Applied Industrial Technologies Inc (AIT) 2018 Q4 法說會逐字稿

Welcome to the Fiscal 2018 Fourth Quarter and Year-end Earnings Call for Applied Industrial Technologies.

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

(Operator Instructions) Please note, this conference is being recorded.

I will now turn the call over to Julie Kho.

Julie, you may begin.

Thank you, and good morning, everyone.

This morning, we issued our earnings release and supplemental investor deck detailing latest quarter results.

These documents are available in the Investor Relations section of our website at applied.com.

A replay of today's broadcast will be available for the next 2 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 various industry sectors and geographies, the success of our various business strategies and other risk factors provided in our press release and 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 addition, this conference call includes the use of non-GAAP financial measures.

These measures are explained in our press release and in the supplemental presentation materials and are subject to the qualifications referenced in those documents.

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 Dave Wells, our Chief Financial Officer.

I will now turn the call over to Neil.

Thank you, Julie, and good morning, everyone.

We appreciate you joining us.

I'll begin with a brief summary of results for the quarter and full year.

Our net sales for the fourth quarter grew 31.7% to $897.7 million from $681.5 million in the same quarter a year ago.

Net income for the quarter was $40.4 million or $1.03 per share compared with $52.9 million or $1.34 per share in the fourth quarter of fiscal 2017.

As noted in our press release and supplemental financial deck, prior year results include a favorable non-routine tax benefit of $22.2 million or $0.56 per share.

Excluding this benefit, fourth quarter fiscal 2018 EPS increased 32.1% compared to the prior year.

EBITDA for the quarter was a record $87 million or 9.7% of sales, up 48.9% from the prior year quarter.

Net sales for the full year were a record $3.07 billion, an increase of 18.5% compared with $2.59 billion last year.

Net income for our full fiscal year was $141.6 million or $3.61 per share.

Adjusted EPS, exclusive of $0.13 per share onetime FCX transaction-related charges, was $3.74 per share.

This represents a 31.6% increase compared to adjusted EPS of $2.84 in fiscal 2017, which excludes the non-routine tax benefit mentioned previously.

Overall, fiscal '18 proved to be an exciting and successful year.

With our 95-year anniversary celebration as the backdrop, we are very pleased with our record financial performance and continued progress in enhancing our differentiation as a value-added industrial distributor.

Through our dedicated associates, enhanced business systems, strategic investments and best-in-class suppliers, we continue to strengthen our capabilities, including our critical core products offering, expanding value-added services, leadership in engineered fluid power and flow control solutions, growing geographic reach and channels to market.

Additionally, our FCX Performance team members continue to demonstrate strong customer focus and engagement, and we are extremely pleased with our progress to date.

Across our organization, we are excited for the new fiscal year and the opportunities to drive continuous improvements and further grow our business with current customers and new end users.

Now at this time, I'll turn the call over to Dave for a closer look at our financial results.

Thanks, Neil, and good morning, everyone.

I will begin with further details on our most recent quarter financial performance and then briefly further recap full year 2018 results.

After that, I will move on to provide some insight on our fiscal year 2019 outlook.

As a reminder, the supplemental investor deck issued this morning recapping key financial performance talking points is available for your additional information.

As Neil mentioned, sales for the quarter ending June 2018 increased 31.7% over the prior year quarter.

Organically, our top line grew 9.3%, inclusive of a 1.1% benefit from the 1/2 incremental selling day in this year's fourth quarter.

Acquisitions increased sales by 22.1%, while the impact of foreign currency exchange added another 30 basis points of favorability.

Excluding the impact of the FCX Performance acquisition, sales per day increased 2% sequentially from the quarter ending March 2018.

Fourth quarter sales in our Service Center Based Distribution segment increased by $58 million or 10.2% year-over-year.

Acquisitions within this segment increased sales by 20 basis points, and foreign currency fluctuations had a favorable impact of 30 basis points.

Excluding the impact of acquisitions and currency translation, sales increased by 9.7%, driven by an 8.5% days-adjusted organic increase and 1.2% benefit from the incremental 1/2 business day in this year's quarter.

Moving to our fluid power and flow control segment.

Fourth quarter sales increased $159 million or 133.8% as compared to the prior year.

Acquisitions within this segment, namely the addition of FCX Performance, generated 126.1% of the year-over-year segment growth.

Excluding the impact of acquisitions, the segment generated 7.7% organic sales growth for the quarter, inclusive of an 80 basis point benefit from the differential in selling days year-over-year.

From a geographic perspective, sales in the quarter for our U.S. operations were up $199 million or 34.4% year-over-year, with acquisitions driving an increase of 25.9%.

Excluding acquisition impact, sales from U.S. operations increased by 8.5%, comprised of 7.7% days-adjusted organic growth and 0.8% benefit from the incremental 1/2 sales day in the quarter.

Sales from our businesses outside of the United States, which increased 17% versus the prior year quarter, grew 14.2% organically, with strong performance across all geographies, and represented the balance of the increase over prior year sales.

Moving on to gross margins.

Our gross profit percentage for the quarter was 29.4%, up 60 basis points year-over-year.

Our first full quarter of FCX acquisition results drove 80 basis points of margin expansion year-over-year.

Excluding the accretive benefit of the FCX acquisition, gross profit margin for the core business was 28.6%.

While this was 20 basis points lower than the prior year quarter, I will remind everyone that our prior year fourth quarter comp included a net 50 basis point benefit to gross margins from LIFO layer liquidation.

We are pleased that our gross margin performance, excluding FCX results, improved 28 basis points sequentially, driven by our various margin improvement initiatives.

Additionally, if we look at the last 2 quarters of fiscal 2018, our second half results reflect a 10 basis point expansion in organic margins despite the LIFO income benefit recognized in the prior year.

Our selling, distribution and administrative expenses on an absolute basis increased $45 million or 30.6% when compared to the same quarter in the prior year.

Acquired businesses accounted for 26.9% year-over-year growth, while fluctuations in foreign currency rates increased SD&A for the quarter by 40 basis points compared to the prior year quarter.

Excluding the impact of acquisitions and currency translation, SD&A spend for the quarter increased only 3.3% year-over-year, driven primarily by the impact of annual merit increases and higher performance-based incentives.

Resulting EBITDA for the quarter was $87 million or 9.7% of sales.

Excluding the impact of the FCX Performance acquisition, despite the tough year-over-year gross margin comps, leverage of incremental volume and continued diligence in SD&A spend helped to drive a 19.4% flow-through to pretax income on incremental year-over-year volume in the legacy business.

In line with our guidance, the effective income tax rate was 33% for the quarter as we completed the final remeasurement of certain deferred taxes from the blended 28% fiscal year 2018 rate to the go-forward 21% U.S. statutory rate.

We now expect our effective tax rate for the upcoming fiscal year 2019 to be in the range of 24% to 26% as we fully step down to the lower U.S. statutory rate.

Our consolidated balance sheet remains strong, with shareholders' equity of $815 million.

Following the combination of the FCX Performance transaction and borrowing to fund the acquisition, our capital allocation priorities remain focused on delevering and continuing to increase shareholder value by maintaining our track record of consistent dividend payments.

As such, there was no share repurchase activity in the quarter, and we extinguished another $68 million of the initial $112.5 million revolver draw taken to fund the FCX Performance acquisition, bringing our outstanding revolver draw to $19.5 million and leverage to 2.9x EBITDA under the current credit facility covenants.

Cash generated from operating activities was $99.4 million for the quarter, $13.3 million improved from the prior year quarter.

Fourth quarter results demonstrated continued traction, generated by operating working capital management initiatives.

Strong quarter performance included the benefit of a $15 million reduction in inventories and 280 basis point reduction in past due customer receivables in the legacy business.

To recap, our fourth quarter performance reflects success from continued execution of our strategic priorities.

Looking at the resulting fiscal year 2018 highlights as context for our fiscal year 2019 guidance, we had record revenues of $3.1 billion, up 18.5%, inclusive of the 5 months of FCX Performance results and up 8.3% excluding acquisitions.

Continued execution on gross margin expansion initiatives, combined with leverage of our systems investments and operational excellence initiatives, drove 18.5% flow-through to pretax income on incremental volumes, exclusive of the impact of the FCX acquisition.

EBITDA for the year of $278 million was 9% of sales, inclusive of a 20 basis point dilutive impact of onetime FCX acquisition charges.

Finally, fiscal 2018 adjusted EPS of $3.74 per share, which excludes the $0.13 dilutive impact of the FCX acquisition onetime cost, increased 32% year-over-year as compared to fiscal 2017 adjusted EPS of $2.84 per share, which excludes the non-routine tax benefit previously noted.

Our 2018 was a record year on many fronts, and we look forward to building on this momentum as we move into fiscal 2019.

Transitioning now to our outlook for fiscal 2019.

As noted in our press release, we are forecasting a sales increase in the range of 16% to 18% and expect earnings per share in the range of $4.48 to $4.68 per share.

Full year impact of the FCX acquisition, coupled with growth in the new flow control space, drives a portion of this growth.

Excluding FCX, sales from our legacy operations are forecast to be in the range of up 5% to up 7% year-over-year.

Our EPS guidance reflects a year-over-year increase in the range of 24% to 30%.

The non-repeat of onetime costs associated with the FCX acquisition of $0.13 per share, coupled with approximately $0.20 per share of benefit from the inclusion of a full year of FCX results, generate a portion of this year-over-year increase.

The fiscal 2019 forecast also reflects an approximate $0.30 per share benefit from the step-down to the new U.S. statutory tax rate from the fiscal 2018 blended rate, coupled with an operational improvement of $0.24 to $0.44 per share, driven by continued sales growth, margin expansion and productivity initiatives as well as execution on FCX acquisition synergy opportunities.

As previously noted, we anticipate that our effective tax rate will be in the 24% to 26% range for the 2019 fiscal year.

Cash provided from operations in fiscal 2019 is projected to reflect further traction from our collections and inventory initiatives, coupled with the incremental benefit of the lower U.S. tax rate, resulting in anticipated cash generated from operations in the range of $230 million to $250 million.

Capital expenditures are expected to be in the range of $26 million to $28 million for the coming year.

Combined noncash depreciation and amortization expense will total nearly $88 million for fiscal 2019.

Additionally, full year interest expense is projected to range from $43 million to $44 million.

Our capital allocation priorities will continue to focus on delevering and continuing to increase shareholder value by maintaining our track record of consistent dividend payments as well as executing on accretive acquisitions in our strategic served markets.

In summary, we are pleased with our progress in fiscal year 2018 and look forward to continuing that momentum and execution into fiscal 2019.

With that, I will now turn the call back over to Neil for some further insight on our longer-term strategic vision and projections, along with some final comments.

Thanks, Dave.

At 95 years, Applied is well-positioned as the technical MRO distribution leader.

With our Working Together, Winning Together mindset, we remain committed to building on our strong foundation and leveraging our expanding capabilities to further generate benefits for all our stakeholders.

Our collective execution of our long-range strategic plan will propel us forward to achieving our new 5-year 2023 objectives, including growing revenues to greater than $4.5 billion through mid-single-digit organic growth and accretive acquisitions, adding an average of $100 million in sales per year, resulting in compounded growth approaching 9% over the 5-year strategic plan horizon; and improving our EBITDA margin to greater than 11% through sales and margin expansion, including continued focus on accretive value-added services and expansionary products, leveraging our system investments and operational excellence initiatives and continuing our cost discipline.

With our long-range objectives in mind, we are maintaining continuity in our 5 strategic elements to generate profitable growth: Core growth, growing our core sales and marketing capabilities across our 600-plus locations, leveraging our local presence to expand with existing accounts and new customers; product expansion, driving results beyond our base offerings, with opportunities across all our product groups, including Maintenance Supplies & Solutions and value-added services; fluid power and flow control, building upon our North American leadership, leveraging our value-added services and expanded product offerings for OEM customers and gaining increased share of MRO end users; in operational excellence, driving continuous improvements across the business and realizing the full potential from our enhanced systems; and finally, acquisitions, staying active in extending our business reach and expanding Applied's capabilities to serve industrial customers in our geographic markets.

We are confident we will continue to build upon our strong foundation and our accelerating momentum, generating ongoing success and value for all our stakeholders.

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

(Operator Instructions) Your first question comes from Adam Uhlman with Cleveland Research.

Congrats on the, all the new records.

Thanks, Adam.

Thanks, Adam.

I wanted to start with the guidance for this next fiscal year.

Could you talk about your expectations for your organic gross margin performance and how we should be thinking about the FCX business and their gross profit performance?

Sure.

I think starting with the organic gross margin performance, we had very good traction as we looked at the back half of 2018 despite some of the material cost increases, as we caught up with those.

We would expect then, as we've talked about, continue to target 10 to 20 basis point margin expansion in the core business.

Then you think about the accretive benefit of the FCX results, we had socialized a $0.10 to $0.20 per share EPS impact.

As we talked about the '19 projections for FCX, as we culminated the transaction, we've talked, I think in the past about $0.09 or so lower amortization around the midpoint assumption there.

So we're seeing some improved volume and some margin performance right at the target expectations, with the kind of mid-33.5% to 34% on the FCX margins, which here again mixes this up a bit, driving to expectations for the EPS, for the FCX contribution, between the amortization true-up and actual results there, plus the improved, slightly improved performance in the kind of 26% to 27% EPS range, 26% to 27%, yes.

Okay, got you.

And then within that, I guess I think I heard you say that amortization's expected to be $88 million for this next fiscal year.

Did I hear that correctly?

That's a combination of depreciation and amortization, both D&A.

And that compares to the $16 million that you had in the fourth quarter?

So we had $32 million of amortization -- I'm sorry, I'm looking at the full year number.

Yes, that's correct.

So fourth quarter, that's...

So why would amortization be stepping up so much this next year?

Okay.

So the $88 million here again was depreciation and amortization.

(Operator Instructions) Your next question comes from Ryan Cieslak with Northcoast Research.

I just first wanted to start it off on the organic growth.

Coming off of, again, another nice quarter of 8% organic growth on a daily basis and just maybe if you can talk us through how initial -- your first quarter trends are looking.

I know comps are getting more difficult, but any thoughts on how maybe July and early August has shaped up for you guys from an organic growth standpoint?

Ryan, I'd say July has really continued as expected, upper single digits increase year-over-year.

Sequentially, some step-down, right, as we get the fiscal year-end and quarter year-end comparisons and also considering business seasonality and plant shutdowns that can occur in July.

Just really starting off as expected, too, for the handful of days that we're into the month.

Okay, great.

And then, Neil, fluid power continues to show some nice growth, but it was below what I was looking for here in the quarter, I think maybe below just normal sequential trends as well.

Anything happening in this quarter or something that you would call out maybe relative to your expectations that stood out to you that maybe wasn't as strong as you would have thought?

Or is there something that I'm missing there?

Well, I think -- maybe Dave will touch on, right, and we've talked in the past, on some of the segment changes and classifications that maybe influenced that comparison.

As I look at the fluid power business within the period, I see double-digit growth with those operating companies, 10% plus.

I would say over 80% of the groups are performing at or exceeding their plans.

If I look at the backlog year-over-year, it's up 20%.

And so right, they would have finished the year teens positive year-over-year and continuing momentum going in.

And if I look at the projects and the work that we're doing for our customers, I mean, we've got a lot of active involvement in how we're enhancing precision machine control and also energy-saving-type sustainability projects that help on the MRO aftermarket side for customers as well.

So hey, we like where we're at and the progress that's going on in fluid power.

And just to elaborate, Ryan, you're getting a little bit of noise from the prior year pro forma work as we cleaned up the statements.

So as we would look at the fluid power business like-for-like, year-over-year, from the business reporting, management reporting standpoint, as Neil indicated, double-digit growth and still looking at a backlog position that is up 20% year-over-year.

So still very solid fundamentals there against the tougher comps.

Okay.

And then the last one for me, and I'll hop back in.

Any update on how to think about the targeted synergies you guys had laid out earlier in the year with FCX?

I think it was around $30 million or so.

Maybe how to think about how that flows through here into fiscal '19, and maybe just, again, some progress or update on progress with what you're seeing there, that would be great.

You bet.

So I think you know we had socialized $30 million, to your point, of synergies over the 5-year horizon.

We had talked about those being not equally weighted, so 40% or so coming in the first half of that 5-year, 60% in the back half.

I think we're pleased we're tracking to expectations.

I think as we talked last quarter, we've got the 18 integration and synergy work streams and continue to be very pleased with the energy and the traction on the execution there.

So I think we're right in line with expectations there, and you're seeing that flow through to some improvement in terms of the '19 EPS, as I indicated, contribution from the FCX business.

Your next question comes from David Stratton with Great Lakes Review.

When we look at your 30 industry groups, I was wondering if you could give some detail there on what you're seeing and then also, broader speaking, some of the puts and takes of the end market uptake you're experiencing right now.

Yes, if we look back at the quarter on those industries, we would have had 22 with increases, I think, up a little bit from the prior quarter, probably continued positives that we would see around primary, fabricated metals, oil and gas, aggregate, machinery OEMs, chemicals and food.

So I think consistent, those that are doing well continue with strength, and maybe it's broadening in the sectors.

And if I think about industrial production overall, I think we're seeing those increases really broadly across all of those segments, and we're seeing that in our results.

Okay.

And then can you break out any impact that you're seeing from either currently enacted tariffs or maybe future tariffs that have been talked about in the news as of recently?

Any impact there that we should take into consideration?

Yes, I don't know if I can touch on all the recent ones, at times, it could be a little hard to keep up.

But I would say with what we are seeing, I think we've done a very effective job, and I think that's reflected in our margins as we look back and as we move through this portion of the calendar year.

I mean, no doubt, we, suppliers, on the 232 tariffs on steel and aluminum, we'd see impact on some direct imported materials or indirectly on pricing around U.S.-produced commodities.

And then on the 301 tariffs, so those 800-plus different groups, that would be impacting some of our supplier base.

Directly, ourselves, I mean, we're a very low direct importer from China, but we see that coming in, and I think we've done an effective job recognizing that inflation in products and in ourselves to the marketplace.

Great.

And then one final, and I don't know if I missed this on the call, but did you give a CapEx projection for the year?

Yes, we did.

$26 million to $28 million is what we had stated as the CapEx expectations for the year.

And I'd just -- color behind the number, I like the deployment.

I mean, we'll have some general things at times I don't like.

But a lot of that investment will be around shops and services that enhance productivity or be around technology and systems advancements that further help productivity, I think, which drives our overall competitiveness.

And so those things are contributors to how we continue to manage SD&A effectively.

Your next question comes from Steve Barger with KeyBanc Capital Markets.

So I was trying to write down all those numbers as you went through them, but if I got it right, you're thinking free cash flow is maybe $230 million.

Is -- was that what it works out to?

In the range there.

We talked $230 million to $250 million of operating cash flow, $26 million to $28 million of CapEx.

So depending on how those fall within the range, we could approach the $230 million, but that would be at the high end.

Yes, I mean, obviously, a big number.

I've been trying to just do the math here.

I mean, if -- given the cash on hand and the $230 million of free cash flow, you're going to be down at maybe 2x net debt-to-EBITDA at the end of next year, if I'm doing the numbers right.

Does that mean you're ready to think about acquisitions again?

Or how do you think about the balance sheet and the use of cash?

The interest projection I gave you, it does assume that we would stay in the kind of the tier that we just dipped to, as we went to the 2.9x net leverage under the credit facility.

So we would continue to, as we've talked, look at to use -- bolt-on acquisitions in line with our strategic objectives and really, as we've talked, keeping the balance sheet being put to use and ultimate long-term target of kind of mid-2s in terms of the leverage ratio going forward, to strike that balance.

So I'd say, Steve, right, we have continued to be active in M&A.

We work our priorities.

We have a productive pipeline, and we have prospects or targets in ongoing, continuing dialogue, but also evaluation and diligence as well.

So we haven't paused, we've remained active, and as we go through this fiscal year, we would expect to close acquisitions.

Okay.

Just thinking about the guidance.

If -- the implied incremental operating contribution margin for the year, I think, is in the mid- to high 9% range.

Are there any onetime costs or higher costs that you're not thinking about being able to capture embedded in that guidance?

It just seems a little conservative given the growth.

No, here, again, we're still lapping, if you stop and think about it, there's 7 months of incremental amortization expense with FCX embedded there.

So if we look organically, we're kind of mid-teens in terms of the core AIT business, if you look at increment, that does include SD&A stepping up a bit more beyond just the merits to 3.6% as we think about making some growth investments on customer-facing resource to drive some incremental volume and pursue some opportunities that we see.

So it does allow for some of that growth investment on the SD&A side in the 10 to 20 basis points of core margin expansion.

As we think about the FCX business, I think kind of the best way to think about it, if we look at the incremental EBITDA year-over-year there, the 7 -- you've got full 12 months, not just the 5, actually, 17.5% flow-through on the EBITDA contribution.

So once we lap those onetime amortization or the amortization costs, obviously, we're going to see that flow-through mix up, as we talked about last quarter, with the more accretive margins that we see on the FCX side of the business.

Yes.

For the organic growth in the quarter, how much was price?

And how much is built into the outlook, whether the 5% to 7% or the 17% total sales growth?

Yes, so we touched on some of the inflation that we're seeing before.

And for us, and I think we've said it, so we'll say it again, in our brake fix MRO, we'd have about 1/3 of our SKUs that repeat over the year so that you can get a real tight price measurement in that.

2/3, either because of brake fix or they're part of a subassembly or part of equipment going into a service, you may not have a perfect match coming in.

But with that said, our belief is we've had price input to sales at about 1.5%, probably not 2%.

And we think going forward, it could continue at that level or it might increase.

And I think that, as we think about over the full fiscal year, will play out.

We just know or believe today we're performing well.

And if it increases, we know how to operate.

If it moderates, then we know how to operate in that environment also.

Your next question comes from Ryan Cieslak with Northcoast Research.

Just a couple of follow-up questions for you.

I wanted to just maybe touch on the oil and gas businesses following the 2014 acquisitions and sort of where they stand today as a percentage of your revenue.

Obviously, today, I would think that those businesses contributed some nice growth for you guys on an organic basis in fiscal '18.

What's the expectation that's embedded in your guidance for those businesses going into '19 at this point?

Yes, the back of the quarter, right, they would have performed mid-, upper teens year-over-year and positive for the full year, almost 30%.

So nice activity and performance.

And looking back in this year, we've done a nice upgrade of bringing them onto the ERP systems as well, which will serve us very well going forward.

And we love the markets and deposits in play that they participate in and obviously including the Permian.

As we think about '19 in those businesses, hey, expectations, again, are mid-teens, that we think we've got a lot of capability.

There are also value-added services to build on and some nice momentum.

So that would be our expectations as we look at the fiscal year coming forward.

Okay.

And Neil, I know there's been a lot of headlines coming out of the Permian as it relates to maybe some constraints on takeaway capacity.

Remind us if that is any -- would that have any impact on you guys in terms of what you're selling into there?

Or what's your thoughts around that and maybe what you're seeing as well at this point?

Well, I think what we're seeing right now is there's still very good activity.

There could be more, right?

I mean, I think the Permian's at, what, 3.2 million-plus barrels a day.

It probably could grow, will grow, to 5.5 million a day by 2023.

To help that, capacity needs to improve, which is, as they look at pipelines going to Corpus or going to Houston, that's going to be very good for FCX in that business.

But also, as that moves to more artificial lift extraction and requiring more mechanical parts, that's good for our business and the service connected around that.

So it's a large producing area, right, on a -- if it stands on its own, it's -- if it was part of OPEC, I think it would be the second-largest producer behind Saudi.

So a lot of output coming through.

And I'm just a believer that market response and those capacity constraints will get addressed in time, but it's still a productive environment right now.

Okay, good color.

And then just to follow up, I had just sort of a housekeeping question.

I wanted to follow up on Adam's question earlier, Dave, with the depreciation and amortization.

So I'm showing here in the June quarter, the most recent quarter you reported, of roughly $16 million of depreciation and amortization.

Is that the right run rate going forward?

I'm just trying to reconcile the $88 million, I think, full year guidance that you gave.

That is.

So there is some potential upside there as we think about the full year at $88 million we discussed.

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.

At this point, I just want to thank everyone for joining us today, and we look forward to talking to many of you as we move throughout the quarter.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.