our businesses, their capabilities.

Our focus has been on looking and working with them on their customers, because we have growth opportunities within current customers, how we expand our product offering.

And then also how we look at the supply chain and how we can help with some efficiencies, including use of a master or large distribution center to provide stock and service from an ongoing standpoint.

We like our businesses.

We like our position.

We know there's cycles in the segment.

We think we moved from underweight in an end-market participation to market weight with that, so we are pleased.

Finally, in terms of how the quarter progressed, was there any notable differences month to month in how the quarter started versus how it ended?

I would say really, good progression, October to November, November really to much of December.

Sometimes you get a little noise around holidays to end of the year to start of year.

Then, I'll expect there is a little interest.

If we look at it from January, we've seen nice progression really, out of the mid to the upper end of our sales guidance.

We have got a couple of days to go, but typically we close strong.

January is progressing just fine as well.

Great.

Thanks very much.

Okay.

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

Your line is open call, please proceed with your question.

Good morning guys, and congrats on a very good quarter.

Thank you.

Can we start with maybe diving in a little bit more on the oil exposure, there, Neil?

I am try to make sure we have a clear picture of what percentage of your business it is now.

If I look at Reliance, Knox, Ira, and TOPS, it looks like you are on a, call it, $90 million-ish quarterly run rate in revenues for those businesses.

As you guys look forward, given what is happening, obviously, with oil prices and rig count and CapEx budgets, help us balance out the big picture headwinds with some of the changes you guys are making to those businesses that might help offset that a little bit?

How much do you think the quarterly run rate may come down for those businesses?

I will start out a little bit out on that, Matt.

We had a solid quarter with our acquisition results, obviously, from the numbers that we presented in today's press release.

We are having active dialogues with all of our oil and gas companies as well as all of our operations on an ongoing basis to make sure that we are making the right moves and doing the right things to run the business efficiently.

Obviously, there is a lot of noise, let's say, around the oil and gas distributors that we recently bought.

So we are having a lot more conversations with them to make sure that we are being proactive in the right way so that if things are happening, we can make sure that we do the right things on that.

I think when we look going forward, into the acquisition impact on our sales in Q3 and Q4, we have -- some of these acquisitions are hitting their anniversary date.

The TOPS acquisition hit the anniversary date December 31, and then Reliance will hit the anniversary date on May 1. The impact, if you just look -- if you just do the math in Q3 and Q4, it will be slightly down, just by where those numbers are.

Then, if oil prices continue to stay low, we are looking and seeing, okay, how would that impact going to be on their run rates in the second half of the year versus the first half of the year?

Our perspective is that in Q3, our projected sales increase, based upon our guidance, gives around a 12% to 15% increase in Q3, which we believe is 3% to 5% core 9% to 10% acquisitions.

Then, in Q4, a similar core sales increase of 3% to 5% in our guidance, and then an acquisition of 5% to 6%.

If you utilize those numbers in the sales projection and it flows into the overall guidance of 13% to 15% in total.

That's very helpful.

Matt, I would add.

We were with many of the guys last week, some more this week, and so there is a lot of discussion as we share the capabilities of each across the business and to our service center network.

As we review current customers and opportunities that we have to be a little better, a little bigger with.

We went in with plans around product expansion and looking at those offerings, especially for those in upstream.

We moved forward on geographic additions in some of the markets, which has been, we think, positioning us and going to be positive for us going forward as well.

Price will drive activity, and we watch the rig counts and the other ones.

We believe we have offsets, and then we were staying close on our cost, our serving position there, as well, to make sure we deliver a good result moving through the cycle.

Okay, thanks.

The last thing for me, guys, on gross margin, you guys seem to be standing out as one of the few that has been able to get some growth expansion in what looks like a little bit of a tough environment.

What are you guys doing beyond just the acquisition mix that is obviously helping there a little bit to help out with your gross margins?

Are we maybe seeing the benefit of SAP to an extent?

Then, Mark, what type of gross margin should we be using going forward?

I think that when we look at the gross profit percentage, we have been talking, last quarter, that we had a few one-time things that had it a little bit lower than our expectation.

Our view is, is our benchmark, our bottom-line benchmark is 28%.

We should always be above 28%.

Then, our strategies and the activities that we are doing is to keep driving it upwards from 28%.

We were able to get to 28.3% this quarter.

Our expectation is that our GP percent should see some slight improvements in Q3 and Q4 from where we were at the December quarter.

Obviously, there is lots of hard work and heavy lifting for that, but that is our perspective.

Where is that coming from?

Golly, it is just coming from the work that we are doing.

It's adds to it, too, Matt, acquisitions, and you can see product expansion helps us in that.

Workaround customer mix and especially having good local presence with local customers is additive and helpful as we go through that.

Then, just good execution to reduce variability and maybe plug some of the leaks that we have had before.

They are right, that the system and the visibility and the more real-time visibility of some of that information helps us do that.

One other thing just to add is the gross profit percent impact of our acquisitions in the December quarter is exactly the same as it was in the September quarter.

So, all of this improvement that we saw from a sequential run rate was from our core operations.

That was driven by operations in the US service centers.

Okay.

Thanks, guys.

Sure.

Our next question comes from Jeff Hammond from KeyBanc Capital Markets.

Your line is open, please proceed with your question.

Good morning, guys.

Morning, Jeff.

Morning.

If I just look back at the envelope, and correct me if I am wrong, your acquired businesses were up 20% year-on-year.

Are you just seeing very good strength in oil and gas now and the expectation is that that starts to roll?

I also noticed that, I you said, Canada was plus 10%, which tends to be oil and gas related as well.

The core Canadian business was plus 10%, but that excludes the Reliance specific oil and gas business.

Yes, we do have a meaningful presence with some of the other oil sand type businesses within Canada, but --

Our other segments as well.

Exactly.

I think, Jeff, from our perspective, is we had a solid quarter from our acquisitions in the December quarter.

Our view going forward for the rest of the year is that while we are expecting them to continue to perform and when we have synergy plans to do that, we are acknowledging that there is a lower oil price out there, so that may have an impact on their sales amounts going forward.

That is in front of us.

Okay.

Just in light of the oil price drop, have you gone back and reviewed these acquired businesses and your Canadian business and how they acted in 2008/2009 when we saw the last drop in oil prices?

How much did the revenue decline peak to trough?>

Where is -- how much cyclicality is there in the margins?

Any color on what a down cycle would have looked like pro forma would be helpful?

Obviously, we have had lots of conversations with our guys about this over the last couple of weeks just to try to get some clarity going forward and looking at how the numbers are going to come forth to us.

I would say when you look at the last downturns in the last cycle, our guys were saying that they saw sales decline of potentially 20% to 25% with similar situations that they are potentially seeing today.

That is still in front of us because we are still doing okay through the December quarter.

I'd just add that we have got experienced leaders that lived through and worked through these cycles.

They have seen them, so obviously you start to make the adjustments on your costs.

You continue to look for opportunities because you have to be ready for when the return comes as well.

It has to balance that we're going through with those guys.

We acknowledge, acquisitions helped us in the first half.

We think they contributed in the second half.

We know we have got a road map with them, but also the other segments of our business for our second half plans.

In those, we like the momentum.

Oil on one side becomes a lower input cost to some of the rest of the industrial economy in time.

it doesn't ripple through immediately, but we broadly believe the industrial economy is stronger than the general economy in this year and many would say in 2016 as well.

We think that is good for our overall business.

Okay.

Just on the organic growth rate uptick for the base, do you think the markets are getting better or is this where we are starting to see this kind of ERP disruption going away and you being able to refocus your efforts on selling and new products and the like?

I do not know that I can parse out both.

I think markets are improving.

That is helpful, and I think we are improving as we go through that.

Again, when I am out with the teams, we are spending a lot more time on customers and targets and growth initiatives than we were at a period ago on organizational change management and readiness for ERP implementation.

Through our phased deployment, we continue to anniversary each one of those as we go through, so I think it is a combination.

The broader industrial economy is pretty good.

We are committed to getting better within it.

Okay.

Thanks, guys.

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

Your line is open, please proceed with your question.

Good morning, guys, congrats on the quarter.

Morning.

Not to beat a dead horse here, but I did want to dig a little deeper on the energy side.

Can you give a little more granularity on the strength in your oil field acquisitions?

Are you currently seeing benefits from pent up maintenances as we've come off line?

Do you think there could be a bigger impact heading into FY16 once that maintenance cycle is over?

I think, again, it is early, as we watch some of this.

I think our presence upstream is on the drilling side, which as rigs go down, there is impact to work through.

It is also on completion, if some of that slows.

But there is ongoing production, which is a part of our presence.

I think in ramps and up, everyone is focused on maximizing.

As things slow, you start to work repair service and efficiencies.

I think the other thing that helps us, we are onshore.

Our geographic plays are close to refining centers.

As people focus on cost and efficiencies, we are well positioned in Permian and Eagle Ford and places in west Texas and other US market that are committed to producing as well as Canada.

Because, often times, those are very long-term decades-focused type investments in oil sands, so there is still work that goes on.

If things stay at a very low level for a long period of time, I am sure there is further adjustments and we will adjust our business as well.

There will be work and opportunities throughout this cycle.

Okay.

Great.

What are the energy price and currency assumptions that you have in your guidance right now?

We took into account the currency impacts of where the foreign currencies were as of mid-last week and just assume that those rates would be constant for the rest of the fiscal year.

Obviously, when the US dollar continues to strengthen, when we make money in our local currencies outside of the US, those just translate into smaller dollars in the US dollars.

We think that that impact for the second half of the year would be right around $0.03 potentially.

Then I would say, on oil and West Texas Intermediate, we really think it is at where it is at through our end of our fiscal year.

Some would point to brass as it improves, but we will be looking at that as we close the fiscal year and start another fiscal year.

We think it does not necessarily dramatically change or improve through the balance of our fiscal year through June.

Okay.

Thanks.

Finally, can you give us an update on your acquisition pipeline?

What are you focusing on?

Maybe talk about the multiples that you're seeing out there?

We continue to be focused on our priorities on geographies that we think we can strengthen or fill gaps broadly across our business and bearings and power transmission also fluid power and some of the geography bases as well in our served markets.

Our pipeline reflects our priorities.

We are active on really each and every one of those areas.

We have said, we'll continue to say, we want to be as busy as we were last year every year.

We don't perfectly control the timing, but we will continue to work those that are in our priorities and have the ability to be a good acquirer and then integrate those back into our business.

Great.

Thanks again.

Okay.

(Operator Instructions)

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

Your line is open, please proceed with your question.

Good morning.

Just a quick follow up on the acquisition question.

Looking at the energy sector, are you satisfied with your exposure at this point or could there be more acquisitions in that space?

We think we are well positioned.

It is a segment that we'll continue to have interest in, so there would be prospects within the acquisition pipeline.

Naturally, when you get this much activity going on, there may be a separation in the perception of values around them.

They are in our pipeline just like our other segments would be.

Okay.

Looking at the last quarter guidance on RIP and KNOX, you talked about $0.17 to $0.22 of accretion for FY15, what is the updated guidance there?

I would say how we look at the results for them, when we look at the first half of our year, you could say we were at the top end of that EPS guidance from the actual results.

As we look at the remaining part of the year, I think we are targeting the lower end of that just to take into the acknowledgment that sales might not be quite as robust in the second half of the year than they were in the first half of the year.

Okay.

Looking at some of the longer-term targets on sales and margins, I wonder if you could provide any updated thoughts there?

I would say our view has not changed on any of the longer term views on things.

We are still expecting that our gross profit percent should grow year-over-year for the next couple of years and that our operating margin should continue to expand over the next couple of years, too.

We do not have any changes at this time.

Thank you.

Our next question comes from the line of Brent Rakers from Thompson Research Group.

Your line is open, please proceed with your question.

Yes, good morning.

I was hoping you could provide some more detail on the core change in SG&A year-over-year?

I know, obviously, the revenue and the gross margin side has gotten a bit better, but maybe give us some of the puts and takes related to compensation and some of the other items driving that increase this quarter?

Brent, I will take a shot at that.

We do have some additional headcount at our customer facing folks out in the US service centers within our Canadian's core service center operations as well as Mexico and US fluid power.

That is part of our strategy is to be more customer facing.

I think we are doing that.

We are seeing some of an increase there in compensation for that.

When I look at the overall SD&A going forward into Q3 and Q4, our expectation is to have a slight downward view of SG&A as a percent of sales as we go forward.

We were at 21.5% in Q2, and my thought is that I should see a slight downward tilt to that going forward from that from a run-rate perspective.

Mark, in terms of clarification, you added some customer face and salespeople, it looks like, in the current quarter, is that something that over the back half of the fiscal year that's going to be something that's going to be continued at this pace?

I will jump in and then Mark can.

I'd say some of the others, if we look back, the guys will show me some one-times on the impact comparables.

I think the other one we have some cost in, as we do financial system transformation and implement the general ledger and the consolidation, so those would be.

We work out of those in time.

I don't know if we work out of them perfectly all in the second half.

We like our forward-facing investments, they are to the plan.

They yield benefit as we go through.

We've got some support costs that are in there that we'll continue to look at, especially as we operate in the macro environment.

We will expect a glide down and if the environment changes, we'll be responsible.

We know how to operate in an industrial environment and we will react.

Great.

Again, I guess to harp more back on the oil and gas acquisitions.

Obviously, since you guys have made these deals, the growth rates have been well in excess of the rig counts in the market that you are serving.

When you go back prior to your acquisition of each of these businesses, was that level of out performance versus the local rig counts in the markets they served, was that above rig count levels prior to the acquisition of these companies?

I do not know if I have all of that.

I can say the businesses are very good.

They had capabilities.

They were making investments that grew their performances, especially as they expanded into geographies, expanded into capabilities.

So none of them were just static and holding on in those areas.

As we model through with them right now, we are working through, what is our sales expectations?

Then, what is the rest of the things that we can do to help?

What should be the things we do to control cost as we just work through the cycle?

The segment has cycles.

We knew it from our smaller participation before.

We know it with our little bit larger participation now.

We will work our way through.

Then, I'm sorry, just one last question on these deals.

You spoke a lot about synergies, I guess some cross-selling, some utilization of some AIT regional DCs.

I think you also referenced some new branch openings and things like that within the oil and gas side.

Could you talk about each one of those growth opportunities?

And maybe even give us a -- cast a little bit of light on how much each of those has contributed to this growth out performance?

We are at different stages.

The one that anniversaried, we are operating in a larger facility, which is just helping them scale for growth.

With Reliance, we have got some added location, including a move to Houston.

That is going to be beneficial for us, looking forward.

We have taken the opportunity and some shared sites to say, can we be more productive together?

So that helps us from an operating standpoint going forward.

Just as we network across these businesses, there is a lot of expertise, customer presence.

And so as we share our positions, our leads in those opportunities, there is just more that we can do as a broader group, as broader Applied with those customers.

I will tell you and all of those, we have made progress and some of that would show in the result, and in others that potential is in front of us.

That is what we will be working in the rest of this fiscal year and next year as well.

I like our progress.

We are not complete.

That gives us some opportunities, especially as we work our way through the cycle.

Great.

Thank you, Neil.

Okay.

Our next question comes from Cezary Nadecki from Schroders.

Your line is open, please proceed with your question.

Thank you.

Good morning, gentlemen.

Good morning, Cezary.

I just had a few clarifying questions.

Mark, start with a little bit on the guidance, the core guidance, 4% going forward.

Is that inclusive of FX and what is the FX impact?

I think the short answer is yes.

We did try to model that in there.

I don't have the exact percentage.

We did the calculation by country to figure out what the potential EPS percentage was, and I do not have the sales percentage with me.

Okay, but you just called out the 1.4% in this quarter.

Is that indicative or should it get worse than this when you look at the rates you used in your calculations?

It did get worse, because it got worse the first three weeks of January.

Okay.

With the rates, specifically Canada.

So, if we look at the organic growth ex FX, we are really looking north of 4.5%, so clearly you are expecting growth from these levels in the core business ex FX?

Right, and I think a good story to talk about on that is our US service centers.

You forget about the foreign currency, but in the US service centers we have now seen sequential improvements in our quarterly results.

If you look back at the June 2014 quarter, our US service centers had a 3.8% sales decline year-over-year.

Then, in the September quarter, slightly positive, but was close to zero.

Then, in December quarter we had a 2% improvement, and we have seen that continue to improve in January.

Our expectation is that that will continue to improve throughout the rest of this fiscal year, and then in the other businesses as well.

Glad to hear.

Maybe clarify a little on the balance sheet.

Your inventories have spiked and you called it out a little bit too, vender support.

But I know recently or over the last few quarters, you guys also hit some ERP numbers.

So can you quantify a little bit what is the impact of supplier support and is there an ERP we should start count on going away as well, or is that are ready flushed out?

I would say the added inventory that we did for the ERP implementations that was really for FY14.

I would say that is pretty much flushed out through our day-to-day normal operation.

What we see now in our core operations, it is about a $25 million increase in inventories from June to December.

We can really highlight -- target those for these special buys that we did to try to capture some benefits from the suppliers and most of those are right around calendar year end.

If I was to take that $25 million -- (multiple speakers) If I were to take the $25 million off, it seems like these inventory levels, looking by DSOs, are still elevated versus historically where you guys been prior two-year cycle?

There is some acquisition in there and there is also some product expansion around the acquisition.

So we know there is benefit in the second half as we work those investments down.

Also, as we centralize some of these inventories, we are able to aggregate at a higher level, that means each individual stocking location in time we'll be able to reduce some of those.

We know we have work and improvements to deliver in the second half, and we're focused on doing that.

Okay.

My last question around M&A.

It seems that a lot of the acquisitions you've made over the last year were oil field related and you called out the acquisitions being around 16% of the revenue.

Can you help me understand that?

How does that relate to being 10% 11% from where I remember you guys talking about energy exposure?

I am assuming you had some energy exposure going into all these acquisitions, are we looking at it right?

Or is there a big chunk that is not energy exposure related in your acquisitions?

When we look at the acquisitions, we have been acquiring now for the upstream oil and gas markets, whereas previously, our core business was all downstream with the refineries.

When we are talking in the past, we said about 2% to 3% of our business was in petro-chem but that was really refinery based.

This 10% to 12% of our sales today, that we're talking about is this upstream oil and gas through these acquisitions that we have gotten.

It is a different business that we are carving out.

Because when we think of refineries we just think of them as plants.

They run like a plant.

So if we (multiple speakers).

Go ahead.

When we did some of the acquisitions, we also purchased a company in Mexico on July 1 and a small entity in Australia/New Zealand that were not oil and gas related.

They are spiking the sales percentages from the acquisitions up a little bit that don't really relate to oil and gas.

I would add, some of the companies that are in, like Reliance, have participation and do well in other segments around products like fluid conveyance.

While they have very good oil and gas expertise, they do serve other customers in other segments out of the geography they play, especially back to that western Canada.

Our run rate today, for the December quarter, for upstream oil and gas is in the 12% to 13% of our sales for that quarter.

Okay.

I guess I can only wish you more fortunate timing on the future acquisitions.

Hopefully, this proves to be a quick recovery.

Thank you.

Thank you.

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 just want to thank everyone for joining us today.

We look forward to talking with you throughout the quarter.

Thanks for being with us.

Thank you, ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.