Richard Shaw – VP, Communications and Learning David Pugh – Chairman and CEO Mark Eisele – VP, CFO Ben Mondics – EVP, COO

Matt Duncan - Stephens Holden Lewis - B&T Brent Rakers - Morgan Keegan Adam Uhlman - Cleveland Research Greg Halter - Great Lakes Review Jeff Hammond - Keybanc Capital Markets Bill Dezellem - Titan Capital Management Brian Carlson - Atlantic Investment

Hello and welcome to the Applied Industrial Technologies second quarter 2008 financial Earnings Call. All lines will be in a listen-only mode until the formal question-and-answer session. At that time, instructions will be given. At the request of Applied Industrial Technologies, today's conference call is being recorded. If you should have any objection, you may disconnect at this time. I would like to introduce Mr. Richard Shaw, Applied Vice President of Communications and Learning. Mr. Shaw you may begin.

Thank you Jennifer and good afternoon everyone. On behalf of Applied Industrial Technologies we appreciate you joining our fiscal 2008 second quarter conference call today. You should've already received our earnings release that was issued this morning. If you've not received it, you can retrieve it by visiting our website at applied.com. A replay of today's broadcast will be available for the next two weeks in the archive information is contained in our news 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 forward-looking. All forward-looking statements are based on current expectations regarding important risk factors, including trends in the industrial sector of the economy, the success of our various marketing strategies and other risk factors identified in Applied's most recent periodic report and other filings made with the SEC. Accordingly, actual results may differ materially from those expressed in the forward-looking statements. This conference call is copyrighted property of Applied Industrial Technologies, any copying, rebroadcast, publication, posting, transcription or distribution of any portion of this call without Applied's express prior written consent is prohibited. Our speakers today include David Pugh, Chairman and CEO, of Applied who will discuss our overall performance during the quarter. We'll also hear from Mark Eisele, Vice President and Chief Financial Officer, who will discuss our financial performance in detail and Ben Mondics, our President and Chief Operating Officer, who will discuss operational activity. And getting us started today is Dave Pugh.

Thanks, Rick. And as usual we appreciate all of you joining us. Let’s get right to it. We have two very disparate discussions today and that is disparate not desperate. First is the review of a good quarter and good first half results. Second, is trying to make sense of the projections for the next six months in light of what we currently experience. And I am please to say it was another record quarter for Applied. For the second quarter we saw the earnings per share improved by nearly 24% on Sales growth of little over 8%. And that continues our year-over-year double-digit earnings per share increase trend. As I view the metrics associated with these earnings I am confident that our management team has the operating fundamental of this company well under control. We were solid in all areas of key performance metrics. From an overall standpoint we saw a mix business conditions during the quarter although the sales of housing related business continue to be impacted by the stress in these markets. Our sales to other industries, such as the metal mining and boot production were very strong. We continue to see upward movement in our government segments; another double-digit increase this quarter maintained our enthusiasm for the future that business. As we’ve stated in the past we’ve been moving our sales focus to areas that are less acceptable to general economic cycles. Our operating margin showed continued strength due to our efforts to control cost and also to shift our mix to the last price sensitive markets and also just better managing our assets. The result of the 7.3% operating margin, exceeding the 7% mark for the third consecutive quarter and in improving on last year 6.1%. Our focus in this area will become even more important in the projected market environment. Cost control particularly gratifying as our SD&A as a percent of sales came in less than 20% mark for the quarter, which is slightly below our plan for the year and it’s certainly had a growth rate well below that of our sales. So this gives us further latitude to support our gross programs with the appropriate resources and still get our cost targets. Asset managements will remain a prime focus in this mixed market environment and for the quarter inventories did go up as a seasonal norm, but they were managed very effectively, the yearend projections were we want them to be. Receivables are directionally correct, they still have opportunity for improvement and this area also is going to require close scrutiny should the market move as forecasted. And we’re already experiencing a challenge or two here. Our return on invested capital increased once again and continues to be better than the industry norm. This is still a key metrics for us to determine how well we are aligning our assets with market opportunity. Cash generation for the quarter was nice and strong keeping our balance sheet in good shape to support any strategic growth and productivity improvement effort that we see. On December 17th we announced the acquisition of VYCMEX and its group of companies in Mexico. The addition of VYCMEX gives us substantial expertise and capabilities in the fluid power products and systems in Mexico. We are steadily and cautiously expanding our presence in this country, as we see the Mexican manufacturing environment as a strong alternative for companies who question the risk of taking on the China challenge. As for the second half, while we've not experienced to-date, the level of overall decline that’s been forecast, we are not blind to the fact that a lot of indicators are pointing in that direction. A recent drop in the purchasing manager's index puts the (inaudible) below its expansionary threshold of 50. And this has been a fairly reliable indicator for us as to future market conditions. Consumer confidence is been declining for some time. And that is now been followed by a drop in consumer spending. Given these warning signs, we feel it's prudent to more cautiously balance our investments with perceived market opportunity in the short run. You're not getting way ahead of the market, but by no means running for cover at this point. So in summary, we had a solid six months under our belts and we have some storm clouds on the horizon. We're confident that we can manage well in a changing environment should it occur. I'm going to now turn it over to Mark for more details on the overall financial performance and I'll come back alter to wrap things up.

Thanks, Dave. Good afternoon everyone. Let me provide some additional insight for our second quarter financial performance. We were very pleased to achieve second quarter earnings $0.52 per share. Sales for the second quarter ended at $511 million, which represents an 8.2% improvement over last year's second quarter. We had 62 selling days this quarter, compare to 61 days in the same period last year. On a sales per day basis, sales increased 6.4% over last year. For the quarter, US service center sales were up 8.4% while sales at our US fluid power businesses were up just over 1%. For the US service centers, we estimate that approximately 1% to 2% of their increase relates to the impact of passing along supplier price increases on our sales. Sales for our Canadian operations increased by 10.8% in the quarter; primarily driven from the 13.7% increase in currency translation. In local currency, our Canadian service center sales were down 6.7%, while the Canadian Fluid Power businesses increased by 7.1%. Our Mexican and Puerto Rican service center operations had a combined sales decrease of 2.3%, primarily due top the impact of a strike at one of our large Mexican customers. We did acquire big mix, the Mexican Fluid Power distribution company with five operating facilities toward the end of the quarter. The impact on our financial statements from this acquisition was not significant. During the quarter our number of operating facilities increased by three locations to 452, due to the addition of the five new locations from VYCMEX and the divesture of two Canadian service center locations specializing in rubber products. Our product mix during the quarter was 19.4% fluid power products and 80.6% industrial products. The gross profit percentage for the quarter was 27.3% consistent with the guidance we’ve provided for fiscal 2008 27.3%. This margin was 30 basis points lower than last year’s second quarter and 10 basis points lower than the first quarter. We continue to experience gross profit margin pressures primarily due to increased sales to large national contract customers, which are generally at lower margins. These pressures have been some what offset by higher levels of supplier support. We do not have any assurances that this higher levels of supplier support will continue for the next six months. Our selling, distribution and administrative expense as a percent of sales was 20.0% for the quarter. This rate is 140 basis points lower than the second quarter of fiscal 2007 and is slightly lower than our go-forward run rate expectations for the remainder of fiscal 2008. We continue to see benefits from our overall focus on productivity improvements and cost controls. The comparison to higher sales, as well as lower employee benefit and depreciation expenses, were the main contributors to the lower percentages. We plan to prudently investment in additional resources for our government and other growth programs for the remainder of the fiscal year in support of our ongoing corporate strategies. The absolute dollar increase in SG&A for the quarter was only 1% compared to a sales increase of 8.2%. Our second quarter operating margin increased to 7.3% compared to 6.1% in the prior year second quarter. This represents the third consecutive quarter that operating margins surpassed the 7% level. The increased sales compare to the lower than expected operating expenses were significant factors contributing to the approved margin results. Our net interest expense was virtually zero. This was due to an increase in interest earned on money market type cash investments and lower interest expense due to the retirement of $50 million of our debt near the end of the quarter. The effective tax rate for the quarter was 38.1%, compared to 36.1% in the second quarter of last year. The higher rate was primarily due to a higher effective rate for State taxes in this period, and recent US tax law changes, which have eliminated certain deductions related to foreign income. Year-to-date, our tax rate is 37.5% and we anticipate our tax rate for the entire year to be at or slightly below that level. Our balance sheet remains solid with shareholders equity at over $470 million, and a current ratio of 3.3 to 1. This ratio is above prior year level due to the retirement of $50 million of debt in the quarter. Our pre-tax returns on assets rose to 18.4% for the quarter compared to 15.8% for the prior year quarter. As anticipated inventory levels increased $22.5 million in the quarter, primarily due to the special buys to achieve calendar yearend buying targets. We expect this seasonal increase in inventories to mostly flow through our system during the next two quarters, so that inventory levels at June year end should be close to our June 2007 levels. In addition, we added $2.7 million of inventory related to the VYCMEX acquisition. Accounts receivable and day sales outstanding of approximately 40 days remained competitive, but not currently at our internal targets. Cash provided from operations for the quarter was a solid $21.8 million, compared to cash used in operations of $12.2 million in the prior year second quarter. This improvement relates to improved collections on receivables, timing of our liability payments and improved operating income. Cash used for investing and financing activities in the quarter included $9.7 million to acquire VYCMEX, $50 million for the debt retirement and $21 million related to our ongoing stock repurchase program. We have continued our annual sales guidance for fiscal 2008 in this mornings press release to be between approximately $2.1 to 2.18 billion, but have increased our earnings per share guidance to the range of $2.10 to $2.25 per share. The increase in EPS guidance is driven by two factors. The repurchase of treasury stock accomplished during the quarter and the second quarter operating results being better than originally expected. Now, Ben Mondics will comment on sales and operations.

Thanks Mark, and good afternoon everyone. We are very pleased with our second quarter performance. As Dave stated, business conditions are mixed. From an industry standpoint the two areas that continued to suffer were the wood product industry, due to its ties to housing, and the transportation group, as it relates to automotive production. Beyond those two segments, we continue to see strength in many of the other industries we serve. The metal mining, cement and food and beverage industries saw strong double-digit growth during the quarter. We also saw growth in such areas as power generation, rubber and plastic products and the primary metal industries. A double digit increase in our government sales confirms our steady progress in this growth area and we will continue to investment accordingly. Our catalog sales continue to make strides showing a double-digit increase over the last year’s quarter, thanks in part to our new and expanded Applied branded catalog that was launched at the beginning of the fiscal year. We also welcome VYCMEX to the Applied family adding five service centers in Mexico. As Mexico’s largest independent fluid power distributor, VYCMEX gives us substantial expertise and capabilities in fluid power products and systems in Mexico thereby allowing us to provide a total product solution for Mexican industries. We feel this increase is our value as a supplier and will help us expand our market share in Mexico. As per the second half of our fiscal year, we’ll work to balance the projected market concerns with the opportunities that exist. We’ve stayed on course to control our cost and we’ve managed our assets very well as indicated by our SD&A and our return on invested capital improvements. This sort of discipline assures that we’re well positioned for a strong or a weak economy. Many of the economic indicators have turned down in the past months and our customer base is increasingly cautious about the general economy and specifically the price of raw materials, as well as energy cost. However, we’re confident in our ability to work through these mixed conditions. We benefit from serving a variety of industries and a very diverse customer base. During uncertain times like these our customers see increased value in our training, technical assistance, value-added solutions, inventory management programs and logistic systems. Our continuous improvement programs continue to drive efficiencies in all areas of the company as indicated by our operating leverage and we continue to see opportunities for improvement in sales growth, market share gain and gross margins. With these positives stacked in our corner even in the face of a potential downturn we’ve a lot to be optimist about. I’ll now turn the call back over to Dave for closing comments.

Thanks, Ben. Again I have to say I'm very pleased with the results that the team has delivered. They've given us an excellent second quarter to complete a good first half. The projected market environment does require a degree of caution. However, there are opportunities out there for those who seek them and we plan to just that. We do feel confident that the full year earnings guidance that we've provided. And I believe strategy is still very sound, and I know our operating fundamentals are strong. We are going to continue to invest wisely and we are going to continue to stress quality in every effort that we have. And we have a strong management team, an experienced veteran management team who've been through the wars before. So, while we are operating at a higher level of vigilance and responsiveness, we are not operating out of fear. We are willing and able to make tough decisions when they are needed. So, thanks gain for your interest in this company and we are ready to do our best at answering your questions.

(Operator Instructions). We'll take our first question from Matt Duncan with Stephens. Matt Duncan - Stephens: Good afternoon guys and congrats on a nice progress in the quarter.

Hey, thanks Matt. Matt Duncan - Stephens: The first question I've got is really, kind of, with regard to the outlook that you guys have been talking about here. And Ben, maybe, you, kind of, referred to this a little bit, but can you talk just a little about, maybe just anecdotally: what you're hearing from your customers about what their expectations are for the next few monthes? I know you mentioned that they are growing more cautious on the economy, but just in general, kind of: what are your senses, your customers are feeling is going on right now in the marketplace?

Matt, I think you stated it well, I think those caution out there, but we have yet see any downturn like you would read in the newspapers. So, we are optimistic, but I think like our customers we are cautious based on all the indicators, the macro economic indicators we have seen and everything you read in the media, but right now we have not seen as of we are at. Matt Duncan - Stephens: And then may be just to give us a better sense of the directionality of your business right now: are you comfortable talking about month-to-month sales trend? I know you have done so at some, and declined to do some, in the past, but: just what is the month-to-month trend look like? And then we are three weeks in to January here: how is the core looking so for today?

Yeah, Matt this is Mark. We tried to avoid talking about those month-to-month trends. I think especially in the quarter that just ended here with December with the holiday moths and their week, typically seasonality here with our sales, in the month of December being with some of our lighter sales in any month through out the entire yea. So what we are really looking at is how we are doing comparative to plan and for the planned sales and I would say for the quarter just ended we were hitting those numbers each of those months.

And Matt, right now that the projections are more hyped than in with an actual results and I don’t know what's caused the election here or what’s going on, but we are still seeing fairly strong demand. Matt Duncan - Stephens: I guess it will be fair to say that when you guys talk about slowing growth in the second half of the year that’s more a reaction to headlines then anything you have seen so far.

Absolutely, as we read the indicators, as we have read the indicators in the past, the indicators would say this possibly its happening. Now the indicators maybe influenced by the same headlines so we just haven’t seen it with regard to day-to-day operations. Matt Duncan – Stephens: Right. On the SD&A expense margin you guys have continued to do a very admirable job keeping those cost down and I am curious: number one you say you expect, as a percent of sales, that those might creep up a little bit in the second half of the year. Can you discuss in a little bit more detail why that might be? And then as a follow on to that: how much of your SD&A expenses would say are actually kind of discretionary in nature?

Matt, I’ll tackle that question. I think the expectation is, and we’ve talked about this over the last several quarters, is that we’re in the process of adding resources to attack more of our growth areas, specifically like government sales, and we still have headcount that we would like to devote more to government sales and devote additional resources through SD&A from the perspective. And, for an overall perspective our SD&A is driven about 60% to 65% based upon personal related expenses so that’s the real key driver for this. We continue to get more and more efficient in doing our day-to-day operations and that helps us. For instance, our headcount right now at December of ’07 is 4661 people and that includes about 60 people for VYCMEX acquisition in Mexico. So if you take that out we’re still down 30 some people from June of '07 to now. I think that reflects some of the overall efficiencies we're gaining throughout our system, which helps the SD&A expense. Matt Duncan - Stephens: I guess to follow up to that then Mark, you guys have talked about the government business being up double-digits. That appears to be where you're devoting the extra D&A expenses. I know you said it's up double-digits, but: are you in a position to quantify for us a little bit more accurately? Exactly how much those are up to give us a sense from what your success rate has been there?

Matt, I think we had previously stated that last fiscal year we a saw growth of about $25 million and ended up the year at 50, and we stated that we expect a similar growth in dollars and we are on pace to do that this year. Matt Duncan - Stephens: And then the last question I've got and I'll get back in the queue is uses of cash. If I look at your balance sheet, you paid off $50 million in debt, you bought $21 million in stock during the quarter, but you are still sitting on $80 million in cash, and only $25 million in debt. Maybe talk a bit about: what's your plan uses for cash? Or: what's your acquisition pipeline looks like? And then: what are you seeing in terms of acquisitions multiples right now?

Yeah. I think that, what we want to do is use our cash to expand the business and we believe expansion through acquisitions is very viable. We have, on an overall basis, been seeing acquisition multiples start trending down and we continually have candidates that we are talking to for acquisitions. And we expect to continue to talk to them. Obviously, we just closed VYCMEX last month and we don’t necessarily project into the future how and when further acquisitions might close, but we'll tell you: “we are working really hard on doing that”. Matt Duncan - Stephens: Sure. Thanks, guys. I appreciate it. Thanks again. Good and congrats again on a nice quarter.

Thanks.

And we will go to Holden Lewis with BB&T Holden Lewis - B&T: Good afternoon. Thank you. Could you also comment, sort of, although in the lines of a general market discussion: You, sort of, seen your allowance for bad receivables creeping up the last couple of quarters: can you talk about whether receivables are sort of lengthening? Or: if you are seeing anything in that, that might be contributing to some sense of unease or is there nothing related to that? And then I guess lastly on the sort of market conditions. About a year ago we saw the ISM dipping below 50 as well and overall conditions just, kind of, stayed sluggish growth. Are we seeing anything on this dip below 50’s that we didn’t see in the last dip below 50’s that would suggest these conditions are different?

Holden, I'll tackle the allowance for doubtful accounts. I would say the general rule we are seeing a slight deterioration in that, which is why we are adding to the allowances. Yeah, we've been at historic lows for bad debts over the last several years, and our entire customer base has been in fantastic shape when we look at our receivables aging. And we have seen a uptake in some bankruptcy over the several months with some of our customers, so that is why you are seeing some increases in the allowances from our receivable perspective, which obliviously does flow through SG&A and then you see it on the balance sheet from that perspective. But, in conclusion on that we are still projecting to be at a normal year for bad debt expense and where allowance is that. So comparative to the last year or two where we at historic lows its an increase, but when you look at the grand scheme things we’re just right where we always are which is generally very good, we don’t have a lot of bad debt expense in total.

At the same time our DSOs have dropped too.

DSOs continue to drop too.

And while that’s the actual case right now, if you look out there at credit tightening, if the market slows, if you have some folks on a very thin capitalization, it could get tighter and then we don’t plan on being the mortgage banker.

Holden, what was the second part of your question again? Holden Lewis - B&T: Well, and I was just curious again on: what sort of market you are seeing? A year ago the ISM was below 50 much as it is in December and really conditions didn’t really change it may be decelerated a bit, but they are still saw growth despite some sub 50 reading. Are you seeing you anything, and maybe the receivables are the part of the answer, but: are you seeing anything different on this dip below 50 that suggest that this is more worrisome than the last one?

All I would say is: “no”. Obviously, the month of December, if you go back historically is always the light month for the ISM and so one month is not a trend maker. I think we continue to be to look in to the future to say well yeah there is a lot of, like Dave said earlier a lot of storm clouds on the horizon, but it doesn’t look that bad well things are looking okay.

Sure, Holden, our age is tough to think back for a full year, but I don’t see anything in the actual performance that would drive or support a thought that we’re moving out of expansionary territory. So, again, we have some purchasing managers, we've reading the headlines and assuming caution in that area it could lead to their projections. Holden Lewis - B&T: Yeah. Okay I understood. And then secondly, the SG&A number now. You are kind of approaching what has been the bottom end of the historic range. Sort of prior to the 1990 down, the 89-90 downturn and prior to the, I think 2000 downturn. You kind of got your SG&A down into this 19% range as you are now. Talk a little bit about it: is there some reason why that 19 can't ultimately become 16, 17? Or: is there some reason why that 19 has historically been the bottom and this time around it's likely to be somewhere around that too? Just so to speak to the possibilities there.

I guess, we continue to see opportunities to control our cost and improve our cost structure. At the same time we continue to see opportunities for investments. So, we are balancing both and trying to manage profitable growth for the company, but we continue to see a multitude of opportunities to control cost.

Holden, the good part of this, is this ratcheting down is a natural process of achieving the benefits of our investments and productivity efforts. It's not because we've put a stranglehold any of our guys. We're still a growth company; we are still looking for growth areas. And this stuff is happening naturally, not through some dictate from the top. Holden Lewis - B&T: Right. But when you talk about the sort of increase in the spending and you, kind of, sighted that as a reason why, maybe, your SG&A, in terms of sales, might go up in the second half, even though I would imagine that your revenue seasonally should be higher too. Typically second half you see more leverage, not less. You've been investing in government, you've been investing in catalog and you've been doing very well in the SG&A. Are you actually stepping up any meaningful way that rate of investment? Which would lend itself to less leverage that you've achieved so far or: how should I view that?

I don’t think we are stepping up our rate of investment there Holden. I think that we still see investment that are out there and obliviously when we talked about investments its really in SG&A that once we put that or in the water that expense continues on for a while. So it, sort of, takes a while to ramp up sometimes as well. Holden Lewis - B&T: Okay. So if the rate of investment is an increasing, you are investing but the rate of investment is an increasing and you still see opportunities in sort of control the cost and it doesn’t appear to be a lot of incremental investment needs to be made: shouldn’t we see more leverage as the revenues, sort of, tick up seasonally?

Well, that’s one of the things that happen. There are certain things that happen seasonally that counter that. For instance, at the beginning of every calendar year we have the new social security taxes that or unemployment taxes and various things that happen earlier in the year and then dwindle along as the year goes on as well. So those things ramp pack up too. So you have some of little bit an offset for that. But generally, we are looking for economies of scale as well and generally you are correct in that when the sales go up we can't get more efficient and drive more down in the bottom line. Holden Lewis - B&T: Right, because you always had those tax patterns and things like that?

Yeah. Right, that’s noting different. Holden Lewis - B&T: Right. Okay. Alright, I will jump back in. Thanks.

Next we will go to Brent Rakers with Morgan Keegan. Brent Rakers - Morgan Keegan: Hi. Yes good afternoon. You guys have hit on a lot of stuff, I wanted to, if you could talk a little bit about, I know you don’t talk specific about months, but in this case you had Christmas Eve, where I believe you open half day following a Monday, which I'd assume to be very challenging in terms of sales. New Years Eve fell on Monday as well this year. I was hoping you could maybe talk us through: what you think the impact on that would be, have been, in terms of lost revenues? Maybe, this year versus last year. And then secondly, I just hear a little bit of talk about plant slowdowns or shutdowns to a greater degree this year between Christmas and New Year, I was hoping you could address that as well.

Brent, we’ve looked at that and it’s really negligible for us where Christmas Eve and New Year’s Eve fall in the week. These are usually down days for us no matter what.

And Brent, I wasn’t concerned of loss that just postponed , so the New, the Christmas Eve staff comes a day after Christmas. Brent Rakers - Morgan Keegan: And: could you maybe also comment then on the level of factory downtime, maybe this year and your experienced between Christmas and New Year versus, lets say, 2006?

I don’t think we haven’t heard any major difference between the two years.

Now, it’s a good question, but there is nothing that has popped up on our radar screen from our guys inputting to us that would lead us to indication any different. Brent Rakers - Morgan Keegan: Right. And then maybe a little more on the SG&A side, you talked, I think a lot about payroll and again, reminding us to key in on the payroll and the employee numbers side of the equation. Could you talk a little about the non payroll side: is there anything else in this quarter? Any kind of prior period adjustments, lets say related to insurance or something like that, that might have artificially brought that SG&A number down more of a one time basis?

I think when we look at the, those SG&A expenses there are some of the other things that we’ve decreases in, with the employee benefits, for instance our 401(k) match, as we've talked about in the past, our 401(k) match is variable each quarter depending upon the company profitability. And for the quarter just ended, our match was at $0.50 on the dollar for the first 6% of people that were contributing into the plan. And a year ago it was $1 for the $1. So we did see some reductions in that. And so that changes quarter-by-quarter as to, if that's a positive or a negative or flat. So, that’s one item that we have. But another thing Brent is that, what we've really seen is that, throughout many of our expense accounts that are our there, we've just seen good controls this year compared to last year and we've seen small decreases all across the board. So, it's not always necessarily just one big thing we saw lots of little things that added up to good numbers in doing our SD&A comparisons. Brent Rakers - Morgan Keegan: And then Mark may be a follow-on question on that also. I don’t know if you've tried to answer this, but I think Dave, I think for the last year and a half you've been emphasizing that SG&A is going to grow at a higher rate than it has actually grown at. And I guess, I just wonder, as we go into the second half of this year: what would make the second half different than anything else we've experienced over the last year and a half?

Brent, right now, if I had to point any one thing I'd say we're probably below what we thought we would be with regard to staffing in the government business, simply because we are pretty, I don’t know, we have some high standards on what we're going to hire over in that area. And getting those people is not as easy as we thought it might have been to start off with. So, we probably have a budget that’s beyond we're actually spending in that area. So -- and we are not taking that budget away, we want the folks to go get that folks and if we can find them. So we now would be in area we are the second half if the opportunities present themselves we will spend more money. Brent Rakers - Morgan Keegan: And then Dave, just one last question and maybe as a follow up to that, I guess, I think that’s where I probably thought you're going with that, but: isn’t part of the government model designed on not necessarily training and bringing up new talent but basically hiring existing producers?

Absolutely! Brent Rakers - Morgan Keegan: So that really, on a percentage of sales basis, shouldn’t really have a negative impact even right from the gauge, should it?

I am sure I, but there were produces in their old companies whether they could be immediate produces in our company and may be some ramp up. Brent Rakers - Morgan Keegan: Okay, fair enough. Okay, thanks a lot guys.

Thank you

Next go to Adam Uhlman with Cleveland Research Adam Uhlman - Cleveland Research: Hi, good afternoon.

Hi Adam, Adam Uhlman - Cleveland Research: I was wondering: if we can dig into business condition a little bit more? Could you talk about your sales growth with small accounts versus large accounts? And: could you also provide some color on average order sizes and mines per order?

Adam, this is Ben, I guess the first part of your question growth from different types of accounts. We have seen stronger growth in the national account arena then we have seen in the remainder of our business. And it’s been very good. Overall, both segments are up, but more so in the national accounts arena. Mark, I don’t, if you want to comment on that.

And for the number of lines per order, that’s stayed the same for long time and it has remained the same, it’s about two lines per order that per ticket that we have and we don’t really see much change in that. Adam Uhlman - Cleveland Research: And then the average order size is that been pretty stable as well?

Yeah, it has been, it has been going up. I don’t have the numbers in front of me Adam, but lets say 6% to 8%, it’s been going, the size is been going up, but its been relatively stable. Adam Uhlman - Cleveland Research: Okay. And then: why would the US Service Center business be growing faster than the fluid power business for the most recent quarter?

The fluid power business is much, a larger percentage of their businesses is tied to construction and in turn the housing industry. So, they have had a challenge with the industries they serve more so than the US Service Centers which are much more diverse. Adam Uhlman - Cleveland Research: Okay. Great thanks. And then the last question for Mark here. Could you comment on the size of the VYCMEX acquisition in terms of revenue? And then perhaps: is it going to be accretive or neutral to earnings this year?

Right, well, yeah, their revenue run rate is, it’s about a $1 million a month and really we bought them right at the end of December. So we’re expecting in January for them to kick in on the income statement to add some dollars to our performance. We do expect them to be slightly accretive, but nothing significant. Adam Uhlman - Cleveland Research: Great thanks.

Thanks Adam.

Next we’ll go to Greg Halter with Great Lakes Review. Greg Halter - Great Lakes Review: Good afternoon guys good numbers there.

Thanks Greg. Thanks. Greg Halter - Great Lakes Review: Relative to the pricing I know you have talked about a 1% to 2% boost historically over the last couple of quarter: is that something you are looking for going forward as well?

Greg, I think that -- I think the answer is yes. In the past several quarters we have been saying it's about a 1% boost and now this quarter we said 1% to 2%, because we have seen a couple of suppliers that had price increases that were little bit larger than what we'd experienced in the past, particularly some of the bearing manufactures. So, I would expect that 1% to 2% should continue on for the next couple of quarter of seeing that boost. Greg Halter - Great Lakes Review: Okay. And, on the housing related side, on the last call you had indicated it was down, but less negative than it had been. Do you see any light at the end of the tunnel there or have things gotten worse in the most recent quarter?

I think that trend, Greg continued. Last quarter was down less than the prior quarter. So, the trend is moving in the right direction and it’s hard to predict when this slide is going to end, but …..

The rate of decline has slowed, but it's still declining. Greg Halter - Great Lakes Review: Okay.

Yeah. Greg Halter - Great Lakes Review: And, in the SG&A number: was there any pick up? Was there any pickup from facility sales in the quarter?

Yeah, we did have, we did have a gain on sale and you can sort of figure that out through the cash flow statement, and I think it was a little under $400,000 was the actual gain in this quarter. So, I think for the whole year it's, what was it, about a $1 million.. Greg Halter - Great Lakes Review: Yeah, $1.1 million.

Yeah. Greg Halter - Great Lakes Review: Year-to-date.

So, about $400,000 of that was this quarter. Greg Halter - Great Lakes Review: Okay, I think it was $700,000 in the first quarter.

Yeah. Greg Halter - Great Lakes Review: Okay. And I think I asked this last quarter as well, but: do you anticipate any further sale of centers down the road?

Well, there are none in our guidance, so we do not have any in our guidance for the remaining six months. Obliviously, we do have properties that are could be sold and we do entertain offers on those periodically whether it’s from somebody coming in and making an offer at our property or if its deciding that we need to move to another area that market that where in and then having a propriety available for sale. But we don’t have a big pipeline for that. Greg Halter - Great Lakes Review: Okay. And we estimate your US business at about 90% of the total is it still in the ballpark?

US is around probably 88% to 89%, total US. Greg Halter - Great Lakes Review: Okay. And two last ones, or really one last one, your capital spending has been relatively minor for the last several years and just wondering: if there is any reason to expect a number of more than $10 million on an annual basis, going forward here?

I don’t think on a significant basis, about half to two-thirds or three quarters of the amounts we spend are IT driven, and those IT expenditures on capital items are, portion of those were just keep the lights on type of a thing, keep the system running, but a good portion of those are rest to drive our improvements in our system, which get us more productivity improvements. So we are going to continue working on those, but looking into the future yeah, we don’t see any big projects down the road.

Certainly no major overhaul of the IT programs which would be the first thing I’d look at from a capital standpoint. Greg Halter - Great Lakes Review: Okay. And I think you put in the IT system last five or six or seven years ago that's seems to be adequate for the foreseeable if my memory serves me correct.

Well we put in our new financial accounting systems gosh 9 years ago and that will bode us well for a while. Greg Halter - Great Lakes Review: Okay. And right, one last one, Mark you had mentioned there were 62 selling days versus 61 and an equivalent selling basis: was that up 6.4%?

Yeah the difference of 62 to 61 days would have added like around 1.6% or 1.7% percentage points for sales if you are doing the calculation to get to the same store. Greg Halter - Great Lakes Review: Okay. Thank you very much.

Thank you.

And we’ll go to Jeff Hammond with Keybanc Capital Markets. Jeff Hammond - Keybanc Capital Markets: Hi. Good afternoon guys.

Hey Jeff. Jeff Hammond - Keybanc Capital Markets: Just a little more to go back to some of the end markets one of your bigger buckets that I don’t think really came up isn’t why good or bad was just kind of the general industrial factory so I was wondering: if one you can speak to that? Two, as you look at maybe 3Q versus – or I guess your fiscal 1Q versus your fiscal 2Q. What markets in your mind either notably accelerated or decelerated? Because within the -- if you step back it just doesn’t seem like a whole lot of changed over the last 3 months.

Going back to the first question: what was the first part of your question? Jeff Hammond - Keybanc Capital Markets: Just in.

General industrial.

General industrial. Okay. Yeah, which is a very large, very general category was good solid growth, pretty much equal to the average for the company. So if you look at the large population of that segment of the business it was solid.

And then I guess to look at comparison of Q2 to Q1, there is some fluctuations in there, if you break it down by SIC code, but I don’t think anything that really sticks out.

Well the biggest decline getting worse would be in the transportation arena for the auto guys. And then our rate of decline for the lumber wood products slowed from Q2 versus Q1. Jeff Hammond - Keybanc Capital Markets: Okay. And then, just Canada Oil and Gas: what -- maybe give us a little more color on the feedback you are getting there?

I think on the natural gas side, still depressed and not a whole lot of exploration and production going on the oil side and tar sand it continues to be a boom. So, we are seeing of a benefit on our hydraulics side of our business, which is much more tied to the oil, and our bearing and power transmission side of the business which is more tied to wood products and natural gas has suffered and we don’t see that changing around in the foreseeable future. Jeff Hammond - Keybanc Capital Markets: Okay. And then just a final question: It seems like outside of these pockets of Canada weakness, the housing related stuff and transportation, everything else is pretty solid as you touch in -- as you talk about the tone change at the customer level: are there any end markets that currently are pretty good that you are more concerned about?

We have a number of markets that are good and from a concern standpoint none that really stick out as facing a downturn. Jeff Hammond - Keybanc Capital Markets: Okay. Thanks, guys.

Next we will go to [Bill Dezellem] with Titan Capital Management. Bill Dezellem - Titan Capital Management: Thank you. We had a couple of questions related to Mexico and we appreciate it’s small at this point, but: what are you hearing from your Mexican customers? And, in general, about the Mexican economic: any thoughts about its direction moving forward?

Very, very similar to the US may be a little bit more, even positive than the US market right now. The economic seems to be going well although it is tied directly to the US economic. We are seeing some good things in Mexico. Bill Dezellem - Titan Capital Management The strike ended?

Yes, one of our largest customer is copper mine has been on strike and hopefully they will be back to work here soon with the end the strike. Bill Dezellem - Titan Capital Management: And then you commented in generally terms about acquisition, but, specifically in Mexico: how would you characterize the acquisition landscape in terms of the companies you are seeing that are available for acquisition? And number two: is the pricing relative to what you would be paying in the US?

We have just couple of comments there, one is there are more company there for sale than we would take a look at for number of reasons. We are picking our spots carefully with regard to selling up a footprint that we feel likely need within Mexico and the product line expertise that we need there to give us full offerings. We feel like we are solid management there, but the prices is down there I don’t see being a whole lot different from what we are seeing here in the states now that some of the multiples have dropped. So we still seeing Mexico as an opportunity for acquisition, but we are about to fill out our footprint the way we want it right now and we are not, money is not burning our hole on pocket down there. Bill Dezellem - Titan Capital Management: Great. Thank you.

Sure.

And next we’ll go to [Brian Carlson] with Atlantic Investment. Brian Carlson - Atlantic Investment: Hi guys. Thank you for taking my call, but all my questions have been answered.

Okay, Brian. Thank you.

And we’ll take a follow up from Holden Lewis with BB&T. Holden Lewis - BB&T: Thank you. Could you talk a little bit more about the gross margin? I hadn’t really covered that on this call, its flat in first quarter down a bit in the second quarter. Just go over for us: what the moving pieces are within that? You mentioned that you took some price increases from, I know, bearing guys, I know of some others that are having a negative positive: how do you expect that to play out? And then you mentioned some pre-buys: is that having a negative positive? And: how do you expect that to play out the rest of the year? And then: any other moving pieces that we should be aware sort of impacting that line?

Yeah Holden, yeah this is Mark. I think when we look at the gross profit percentage going forward, we continue to see the pressures on our point of sales margins there and a lot of that is because of the supplier price increases and our ability to pass those through immediately, especially with our contract customers or sometimes challenge, although we’ll pass them to eventually when we’ll have our price update thresholds. So those were challenges for us. Also as we’re gaining more sales to these larger national customers, the overall margins for them are slightly lower than the average margin for the company, which continues at that price pressure. Those downward pressures have been offset by increases that we’ve experienced with some suppliers so supplier support. We expect the supplier support in the second half the year to be more flattish, as opposed to increases that we saw in the first half of the year. Although, we are going to work really hard to negotiate with our suppliers in order to try and maximize that. Holden Lewis - BB&T: And by suppler are you referring -- by suppler support are you referring to the sort of end of year, sort of inventory clear outs, that you can get discounted products? Or: are you talking about a more? For some reason: a more collaborative relationship then you had had in the past couple of years?

All of the above: Anytime we can get some supplier purchasing incentives, we negotiate those with our suppliers from all sides, and however we can maximize those, it's all of the above. Holden Lewis - BB&T: Okay. And you think that the discount at the end of year discounted products would fall in that as well? Shouldn’t that be an impact on your fiscal Q3, Q4 right, those will be yearend clearances?

Well, we don’t call it, quite call it: “year end clearances”. Holden Lewis - BB&T: Fair enough.

But yeah, with the purchases of the product that we had at calendar yearend, the benefits we get from those supplier incentives, they roll through into our income statement when we sell those products generally. And so, so that would roll through in our third and fourth quarter. But then again, in the third and fourth quarters we will be purchasing less products than the supplier chose since we are then using the inventory that we had at stock at December 31st too, which is a downward thing on supplier purchase incentives as well. Holden Lewis - BB&T: Okay. And then I guess lastly, you talk about given what you are seeing in the macro stuff even though there is nothing in the market right now suggesting a big change, but you are talking about balancing perhaps differently. What levers would you pull to, sort of, reduce the cost? We know what levers you want to pull increasing your cost not, right, adding sales people to government, that sort of thing, but: what areas might there be a bit of change in your approach that would actually reduce the cost side of things specifically?

Well, I don’t know that we have anything sitting out there, that we have focused with regard to we how balancing thing and being somewhat more circumspect just because of the some projections. Basically we are saying is we keeping things on a little bit of a shorter lease. We are not getting way out of ahead of things. So, if we find a fall off that the numbers that are projected actually happened, we don’t want to be so far that takes us takes three months to recover. So basically we are saying is, hey the “leashes” are just a little shorter, so the puppies don’t get rapped in around the tree. And it just, that’s the balancing actively doing right, now that’s being circumspect. Holden Lewis - BB&T: Right but one area you said I would argue based on your comments earlier that, the government lease is been too short because you don’t find enough people and actually it sounds like you are going to let that lease run a little bit, try to add more people that try to catch up with where you wanted to be. So what leases are you raining in a little that?

Well, they depend upon where the markets go. If markets drops drop in any certain places we can certain pull in people, we can as Mark said, you look at what two-thirds of this is people related and with regards to normal attrition are you going to fill this loss or just lets the attrition flow, and who will make those calls as we go.

I think that’s one of the things we’ve done well and one of the things you see in our SG&A is as we've seen a downturn in the wood products or the automotive industry, we’ve adjusted our cost as we’ve gone along. So we are not sitting out there with extra cost, we've made the adjustment along the way. And then to tag on to Dave’s comments we do have investments that we are looking to make and if we need to delay some of those investments we’ll delay those.

And let me, I do remind you and everyone else is listening during that last downturn we didn’t have any forced reductions. We went through that one with normal attrition and it was absorbed that with no restructuring reserves no reduction of force and we’ve no plans of looking at that in the future. Holden Lewis - BB&T: Okay thank you.

Okay thank you.

And that concludes the question and answer session today. At this time Mr. Pugh I would like to turn the conference back over to you for any additional or closing remarks.

Great. Thanks so much and I appreciate the positive comments you gave us today, good questions. Its going to be fun working with you next couple of quarters and as I mentioned earlier I think we’ve better in-staff, moved through the wars before, we know how to handle it and just trust us to pull the right punches. Thanks so much. See you later.

This does conclude today's presentation. We thank you for your participation. You may now disconnect.