Welcome to the Fiscal 2013 First Quarter Earnings Call for Applied Industrial Technologies. My name is Christine, and I'll be your operator for today's conference. [Operator Instructions] Later, we will conduct a question-and-answer session. Please note today's conference is being recorded. I will now turn the call over to Julie Kho. You may begin.

Thank you, Christine, and good afternoon, everyone. On behalf of Applied Industrial Technologies, thank you for joining us on our fiscal 2013 first quarter investor conference call. Our earnings release was issued this morning before the market opened. If you haven't received it, you can retrieve it from our website at 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 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 also with other filings made with the SEC. Accordingly, actual results may differ materially from those expressed in the forward-looking statements. 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, our Chief Executive Officer; Ben Mondics, our President and Chief Operating Officer; and Mark Eisele, our Vice President and Chief Financial Officer. At this time, I'll turn the call over to Neil Schrimsher.

Okay. Thank you, Julie, and thanks to all of you for joining us today. As we reported in our news release this morning, our sales for the first quarter were $610.5 million, up 5.3% from the first quarter of fiscal 2012. Net income for the quarter increased to $29.5 million or $0.70 per share compared to $26.4 million or $0.61 per share in the prior year quarter. We continued to deliver solid earnings performance this quarter, along with good cost control and a strong balance sheet. While Ben and Mark will add some additional commentary, our 7.3% operating margin for the quarter reflects the plans we have in place to increase our efficiency, productivity and profitability. Our ongoing efforts to build upon our strong capabilities, expand our value-add and to generate success with our customers, in conjunction with our technology investments, provide the foundation for future growth and increased profitability. From my perspective, we have 3 key takeaways. One, core business is operating well and with good efficiency. The 14% increase in earnings per share on 5.3% sales growth indicates good leverage and continued improvement in our productivity, and there's more we can do. Second, we are actively deploying our strategic plan on all fronts, including leveraging sales capabilities with existing and new customers, expanding our products and solutions offerings and building on our Fluid Power strength. And third, we continue to have strong cash generation and remain debt-free, providing the financial capacity to accelerate our acquisition activity. And with that, I'm going to turn the call over to Ben for some additional insight on the quarter.

Thanks, Neil. Let me begin by providing a macroeconomic view of the industrial market. Industrial Production increased 0.4% to 97.0 in September, better than expected, after having fallen 1.4% in August. For the third quarter as a whole, Industrial Production declined at an annual rate of 0.4%. In the manufacturing sector, output increased 0.2% in September, but moved down at an annual rate of 0.9% in the third quarter. Capacity utilization for manufacturing was unchanged in September at 76.8%, a rate 2 percentage points below its long-run average. Looking at the ISM Purchasing Managers Index, it rose more than anticipated, increasing from 49.6 to 51.5 for September. This puts the index above its neutral threshold of 50 for the first time since May, an indication of an improving manufacturing environment. Comparing this macro view to what we're hearing among our suppliers, the tone is consistent with moderating demand levels. Looking across our customer base, we see a mixed bag of business activity. We have many customers that are still very active. Their business is good, their MRO purchases are steady and they're busy planning capital projects. And that bodes well for us as we expand on our product and solutions offerings and expand and enhance our local capabilities. We see the opportunities and the potential that is available to us. As evidenced by our improved SG&A for the quarter, we're doing a good job of managing our operations to the current pace of business. As a percent of sales, our SG&A for the quarter was 19.7%, an improvement over last year's 19.9%. We're maintaining discipline in our cost control, specifically as it relates to our resource planning and to our hiring activity as we invest in growth. Touching on our ERP project, we continue to implement our phased roll-out as planned, and we are pleased with our progress to date. I spent several days earlier this month visiting the locations at our most recent deployment, and I can tell you that there's a lot of excitement among our teams around the power of the new system. Its potential is becoming more apparent to us with each implementation. We can better see the opportunities where it can help improve our business and generate profitable growth into the future. I will now turn the call over to Mark for details on the quarter's financial results.

Thanks, Ben. Good afternoon, everyone. I'll provide some additional insight regarding our first quarter fiscal 2013 financial performance. Our sales per day during the quarter was $9.7 million or 7% above the prior year quarter with 1 less selling day in the end of the September 2012 quarter. Of the total quarterly sales increase, acquisitions contributed 3.4%, and we believe the impact of vendor price increases was around 1%. Unfavorable currency fluctuations during the quarter of $5.8 million reduced sales by 1%. Our product mix during the quarter was 27.9% Fluid Power products and 72.1% industrial products. First quarter sales at our service-center based distribution segment increased $34 million or 7.3%, 4.2 percentage points of this increase was due to acquisitions. Sales in our Fluid Power Businesses segment decreased $3 million or 2.6% from the same period in the prior year. From a geographic perspective, sales in the first quarter from our U.S. operations were up $12.1 million or 2.5%. Sales from our Canadian operations increased $0.6 million or 0.9%. The Canadian increase resulted from $4.7 million of sales from acquisitions, partially offset by a $2.9 million decrease due to foreign currency fluctuations. Consolidated sales from our other country operations, which include Mexico, Australia and New Zealand, were $18.2 million above the prior year. 20% of this increase or $3.7 million relates to our Mexican operations. This Mexican improvement consisted of a $6.7 million increase in local currency, partially offset by $3 million of unfavorable currency fluctuations. Our gross profit percentage for the quarter was 27%, 40 basis points below our prior year's first quarter. This decrease was due to a combination of slightly lower point-of-sale gross margin and a lower impact on our income statement in the first quarter from supplier support. We expect our gross profit percentage to improve for the remainder of the year. Our selling, distribution and administrative expenses as a percentage of sales was 19.7% for the quarter, 20 basis points below the prior year first quarter and 10 basis points below our fourth quarter rate. SD&A expense has increased in absolute dollars from the prior year by $4.8 million or 4.1% compared to a sales increase of 5.3%. Excluding the impact of acquisitions, our SD&A expenses were 0.8% below the prior year. ERP spending in fiscal 2013 is in line with our previous estimates. Our effective tax rate for the quarter was 34.0%, down from our historical averages due to lower effective tax rates in our foreign operations. We expect our tax rate for the rest of fiscal 2013 to be in the 34.0% to 34.5% range as the impact of lower effective foreign tax rates continue. Our consolidated balance sheet remains strong with shareholders' equity of $703.1 million. Our after-tax return on assets for the quarter increased to 12.1% compared to 11.6% in the same period a year ago. Inventory has increased in the quarter due primarily to our acquisitions and adding of core power transmission inventories and catalog-related stock to support sales growth initiatives. Overall, receivables DSO increased slightly, although they remain in good shape. Cash generated from operations was $23.9 million for the quarter compared with $16.4 million in the prior year quarter. Expectations are for fiscal 2013 to continue to be another solid year for generating cash from operations. We did not purchase any shares of our stock in the open market during the September quarter, and we continue to have board authorization to buy our stock in the future. In summary, our first quarter financial performance provides us with a strong foundation to continue to pursue our business objectives in fiscal 2013. Now, I'll turn the call back to Neil for some final comments.

Okay. Thanks, Mark. We had a solid quarter and a start to our fiscal year, and we're focused on the full year ahead, delivering value-added solutions to our customers, driving our strategic plan and deploying our new ERP system. While we're not immune to the macroeconomic industrial environment, we remain confident in our ability to execute our strategic plan for growth and increased profitability, organically, via acquisition and through our technology investments. Accordingly, we are maintaining our full year fiscal 2013 earnings per share guidance of $2.90 to $3.05 while adjusting our revenue growth expectations to 6% to 10%. We have a strong foundation and expanding capabilities, and we are committed to serving our customers and to increasing shareholder value. So with that, we'll open up the lines for questions.

[Operator Instructions] The first question comes from Matt Duncan from Stephens Incorporated.

First question I've got maybe for you, Ben, if you could talk a little bit about the month-to-month sales trend in terms of growth rates month-to-month. What have you seen so far in October? Has there been any meaningful shift? Or is it sort of just consistent and a little bit lower rate than maybe what you had previously anticipated?

Hey, Matt, this is Neil. Maybe I can jump in a little bit with some thoughts and Ben can add on. But I think as we look back at the quarter, all months had a year-over-year growth and sequentially positive throughout the quarter. October is really trending similar to the fiscal Q1. It's early in the overall quarter, but kind of as Ben laid out and I think others are talking about, the external demand indicators around Industrial Production, capacity utilization, Purchasing Managers Index, those are generally favorable, perhaps a little bit more variability in some of the end markets. I think the customer outlook is still positive. The capital planning going on, the making of the MRO spend for their operations and their ongoing productivity and then kind of the supplier dialogue. When they're talking North America and the industrial markets, they're more positive. When the conversation turns a little bit more global, perhaps to Europe and China, maybe a little bit more concerned with them. But I think for the North American industrial, that side of it is positive. So I think that's what we're really seeing overall.

Okay. Mark, you mentioned that the decline in gross margin some of that was point-of-sale pricing. Is there any way to sort of call out how much of that was pricing? And can you sort of marry that up with your comment that you think price added a percent to the top line in the quarter.

The price on the top line adding a percentage point, that was related to passing along the price increases that we've experience from our suppliers throughout the year, and we do a pretty good job of doing that contemporaneously when they occur. I think some of the challenges regarding our point-of-sale pricing was just larger increase in our sales mix to larger customers, who generally have lower margins than some of our smaller customers.

Okay. That's very helpful. And then last thing and I'll hop back in queue here. On the SG&A cost, both in the quarter and going forward, can you talk a little bit about -- you were down I think about $2.7 million sequentially from the June quarter to the September quarter despite having made acquisitions that were contributing to that number. How much of that decline, Mark, is sort of offset by acquisitions? How much of it is more sort of lower variable cost and a little bit of a small sequential decline in total sales versus the more active cost controls that you guys alluded to in your prepared comments? And can you sort of help us sort through that. And then as we look at your EPS guidance, I'm assuming that the maintained EPS guide on lower sales growth is largely a function of again actively managing SD&A. Again, how much of that is lower variable versus lower fixed cost?

Yes, you had a lot of questions in there, Matt, and I think the perspective is we do expect our gross profit percent to improve in future quarters for the rest of the year, so that will be helping. We also do expect to have our SD&A to be under control for the rest of the year and, obviously, in delivering the earnings per share in the September quarter by managing and controlling our SD&A cost, was a big driver for the results that we have been able to deliver. And since we are decreasing our sales guidance for the full year but still maintaining our earnings per share guidance, that mix of being able to leverage the sales we do get, to a good profit level, is still there, and we still feel that we can continue to manage that going through the remaining quarters. Regarding the acquisitions, the new SD&A from the acquisitions did add about $5 million in this quarter. So that wasn't in the prior year same quarter. So we do feel we are just about flat to a little bit down on our SG&A expenses. And we continually look at those to make sure that we're doing the right thing to spend the money. We're also making sure that we're not scrimping, and so that we could spend the money on our growth initiatives too, as we move forward.

The next question comes from Adam Uhlman from Cleveland Research.

Just to start, I guess, first of all, on the gross margin commentary, Mark. Why exactly do you think that the gross profit percentage will be going up for the rest of the year?

We think we'll be able to see improvements in our gross profit percentage regarding our point-of-sale margins for the rest of the year. We also believe that we had a lower impact of some of our supplier support in this quarter that flowed through to the income statement, based upon the various accounting rules that we have to follow to make sure that the supplier support is there for the items that we sell to customers, not necessarily from when we buy it, but it's when it gets to be sold to them. We expect that we should see some improvements in the supplier support as it's flowing into the income statement in the next couple of quarters as well. So I think the combination of those things is making us feel comfortable that we can see some forward progress with the gross profit percentage as opposed to what we had in the September quarter.

Okay. Are you getting any indications that there might be some year-end buying opportunities from your suppliers, and how should we think about the inventory levels with that?

Yes, I would say that our buying opportunities, they arise sometimes, but they've been more few and far between over the last several years. We do not expect to see any real significant opportunities arising as calendar year-end approaches. But you never know. Our view on inventories is we added some inventory strategically during this quarter to help with some sales growth initiatives, and we expect inventories to be relatively flat for the rest of the fiscal year based on our plan.

Next question comes from Jon Tanwanteng from CJS.

Can you talk a little bit about your revenue growth plans in light of updated guidance, x acquisitions, it looks like we've got roughly 2% to 3% organic growth in the quarter. In your guidance you said [ph] something in the 4% to 6% range going forward. Is that just a new normal given the macro environment? Or have there been changes or challenges to the plans since you last gave us an update?

Hey, Jon, this is Neil. I would say kind of the macro environment kind of led to our adjustment on the sales expectations, kind of alluded to, right, we're not immune to the macroeconomic environment. We believe we can grow a base, a multiple of the base economy. We probably did a little so in the first quarter, we think we can do even better going forward. Our work around expanding sales with existing customers, reaching new customers, doing product expansion and really some -- a few focused areas, working Fluid Power. And we're making progress. As I look around with the sales team in the areas and resources, we probably got 10 new leaders in some key roles. I'm encouraged that 2/3 of those are internal associates promoted with greater opportunities, and 1/3 from the outside providing perhaps some added organizational vitality. So that's our look, that's what we're working on. We think we can grow a multiple of the base economy and then of the acquisition.

Got it. And then on the acquisitions, I guess the strategy and the environment. Are you accelerating your plans versus 3 months ago? And has pricing gone up or down? And are you seeing any kind of pressure to sell ahead of potential tax law changes?

I would say our pipeline remains robust. We're active. Maybe we're as busy as we've ever been in that area. We contend and say we remain a strategic acquirer. We're going to stay disciplined in this process. If year-end brings some of those to closure, perhaps, but the pipeline is good. It's full. We're busy, and from a financial standpoint, we've got a strong balance sheet and the financial capability to be in the space. Perhaps, right, economic environment stays a little tough for a period of time, it likely makes some of those businesses look to sell.

The next question comes from Jeff Hammond from KeyBanc Capital.

So just to be clear on the guidance. I mean, you're taking the top line down, it looks like 3 points, and leaving the earnings numbers. I mean, is it simply the SG&A cost control coming in better that allows you to kind of keep the earnings number even though revenues are coming down, or is there more to it?

I think it's a combination, Jeff, of the cost control, as well as our expectation that our gross profit should improve a little bit in future quarters as well. But I would say the large amount of that work will be because -- maintaining our control of costs.

Okay. And so you weren't surprised necessarily by the gross margin dip?

I'd say no. As you look at the timing and the year-over-year comparisons of that, I'd say no, not surprised.

Okay, because just as we hear other people's earnings and some of the fluid power guys, there seemed to be a disconnect and a little more caution in September, and discussion that some big OEMs and manufacturing companies are kind of tightening the reins, cutting production a little bit, going through a destock. And that just seems like an environment where point-of-sale pricing maybe on the margin gets more difficult.

Jeff, I mean, you mentioned the Fluid Power and one, we like the business, we like our position both with OEs right? And we don't serve the big OEs from a direct basis, but we serve other OEs. Also, our ability or our potential to grow on the MRO side and the activity. And kind of our Fluid Power performance, we can really circle to kind of one segment that we've talked about before that has not done so well, and it continues in that. So if I set that aside, Fluid Power's performing pretty well. We were out at the Mine Expo, got good customer opportunities, opportunities in Western Canada, Mexico doing well. I think from a Fluid Power standpoint on MROs, both with local customers and strategic accounts, there's good opportunities. Just on the call with our subsidiary guys going through reviews, a little bit of improving construction. For most of them, the ag markets, they're talking positive on. Those customers are looking for more controls, more integrated designs. That's good for us from a service and solutions standpoint. And then the industrial machinery is not bad for them either, and that's a big segment. So we think Fluid Power's a contributor.

Okay. And then -- I didn't hear you call this out at all as you kind of went through the moving pieces of gross margin and SG&A. Is it fair to say that the Australian deal had a negligible impact on gross margin and SG&A percentages? I mean, are those fairly comparable to the overall?

That would be fair to say. We have 2 months of their activity in this quarter, and we'll have 3 months in, obviously, the future quarters for Australia and New Zealand as we go forward. And their result so far from a top line perspective is spot on to what our plan was, and our previous announcements as to what their annual sales run rate was of $83 million a year annually. So we saw that in this quarter.

Yes, I'd say the businesses are performing well. We're on the integration. It's early, but we're working the product expansion. I'm going to be over with the teams in a few weeks doing the opportunity reviews firsthand with them. So we think we're off to a good start, and good product expansion opportunities that it made sense -- that made sense for us at the start.

And then, I jumped on a little bit late here. I don't know if you gave us an update on the ERP cost. Is that number moving around at all or surprising you to the better? Is that part of the SG&A cost control? Are those kind of all coming in, in line?

I'd say they're coming in, in line. And at our last call we gave an overall view for fiscal 2013 of our spend on the ERP, and that has not changed. So we're working the plan.

Next question comes from John Baliotti from Janney Montgomery Scott.

Hey, Mark, in the past, regarding the ERP expense and SG&A, you had given that number at us. Should we just look at that as a -- that $15 million is a pretty even spread throughout the year? Or should we -- does it kind of progress like it did last year? How should we think about that?

I think it would be fair to say it's a pretty even spread throughout the year.

Okay. And would you mind, just if you kind of go through the industry, is there any kind of color you can give us on the different industries? We've heard kind of some mixed reviews from some of the suppliers, some of the big equipment suppliers, and I don't know if it necessarily translates in exactly what you guys are seeing given your mix of MRO and OE type of business.

John, this is Ben. 20 of the 30 industries we track were up for the quarter, and 11 of the top 15 were up for the quarter versus same quarter last year. We saw strong double-digit growth in food and beverage and transportation equipment. And in addition, we had good sales growth in our government side of the business in spite of all the headwinds that we're seeing in the government segment. And budget cuts, we had again strong double-digit growth there. On the weak side, coal mining and metal mining were both relatively weak. And I guess looking forward, we're seeing some good growth opportunities in the housing segment, as well as nonresidential construction. So we see some good near-term prospects for lumber, wood products, cement and the other construction-related industries.

Ben, do you think as people curtail some of the big equipments or the big ticket items spend on the mining side, does that -- they obviously have to keep operating a certain level of capacity utilization on those, and does that -- have you historically seen that shift maybe more to the MRO side of your business, as they just maintain what they've got?

Yes. It depends on the industry. I would say in mining right now, with the production turning down somewhat, that does impact our business. On the Fluid Power side, some of the -- through the OE business, it affects us more on the new equipment build.

Next question comes from Joe Mondillo from Sidoti & Company.

First question, I just was wondering if you saw any one-time acquisition related expenses in the quarter such as due diligence, inventory write-up, et cetera?

There were not anything significant or material in the quarter for -- that I would call out as one-time. Most of our due diligence expenses that we did for Australia were expensed contemporaneously, and a lot of that happened before the actual acquisition date. So there wasn't really a lot here. I mean, obviously, there is a little bit of stuff but nothing really to talk about.

Okay, and then also in terms of the -- what you realized from the acquisition, was that sort of in line to expectations? It seemed a little light. You saw 2 months worth, and it was only $5 million. Was that in line with your expectations or is it because it's seasonally weak because it was the winter over there or?

No, I -- we saw about $14.5 million there, Joe. So when -- and I was talking about my information -- but when we talked about, there was an $18.2 million improvement in our other country operations, which were including Australia and New Zealand into during the quarter. Well, $14.5 million of that was Australia and New Zealand, and the other $3.7 million was an improvement in Mexico.

Okay, so total acquisitions was $14.5 million in the whole quarter?

It was a little bit more because we did have some of our smaller Canadian acquisitions we did this past winter that were in there. So that added a little bit more to that -- about $4 million of additional revenue from that as well.

Okay. So call it about $19 million or so?

That's close, yes.

Okay. And then just I was wondering if you're able to -- you talked positively again about the ERP helping out and everything. I was wondering if you could address any examples yet, regarding how and where you're actually seeing those benefits?

Joe, right now, we're focused on the build and deployment, getting the critical functionality in. And so we're going through the release to build. Ben talked about the deployment that we had in focused areas. We'll continue that phased rollout through calendar 2013. So I would say it's early, and I've kind of alluded to it before. We're going to talk to it in our business because to point to an improvement that was ERP-related or business-related, it's hard to assign one because they're both going to contribute to those in many areas. So we're going to be talking about it in the total business.

Okay, just trying to get a -- I'm just trying to get an idea with all the money that you're spending on that, if it's actually visible, can you actually see it? And I was wondering if there's anything that you can point to.

Joe, this is Mark. We've done some implementation so far in our Western Canadian operations, and we have a planned rollouts over the next, let's call it 15 months, for additional rollout of the SAP system. And the real benefits will continue to ramp up over time, as we roll these out and convert our operations to them. So it's really immature to talk about that now.

Okay, okay, and then just lastly, I know you guys have talked about in the past about sort of how you -- big opportunity in terms of product expansion. You mentioned Fluid Power, but you've also focused, I know it's in your investor presentation, regarding sort of your other section where it's -- you're sort of I guess more or less neglecting about maybe half the industry. So I was wondering if you could talk about that and speak on how you're sort of trying to attack market share through product expansions, specifically trying to attack the other section of products.

Yes, I don't know that we're neglecting anything. So.

Probably a poor choice of words.

My choice of words, but -- and we think the existing customers is good customers. We're looking at 14-plus product categories, building our capabilities and what are they using, utilizing of our products and solutions. And if we're not fully represented, we're talking with our sales teams and those customers about how we fill up more of those categories. So that's what we're doing with existing customers. And we've got good visibility and trends on new customer opportunities, either that they've done business with us previously or they're just new targets and their sales teams are using things like good opportunity funnels to how they progress those through at each stage. We work them ourselves. We work them in combination with our suppliers to close those. So we're working those fronts, but hopefully, you can't accuse us of neglecting anything.

No, I certainly didn't mean that. I apologize. And so, are you sort of referring to mostly organic growth on the product expansion through those avenues, like you just mentioned or is it through acquisitions as well?

No, no, those would be organic in those areas. And then right, we've talked also about the potential that we have in Australia and New Zealand, as we branch out with that footprint, beyond just bearings and some core power transmission, that we expand out in some of those categories. And that's going to show up for a year as acquired, but some of it will occur because we're doing product expansion in those markets.

Okay, and then just lastly, could you just sort of parlaying that question in terms of acquisitions, just to sort of address the balance sheet here, and sort of -- are we same sort of viewpoint and how the sort of deteriorating environment or the slowing environment sort of affecting your sort of view on utilizing the balance sheet?

Yes, it's not diminishing our view at all, right. There's solid balance sheet, good cash generation, no debt. And we talked before, we'll stay investment grade, but the right opportunities, 30% debt to total capitalization does not concern us.

Next question comes from Jason Rogers from Great Lakes Review.

Looking at the ERP system again, has deployment in the U.S. started?

Yes, we had -- within the past month, we had our first go live in the U.S., and in the next few months we're going to continue with our phased rollout across the rest of the United States.

Okay, and then looking at your 3-year plan for the $3.5 billion in sales, has that changed at all in the current environment?

We haven't changed that. We think we're well positioned in this space, good financial capability. We have the opportunity to grow organically and via acquisitions, and we're not changing.

Okay, then finally, just looking at the income statement. The other income, I think of a few hundred thousand dollars, just wondering what that was.

Yes, what that really relates to and we traditionally disclose the components of that in our [indiscernible] 10-Ks and our 10-Qs, and we'll continue to do that when we released the 10-Q for this quarter. But what that amount relates to is the asset gains that we have related to the equity securities that we're holding in a rabbi trust with nonqualified deferred compensation plan. And so how that works is when the equity values go up, which the September quarter was a good return on equities in the market, those asset values get mark-to-market, and so then we get a gain. Whereas, looking out on the press release, if you look at a year ago in the September 2011 quarter, the equity markets went down and our loss at that point in time was really driven by a reduction in the equity values in this deferred compensation plan as not qualified plan that we have there. And the overall perspective on this is all the gains and losses that are showing for this item in that other income and expense category are completely offset by an opposite impact within our SD&A expense. So when the assets go up in value, we have a gain, and that's below other income. We also have an increase in our compensation expense to associates because we owe this to our people that are working for us, and so that has a corresponding increase in our SD&A expense. So the net impact for the corporation's bottom line is a push. Hopefully that was clear.

The next question comes from Gregory Macosko from Lord, Abbett.

Most of my questions have been asked, but just, Neil, with regard to your opening statement regarding 5.3% revenue growth and 14.3% earnings growth, and that leverage figure, if I just divide one by the other, you get about 2.7. And if we've looked at sort of the expectations prior to that, that leverage number was much lower, something less than 2, maybe 1.8, 1.9, just looking at it in those terms. The fact that you're saying you can do more, suggests that you're able to vary the SG&A, particularly I think relative to your -- to the growth rate. In other words, your growth is dependent upon the macro -- the GDP growth, as well as your expectations to gain share. Give us some color on the ability to kind of maintain some kind of a ratio over 2 going forward.

Greg, this is Mark. I'll try to jump in, and we don't quite look at it like that ratio, but we do look at it as improving. And I would say that the opportunity for us in the future is related to this runway that we're building with our ERP system, to give us the abilities to continue to leverage sales growth and to help leverage the bottom line from that, to improve profitability. And we're trying to leverage every line item on the income statement to help improve our operations and drive value to the bottom line.

Yes, but you haven't really gotten the ERP system. It -- obviously, it's coming in, but it has a ways to go, and you're still able to keep that SG&A line, in line. If we should see the economy recover to some extent, industrial demand pick up a bit, would it be fair to say we would expect to -- maybe to spend a little more to build out growth and enhance top line a little bit? So you just maybe spend more on the SG&A line?

I think, as we've said, right, we look at right focus smart investments in forward-facing resources to help us implement strategic plan, help us to grow. And we see the potential in our work processes and also with ERP, the ability to scale more growth and have the productivity with our internal team and associates, that they can handle a greater velocity of business. And that we can do that through our distribution centers, that we can do that through our service centers. So common support structures in cost and more business coming through the top of the funnel creates a nice bottom line expansion.

If I just -- I could Greg, also, this is Ben. I would say our teams are doing a great job of managing our expenses in line with our business activity, but some of our business units are still building for the future, still investing for the future. We're not solely focused on cost control. So we have a number of different activities going on, but the teams are doing a great job in line with the business activity at each business unit.

Next question comes from Holden Lewis from BB&T.

Wanted to -- I recognize that you really don't want to give too much detail I guess about the SAP program and the pace of improvement that you would expect based on sort of the initiatives, but just trying to help us out to understand sort of if we're succeeding or if it's taking longer than expected or what have you. I'm kind of curious, I mean, when would you expect to begin, without talking about specific numbers, but when you would you expect to begin seeing real tangible impacts on the ground from this SAP being rolled out? Right now, you're incurring costs. When do you expect to start seeing benefits offsetting those costs? What's kind of that point?

Holden, I'll take the first shot, and again I don't know that I can stick numbers and timing that maybe you're looking for in it. But the project teams have been busy working on this release to functionality, right? Really aimed at the deployments in the U.S. We're out at the locations live in October, strong performance by the teams in the build and the deployment. So I'm pleased and proud of the associates and the work that's going on. We're going to continue those phased deployments throughout calendar '13. I think we're doing a nice job at managing costs and the functionality changes that could go on in a system on the upfront. And we've got a real good focus on the organizational change management, that we're doing effective training upfront to help it pull through, and then the right post-conversion support activities to drive the operational efficiencies and productivity. So that's all around deployment, and you'll see the U.S. go live across calendar 2013. When you set that aside, is that we've got a good understanding of what the value drivers or enablers are, what those actions are, good teams, good owners. We're working those ahead of time. So they go sequential. And so some of them are system related, and some of those are going to be business process and perspective related in that. So we are working those as well. And we're going to just talk about them in the total business results going forward. But those are the activities and the timing that are going on.

Okay, but right now, you're only incurring cost for SAP right? You're really not counting on there being any benefits in the mix?

I would say they're not huge benefits that would be coming specifically from SAP. As we work our business, continuous improvement and productivity initiatives, there'd be benefits that occur from that. And they've occurred in the business previously and they will occur in the business ongoing. And that's why I say there's the difficulty of saying, when is it ERP related and when is it from other actions, and often those are blended.

Okay, because again, I guess what we're trying to get a sense of -- because other companies have, obviously, put in ERPs and they've kind of argued that we're going to spend this much money. We kind of expect as things turn on, we're going to start to see benefits, but it at least give us a sense of, is when you get the turn from basically incurring maximum cost to the point where that bottoms out and you'll at least begin, even if you are not quantifying it, you at least begin to get dwindling that cost and ultimately net benefit. And I guess I'm kind of wondering, kind of when you hit the bottom and start climbing back out of that?

I think, Holden, right, Mark's outlined before was the expense outlooks, cash outflow outlooks are for '13 and then we talk about our overall EBITDA ranges that we want to achieve over a 3-year horizon in the 9% to 10% area, I think those are the drivers that's in there.

Okay, and then as it relates to sort of the revenue drivers, the 6% to 10% revenue guidance that you give for the year, does that include any sort of pending acquisitions or is that based on the business that exists today?

That's the existing business.

Okay. So you sort of grew revenue in Q4 about 5.1%, Q1 about 5.3%. Is the increase that you anticipate for the final 3 quarters of the year, is that primarily because you're seeing some improvement in the indicators? Or is it primarily because if things are the way they are today, you think that the initiatives are going to get such a grip that it's going to generate that growth? Where's that acceleration in revenue growth coming from?

I think one of the things, Holden, is we had 1 fewer selling day in the September quarter, which was an impact of a 1.6 percentage points. So if you would take that into play, we were basically looking at a 7% improvement on a sales per day basis in the quarter. And I do believe that with our various strategic initiatives out there, that we feel that as we march forward that we will be solidly in our sales range.

Okay. So it's primarily because of the initiatives more than anything else?

Initiatives and the overall economy, I mean, I think we're still optimistic on the overall industrial economy for North America. And sure, it's slowing. We acknowledge that. We read the papers too, and we see the numbers. But I think that we're still seeing opportunities for expansion. Some of the negative numbers that we've had in our Fluid Power businesses, as Neil mentioned even on this call, we're still seeing negative headwinds from one customer in one of our business segments that brings that overall sales in the Fluid Power business segment that was actually down a little bit this quarter. But our other Fluid Power businesses are showing sales growth. So as we look forward, we see opportunities out there for the rest of the fiscal year.

Okay, and then I think you alluded to sort of October is kind of running kind of in that 5% to 6% range like Q -- well like fiscal Q1 is that what you indicated?

I think what we were saying so far, and obviously, we don't have October guidance early in the quarter as to where things are from that. So I don't think we're trying to imply a specific percentage.

Okay, and then just lastly, do you have the days each quarter that you expect?

I don't have them right here.

Okay, I'll get them offline.

Yes, okay. Thanks.

Next question comes from Derek Jose from Longbow Research.

Guys, can you talk about what you're seeing in terms of supplier pricing? In terms of what they're kind of passing on to you at this point, if anyone's being more aggressive or less aggressive?

There's nothing significant to report. I would say these increases from our suppliers are nothing in the way of anything outrageous, compared to kind of the long run. And nothing in the way of shortages of product. Overall, product flow from our suppliers is good. Our supply base is strong, and we're in somewhat of a normalized period right now.

Okay. So if they're increasing it, so increases would probably be in a normal range of something like a 3% to 5%. Correct?

Correct.

Okay. Well then, the question is if you guys are getting 1% from pricing, obviously, it's not an apples-to-apples comparison, but I'm just kind of curious if supplier pricing, when you're having a slowdown in demand, kind of creates a gross margin headwind for the company at all.

Obviously -- this is Mark, Derek. It depends on the mix. And the way I look at it from a rule of thumb perspective is when I hear of our suppliers announced price increase, they always say well, gee, this price increase averages x percent. About 1/2 of that percentage announcement is really what we eventually see that is flowing through our system based upon the mix because so they have very different things probably [ph] each of their SKUs for that. We've seen stability in supplier pricing for the last year or 2, where it's been in this, I'll call it 2% to 6% range, and it really just moves up a little bit or down a little bit. And I think the view right now is that it was calm. So we haven't seen many of the suppliers that could traditionally have a December 31 price increase because it's getting close for when they should be announcing those things. So we don't hear a lot of drum beats for a big number going forward.

Okay, and then kind of have you had -- let's just take it from the other side. In terms of customer requirements, are they -- how much pushback are you seeing in terms of just any price increases? Obviously, you're passing through some of it. What is -- are you seeing anything from their end, either in terms of specific end markets or specific types of products where you're seeing a higher level of customer pushback on, even just general small, like 1% to 2% price increases?

Nothing out of the ordinary. We're seeing the normal competitive pressures, and we continue to work very hard to prove our value to our customers. And they certainly see the value we provide.

Okay, just lastly then. Talking about the company's value-add proposition, given that demand is so -- has kind of come down from where it was earlier in the calendar year, how much -- where -- are you seeing any specific types of services or any types of value-add that AIT provides, that you know is, say, making a difference in picking up market share or just growing with the market at this point?

Well, one of the value we provide is in-plant. And we help our customers with productivity, increasing their uptime, decreasing their downtime and documenting the value we provide to our customers. And that is, certainly in a struggling environment for those industries that may be seeing a downturn right now, that is definitely something our customers require, and we're well positioned to fill that requirement.

There's time for one last question. Today's final question comes from Brent Rakers from Wunderlich Securities.

This is Anjali Voria for Brent Rakers today. Let me begin with a housekeeping question. What was your headcount at the end of the quarter?

I don't have the exact number in front of me, but we were up approximately 210 on our headcount, and it was all related to acquisitions. So our existing operations were flat to slightly down.

Okay. Okay. That's fine, and then with regards to the gain in your other income line, could you break out how much that actually was, by any chance?

It was virtually the entire number. I don't have the exact numbers in front of me.

Okay. So you didn't actually exceed that number? It's not -- it's more like $0.5 million, not a $1 million type of number?

It was like $440,000 of the $480,000 amount that was showing on the income, sorry $440,000 of the $460,000 was showing on the income statement.

Okay, okay, that's fine. Okay, when I break out some of these factors with the headcount, ERP acquisition, DD&A, et cetera, your expense line clearly was very favorable this quarter. Could you talk us through some of the benefits that you saw in the quarter? I understand lower gross profit, some from the Canadian currency. What about things like bad debt expense? Or are there any other factors you can call attention to that might have been lower than normal this quarter?

Yes, Anjali, the bad debt expense and our overall provision for bad debts was lower this quarter compared with a year ago in the September quarter. So that definitely was one of the items that was in the -- that change within the SD&A perspective for things. But I don't really have a lot of specific items. There's not one big thing that does this. It's just a lot of little numbers that add up to the smaller numbers. I mean, we continue to look at our expenses with a fine-toothed comb to look at all the things that we're doing. And this is really a by-product of our annual budgeting process that we entered into and we worked on last spring as to identify what expenses we're going to do, and what are we going to try to work on going forward into the next fiscal year. And I think we're seeing some of that right now this quarter.

Okay. That's great. How about on the acquisition side? Would you mind giving some flavor around the gross margin profile for SKF?

Yes, we really don't break that out with individual acquisitions, Anjali. So we're not going to do that.

That concludes the question-and-answer session for today. Please go ahead with any final remarks.

Just from our side, thanks for joining us today. We appreciate the interest and the investment in Applied, and we look forward to talking with you throughout the quarter. Thanks a lot.

Thank you. This concludes the Fiscal 2013 First Quarter Earnings Call for Applied Industrial Technologies. Thank you for your participation. You may all disconnect at this time.