Julie Kho Neil A. Schrimsher - Chief Executive Officer, Director and Member of Executive Committee Benjamin J. Mondics - President and Chief Operating Officer Mark O. Eisele - Chief Financial Officer, Vice President and Treasurer

Jonathan Tanwanteng - CJS Securities, Inc. Adam William Uhlman - Cleveland Research Company Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division Matt Duncan - Stephens Inc., Research Division Holden Lewis - BB&T Capital Markets, Research Division Derek Jose - Longbow Research LLC Joseph Mondillo - Sidoti & Company, LLC Jason Rogers Anjali R. Voria - Wunderlich Securities Inc., Research Division

Welcome to the Fiscal 2013 Second Quarter Earnings Call for Applied Industrial Technologies. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Julie Kho. Julie, you may begin.

Thanks, John, and good morning, everyone. On behalf of Applied Industrial Technologies, thank you for joining us on our fiscal 2013 second 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 to the general public, as well as to analysts and to investors. Because the teleconference and its webcast are open to all constituents and prior notification has been widely and unselectively disseminated, all content of the call will be considered fully disclosed. Our speakers today include Neil Schrimsher, Applied's Chief Executive Officer; Ben Mondics, our President and Chief Operating Officer; and Mark Eisele, our Chief Financial Officer. At this time, I'll turn the call over to Neil. Neil A. Schrimsher: Okay. Thank you, Julie, and good morning, everyone. We appreciate you joining with us today. As we reported in our news release earlier this morning, our sales for the second quarter were $589.5 million, up 3.4% from the second quarter of fiscal 2012. Net income for the quarter increased to $27 million, or $0.64 per share compared to $20.9 million, or $0.49 per share in the prior year quarter. Our modest sales increase reflects the slowing business activity we experienced in the industrial environment as we progressed through the quarter, especially in December. In spite of this, we achieved a solid increase in earnings and profitability for the quarter. More specifically, a 30% increase in earnings per share compared to last year, and a 15% increase when adding back the one-time expenses from a year ago. I attribute this performance to our focus on cost containment and continuous improvement throughout our operations. We continue to be focused on driving operating performance in the current environment, while implementing the programs that support our long-range strategic plan for future growth and profitability, organically, via acquisition and through our technology investments. We welcomed 2 additions to Applied in the past 2 months. On November 1, we announced the acquisition of HyQuip Incorporated, a distributor of hydraulic, rubber and plastic industrial hose and tubing, along with some related accessories. The company produces hose assemblies and custom kits for fluid conveyance applications and provides inventory management, stocking programs and other value-added services. HyQuip is a strong, established company, and their addition is consistent with our strategy to build upon and strengthen our Fluid Power leadership. We're excited about the growth opportunities and the operational synergies we can realize with the addition of HyQuip. Later in December, we announced the acquisition of Parts Associates, Inc., or PAI, a distributor of maintenance supplies and solutions, including fasteners, fluid flow components, paints, chemicals, electrical and shop supplies. We gained a solid company in PAI, with strong brands and a high level of expertise. Strategically, the company is an excellent fit for our business, going forward, as we strengthen our maintenance supplies and solutions offering for sustained growth. Overall, the acquisition environment remains productive, and our ongoing activity demonstrates our commitment to pursuing opportunities that are in line with our strategic priorities and generate shareholder value. Now I'll turn it over to Ben for some additional commentary on the quarter. Benjamin J. Mondics: Thanks, Neil, and good morning everyone. First of all, I'll echo a point that Neil made in his opening comments that we did experience some slowing of demand in the industrial environment during the quarter. What we're seeing and hearing out on the front lines, among our supplier and customer base, continues to be mixed business activity. And although sales were sluggish in the quarter, we drove an improvement in our gross profit percentage and moved to align our SD&A with our sales. From a macro standpoint, we do watch key economic and market indices and pay close attention to their movements, as they are typically a good indicator of the future economic environment. Recapping the recent activity, Industrial Production increased 0.3% in December, following a 1% increase in November. For the fourth calendar quarter as a whole, Industrial Production moved up at an annual rate of 1%, after a 0.4% increase in the third quarter. For the fourth quarter, manufacturing production increased at an annual rate of only 0.2%. Not a strong number, but an improvement from a decline of 1% in the third quarter. Mining production increased 0.6%, while utilities plunged 4.8% as a result of unusually warm weather. Capacity utilization for manufacturing rose to 77.4% in December, up from 76.9% in November and 76% in October. The current rate is 1.4 percentage points below the long-run average. The ISM manufacturing index rose 1.2 points in December to 50.7. This reversed about 1/2 of November's decline. A look back shows the index has been above the neutral threshold of 50, only 3x in the past 7 months, and this is consistent with the mixed conditions we've been seeing. A benefit to us is our broad and diversed customer base, providing us opportunity and potential. Everyday, our customers turn to us for component parts and systems, technical expertise, value-added services and a thorough understanding of their equipment and operations. In order to meet and exceed our customers' expectations, we continue to invest in our business by expanding our product and solution offering, investing in our Fluid Power business and building upon our market leadership, strengthening our position in attractive vertical markets while growing in our core segments, enhancing our operational excellence, and driving continuous improvement throughout our operations. We will continue to execute on these fundamental strategies with the goal of generating success for our customers and value for our shareholders. I will now turn the call over to Mark to discuss the quarter financials in greater detail. Mark O. Eisele: Thanks, Ben. Good morning, everyone. I'll provide some additional insight regarding our second quarter fiscal 2013 financial performance. Our sales per day during the quarter was $9.5 million or 1.7% above the prior year quarter. We had 1 additional selling day in the December 2012 quarter compared to the prior year. On an overall basis, sales increased 3.4%. Acquisitions added 4.4% to sales, and favorable foreign currency fluctuations increased sales by 0.4%. We believe the impact of vendor price increases was less than 1% during the quarter. Our product mix during the quarter was 27.7%, Fluid Power products, and 72.3% Industrial Products. Second quarter sales in our service center-based distribution segment increased $22.2 million, or 4.8%. All of this increase was due to acquisitions. Sales in our Fluid Power Businesses segment decreased $3 million or 2.7%, from the same period in the prior year. From a geographic perspective, sales in the second quarter from our U.S. operations were flat compared to the prior year quarter. Sales from our Canadian operations increased $0.6 million, or 0.9%. Consolidated sales from our other country operations, which include Mexico, Australia and New Zealand, were $18.4 million above the prior year, and all of this improvement was due to our Australia, New Zealand acquisition. Our gross profit percentage for the quarter was 27.6%, 30 basis points above our prior year second quarter. This increase was due to a combination of improved supplier support and the impact of recent acquisitions operating at gross margins above our core businesses. We expect our gross profit percentage to slightly improve for the remainder of the year. Our selling, distribution and administrative expenses, as a percentage of sales, was 20.8% for the quarter, 60 basis points below the prior year second quarter. On an absolute basis, SD&A expense is flat compared to the prior year, on a sales increase of 3.4%. If you recall, in the prior year second quarter, we did separately identify and discuss $4.4 million of one-time SD&A expense items, that primarily pertained to the freezing of our supplemental executive retirement plan. If you take these prior year items into account, our current quarter SD&A expenses increased 3.8%. Acquisitions added more than 3.8% to our SD&A footprint, so our core operations actually had a year-over-year decline in SD&A expenses. We continue to have a tight focus on our operating expense. ERP spending in fiscal 2013 continues to be in line with our expectations. Our effective tax rate for the quarter was 34.0%, which is lower than 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 $722.1 million. Our after-tax return on assets for the quarter was 10.7%, compared to 9.4% in the same period a year ago. Inventory has increased in the quarter and year-to-date, primarily, due to acquisitions and strategic purchases of inventory to support sales growth initiatives. We believe our inventory levels should decline by up to $20 million for the remainder of the fiscal year. Overall, receivables DSO increased, primarily due to seasonality around the December holidays. Cash generated from operations was $5 million for the quarter, compared to $13.8 million in the prior year quarter. Expectations are for improved cash generation in the second half of our fiscal year, consistent with our traditional cash cycle. Fiscal 2013 should be another solid year for generating cash from operations, and we expect to achieve a nice improvement from our fiscal 2012 results. We did not purchase any shares in -- of our stock in the open market during the December quarter, although we expect to be more active in the last half of fiscal 2013. In summary, our second quarter financial performance reflected a slightly softer environment than our original estimates. This caused us to reflect on the impact of our full year results, with the resulting scaling back of our sales and profit expectations and the guidance disclosed in this morning's press release. We feel we are well-positioned and focused on executing our strategy to produce solid results in the second half of our fiscal year. Now I'll turn the call back to Neil for some final comments. Neil A. Schrimsher: Okay. Thanks, Mark. From a macroeconomic perspective, our second quarter included some headwinds. However, our cost controls and continuous improvements yielded results. While some economic uncertainty persist, we remain optimistic about the overall North American industrial economy for calendar 2013. As we celebrate our 90-year anniversary, and 90 years of strength and distribution, we have a proud past and expounding foundation to build upon. As we enter our 10th decade of doing business, our associates remain committed to expanding value-added solutions for our customers, to accelerating our growth, and to generating benefits for all Applied stakeholders. Now we'll open up the lines for your questions.

[Operator Instructions] Our first question comes from Jon Tanwanteng from CJS Securities. Jonathan Tanwanteng - CJS Securities, Inc.: So does the current guidance of 4% to 7% include the effect of potential acquisitions in the next 2 quarters? And how does that pipeline look, and are you going to increase that pace at all? Neil A. Schrimsher: Yes, I'd say the look forward does not include any acquisitions. So year-to-date, we've closed 3. The environment's productive, we're active. I would anticipate kind of similar activity in the back half. You never can call them with certainty, but I think we will be as active. And as we've said before, we continue to look to raise our sights in the acquisition prospects for the targets, and if they come in a little larger, that would be fine with us as well. So we're active, we're busy. We don't perfectly control the timing, but I would expect in the second half, we'll be as active as we were in the first half. Jonathan Tanwanteng - CJS Securities, Inc.: Got it. And how does that line up with the long-term target? Mark O. Eisele: I think, from our perspective, our long-term target, as we talked about over the summer, is to have a balance of growth through acquisitions and growth through, organically. And I think we're trying to hit those numbers. I mean, we don't look at them in the -- just a 12-month window, but we're looking at over the 3-year time horizon. I think we feel very comfortable with the acquisitions we've done year-to-date, and with the pipeline going forward, we're comfortable with that. That we are working hard on accomplishing our strategic plan. Jonathan Tanwanteng - CJS Securities, Inc.: Got it. And then what kind of macroeconomic assumptions are you using in your guidance for fiscal '13? And I guess, maybe calendar '13, since you seem to be pretty optimistic about it? Mark O. Eisele: Well, I mean we're looking at all the same things that everybody else is looking at, from the various economists that are talking about the industrial economy in North America, and I think that our view is that 2013 is going to accelerate throughout the calendar year. And I think a lot of economists are stating that. I think that's part of the optimism we have for looking at 2013. Neil A. Schrimsher: Yes, John, I would say as we looked at the start of the second quarter, it started like the end of our first fiscal quarter and then kind of later in October, or November maybe, a little bit more variability. But, hey, December was really the drop off. If we look at kind of the macro statistics, and Ben kind of walked through them, those aren't all bad in that. And so, our look, I think most would call, GDP, Industrial Production, that environment continues to strengthen in '13. I just saw something recently on Canada. I think those are similar for Canada in '13, '14 and '15 and on. And as we talk with suppliers, they would say, U.S., North America, is still probably their best region. And then as we talk with customers, when they're in their macro discussions, I mean, they use the words like, uncertain or cautious, when they're talking about kind of broader economy. But when they get to their specific business, they're more optimistic, right? They're performing pretty well, they're generating cash. They're looking at things to do. So we believe some of this December, perhaps January hangover starts to work itself out, and the economy improves quarter 1 and quarter 2, and then throughout '13.

Our next question comes from Adam Uhlman from Cleveland Research. Adam William Uhlman - Cleveland Research Company: Hey, can we start with the recent acquisitions? I was wondering, first of all, could you size the HyQuip deal and Parts Associates, and the contribution expected for the back half of the year? And then just tied into that, the Parts Associates deal's quite a bit different than the core business. Could you maybe walk through your plans of how you plan to run that business along with the service centers, and maybe a medium-term outlook of your thought process there? Mark O. Eisele: Adam, I'll start and talk about some of the relative size on these things. The HyQuip acquisition is relatively small. They have 2 locations in Wisconsin, around 19 associates that came with us for that. They've been in business a long time, and as Neil mentioned, they have very strong operations and they'll complement our Fluid Power offering quite well. Regarding PAI, we did not formally announce the relative size yet, for them. But I think that their sales level will be right around 1% of the total company sales level, just to give you an idea of what they're providing from their run rate when we bought them. Neil A. Schrimsher: And so I could say, Adam, on HyQuip, I think, right, that continues our outlook and views of the business in Fluid Power. And then PAI's, as we look at maintenance supplies and solutions and continuing expanding the broader product portfolio of the company, we like the prospects. What, 84%, 85% of what we sell is bearings, power transmission and Fluid Power. If we size our couple billion sales to the market available there of maybe $18 billion, right, we're a double-digit share. As we think about the other categories and outlook, at least the last fiscal year, $400 or so million of sales, we think that market is probably $16 billion. So we like the growth prospects in this maintenance supplies and solution, and we can grow within businesses that exist like, UZ, which is a prior business that we had. We can grow with our platform in PAI, and then we can take those synergies across and work with our Applied associates and reach customers, those good local customers and also strategic accounts. So we like it, and we don't think it's a far adjacency from us. Right? We're in these products, we're in these businesses. There's some common supply lines, but it will be a nice growth platform for us to start down.

Our next question comes from Jeff Hammond from KeyBanc Capital Markets. Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division: Just to follow-on on the acquisitions. It looks like you spent $28 million in the December quarter on acquisitions. So if we run through the cash flow statement, is that HyQuip and Parts Associates? Or is there some trailing acquisition spend from other deals? Mark O. Eisele: You are correct. Those are the 2 acquisitions in the quarter that are reflected there in the cash flow statement. Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division: Okay, so I know you didn't give us an exact size of those businesses, but it seems like on a sales multiple, these are more expensive deals. Are these higher return businesses? Mark O. Eisele: I think, as we -- we did state in the call, a little bit from our gross profit comment, that these folks do have higher levels of gross margins that we're experiencing, that's helping our overall margin perspective. We have not really talked about what's the operating profit for these things. And obviously, we have intangible asset amortization that we need to take into corporation for our bottom line numbers. But these are successful businesses, and we are thrilled to get them. Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division: Okay, but these acquisitions wouldn't have much impact on the December quarter? Mark O. Eisele: Correct. Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division: So the gross margin impact is more from the Australia deal? Mark O. Eisele: Yes. I mean, as we said, the acquisitions so far this year, they have been better than our traditional margins, and the PAI one will continue that. Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division: Okay, good. And then the comment on share repurchase and being more active, is that a reflection of just where the balance sheet is? Or comfort with the forward look? Why the change in tactic on share buyback? Mark O. Eisele: I think, we're -- we will continue to look at our share buyback on an opportunistic perspective, as we've talked in the past. Although looking at our balance sheet, we obviously have the capabilities to do buybacks, and we just expect to be active during the calendar, or fiscal year period. And we have not been active in the first 2 quarters. If you go back in our history, that is consistent with other prior times. But we think that in these next 2 quarters, we will have some more activity. Neil A. Schrimsher: And it kind of fits with the overall capital allocation strategies that we have and how we've performed. We'll continue to, in our view, pay an attractive dividend, and which we increased. We want to be active in share repurchase. We'll manage a creep in that. And we'll continue cash generation that will keep us in positioned to be active from an acquisition standpoint. Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division: Okay. And then just, you mentioned gross margins slightly improving from this quarter. So it sounds like your acquisition contribution will continue. What else is driving the better gross margins on a go-forward basis? Mark O. Eisele: Some of that, on the go-forward will relate to the PAI acquisition, for which we'll start basically recording sales benefits for that starting in January. We closed that deal December 21. So that will be a piece of that. But we expect to see gross margin improvements in virtually all of our core operations and continuing operations. We see the opportunities out there for that, and that's part of our tight focus. And our tight focus is not just on cost controls on the SD&A line. It's a focus on improving margins out in the marketplace. Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division: Okay. And then it looks like your inventory ticked up at year end. Did you take advantage of some year-end buys? Mark O. Eisele: We've been -- we did increase inventories this quarter. We increased them last quarter as well. Most of the increases are to help fund inventories for our strategic initiatives, to go forward to try to grow sales. A lot of the buying that we do with some of the programs with our suppliers are calendar year-based programs, too. But we're trying to fund inventory to help grow sales. Benjamin J. Mondics: And there's a fair amount of inventory growth from the acquisitions also. Mark O. Eisele: Yes. That's true, too. Yes. Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division: Okay. And then just last question, can you give us a sense of trend into January? Neil A. Schrimsher: Yes, so we talked about the quarter side, and Ben may have, I'd say, January started maybe like Q2 ended. But I think, as it's moved on, we started to see some improvement. And so that kind of leads us into that sales guidance range, right? If the core is flattish, right, we're at the low end. If core performs, we're at the upper end or maybe beyond. But that's our look at that. And so we started to see the early part of January, was -- it felt like December, but as it's progressed on, we see some improvement.

Our next question comes from John Baliotti from Janney Montgomery Scott. John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division: I was just wondering if we could talk about inventory, both yours, as well as customers. I would imagine that in this environment, your ability to hold inventory, maybe added strategically for growth. Is that -- are you getting any better relationship, are you having a different conversation with your suppliers? Because I can't imagine a lot of your competitors that carry similar products are in the same financial situation, is that fair? Mark O. Eisele: Well, I think that we have the capabilities to have inventory and use inventory, I mean, for our customer's benefit. And obviously, much smaller competitors, local folks don't have that. So we believe, long term, that we will be able to grow share. And I think having the inventory's a key part of that. Neil A. Schrimsher: We also -- the model helps, too, right? With the 7 kind of North America, 9 overall distribution centers, that supports local inventory, that's also in the service centers. We plan on having what our customers need in a very, very quick time frame. John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division: Yes. I mean, I would imagine the dynamic of them probably operating hand-to-mouth and destocking a bit as the quarter went on strengthens their relationship with you, given that they know now, when they need it, they can get it from you. Is that fair? Mark O. Eisele: I think it's fair, And I'm going to tell everyone of my sales guys that. John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division: I mean, it seems like there's only a certain point where they can destock to a certain point. I mean, if they don't -- once they're fully flushed and they feel more confident about things, if they don't start buying some of these things, they would just -- I would imagine that what we saw yesterday in GDP would be a leading indicator of the next quarter. It just seems hard. If you listen to all the distributors, each one of you kind of does different things, but the tone is almost identical. That December was really -- it fell off and January started that way, but now it's picking up. And I would imagine that that's -- the little guys out there probably aren't feeling that. Benjamin J. Mondics: So I guess from an inventory standpoint at our customer, it's not a 1-quarter impact. There's been a longer-term trend here. And that's where, as Neil mentioned, our logistics, and this is a big part of our value-add to our customers or supply chain, and knowing our customers' operations and what they need and helping them to reduce their inventory. So it's been a longer-term trend that continues. Especially in the industries that are seeing some challenges right now, so they turn to us, and it's good to be in a position to help them out and take some inventory out of the supply chain. John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division: Yes. So, Ben, do they -- are you getting a sense from them that when things stabilize, that they just aren't going to go back, and then they're just going to -- use fewer, more strategic distributors like yourselves, where they know they can get the products, regardless of the economic environment? Benjamin J. Mondics: Definitely. We have -- many of our customers are looking to us for inventory management and they're looking to reduce their supply base. So buying more products from fewer suppliers puts us in a very good position.

Our next question comes from Matt Duncan from Stephens, Incorporated. Matt Duncan - Stephens Inc., Research Division: So, Mark, the first question I've got, just back on the 2 acquisitions, to make sure I understood you correctly. So Parts Associates is about 1% of your go-forward revenue. So I guess that implies around $25 million a year. Did you give a number on HyQuip, just so we can make sure we're getting that in our models the right way? Mark O. Eisele: It's a lot smaller and -- than that number. And we haven't given that number. And I think HyQuip is under $10 million a year. Matt Duncan - Stephens Inc., Research Division: Okay. That helps. And then maybe, Neil or Ben, on the commentary and what you guys are seeing in January. So it sounds like, obviously, it's started slow that first week and it's picked up. Can you quantify for us at sort of what level of growth you're seeing in the business after that slow start? Neil A. Schrimsher: No. I'd just say at this point, slower start to the -- maybe the first week, more than the first week. We start to see the pickup now, but there's still some variability that would be in there. So we're focused with our teams on executing. So I think we've got a lot of opportunities. Benjamin J. Mondics: I think if you combine -- and Matt, if you combine that with the uptick we're seeing in the ISM and the MCU -- and to Mark's comments, we're expecting to see a gradual increase as we go out throughout the calendar year 2013. So everything seems to align with what we're seeing and hearing, along with the indices. And typical seasonality in the business starts to ramp in the kind of the February go-forward time frame as well. Matt Duncan - Stephens Inc., Research Division: Sure, sure. So I guess it looks like in the December, your organic revenues were probably down a little bit when you back out SKF and some of the smaller acquisitions you had done. And if I'm hearing you correctly, do you feel like that was probably the bottom, and that things are going to accelerate off of that level going forward as we move through '13? Is that kind of the general tone that you expect? Mark O. Eisele: I think that's correct. Matt Duncan - Stephens Inc., Research Division: And then the last thing for me, on the SAP install, if you could just kind of give us an update how that's tracking, what kind of benefits you're seeing in the locations that have gone live on that? And then sort of maybe update us on what the dollar expenses that's flowing through the P&L this year? And then, Mark, when is that going to start to kind of top out, head back down? And when is the install in terms of a dollar spend going to be finished in the rollout of the P&L? Benjamin J. Mondics: Hey, Matt, this is Ben. I'll hit some of the high points, and the other guys can jump in here. But we're in the midst of -- we've shifted our focus a little bit from the build of the system to more of the deployment, and we're in the midst of the deployment activities right now. As we'd said before, we continue with our phased rollouts. Everything is going very well. We're aiming for completion of the majority of our locations by the end of the calendar year. But we'll probably have some spillover into calendar 2014, as we pick up some of the acquisitions we've done in Eastern Canada and finish up in Mexico. But overall, the project is growing very well. We're within our timeline, we're within our budget. From a benefit standpoint, it's still too early. Still in the midst of deployments and rollouts, so we'll hold off on talking about benefits till a later time. Mark O. Eisele: And let me jump in here on the expense rolling through the income statement, Matt. Over the summer, and we talked in our conference call about fiscal 2013. And I think, even in our annual report information in our MD&A we talked about, expense running through the income statement in the $15 million to $16 million range for this whole fiscal year, which was lower than the range we had in fiscal 2012. So you're seeing a step backward. We are on track for our spending. I wouldn't be surprised if we spend a little bit less than what we talked about over the summer. But we're really not tracking that quarter-by-quarter because a lot of these costs, as they move from the implementation, they go to the operations, as to running this thing. And so -- but we're right on track like Ben mentioned. Matt Duncan - Stephens Inc., Research Division: So, Mark, it sounds like you're getting a little bit of a benefit within your SG&A cost. Just on a year-over-year basis, the cost is running a little bit lower this year. And then, so by the end of calendar '13, it sounds like the expense with putting the system in place, will be by-and-large done. So you'll get another little bit of a benefit there in calendar '14 as you sort of lag the costs from this year? Is that right? Mark O. Eisele: I would think that's reasonable. And as we've said in the past, some of these expenses will translate into continuing operating expenses for the care and feeding of the system.

Our next question comes from Holden Lewis from BB&T. Holden Lewis - BB&T Capital Markets, Research Division: I just wanted to touch on the guidance really quick. I mean, just sort of using the midpoint, sort of the midpoint of revenues and the midpoint of the EPS, it really -- clearly, you're expecting a little bit better revenues in the back half than what you saw in Q2. Looks like with DSR standpoint, maybe around the Q1 level, but you're kind of looking at your earnings, I think, year-over-year, going from growing nicely in the 10% to 15% range in the first half to barely growing at all, I'd say in sort of the back half guidance. So I'm just trying to get a little bit of color. Does that just reflect a high level of acquisition accounting stuff? Or I mean, to what do we attribute the likelihood that revenues could actually improve, but earnings growth become relatively minor? Mark O. Eisele: Yes, Holden, I'll chat a little bit about that. Obviously, the earnings per share guidance range is a long range, or a wide range. And the challenge is, if we're on the low end of our guidance, we will be closer to the low end -- or the actual results of what we did a year ago, for those numbers. If we can get closer to the higher end of our guidance, we should continue to see some leverage from the sales growth down to an EPS perspective. We still do expect to see improvements in our EPS. But as you mentioned, it will be more modest, potentially, depending upon where everything fleshes out in the second half of the year. Holden Lewis - BB&T Capital Markets, Research Division: Right. So that, I'm just using your midpoint. Right? So I mean, setting aside the range and assuming you sort of do your forecast and then you sort of slap a range around it. But just using the midpoint, you're talking about, again, revenues which improved from Q2, it's looking a lot like Q1, I think, in terms of organic, but very little growth in earnings. And I guess I'm just -- you grew 13% in Q1 against, and up to DSR, organic DSR, you grew 14% in Q2 against a down, I think, 2.5% organic DSR. I guess I'm just wondering why, at the midpoint, you would be forecasting only nominal improvements in EPS? I mean, are we seeing an increase in spend on ERP, or is it acquisition? Or I just -- it doesn't seem to make a lot of sense to me, and so I'm just trying to get a sense of what goes into that forecast. Mark O. Eisele: All of those things are in there. I would say from the acquisition perspective, we're layering the acquisition numbers into our numbers. As we have stated in the past, the acquisitions are accretive, but from an earnings per share perspective, with the intangible asset amortization, it's modest. And we do have acquisition expenses to get those acquisitions closed and integrated, that are one-time expenses which do impact the first year of their operations a little bit more than on an ongoing basis. And so we're seeing some of that flow through the income statement as well. Holden Lewis - BB&T Capital Markets, Research Division: Got it. Then flipping on over to the gross margin. Can you talk a little bit of how much of the increase you saw, maybe versus Q1 with the function of blending, or your view of the function of blending acquisitions? And I also was sort of curious if you can quantify kind of what the impacts were from you increasing inventories and pre-buying? And does that -- when you look forward, organically, do gross margins continue to move up? And then -- or do gross margins go down and then the increases are because of the blending effect. I'm just trying to get a sense of, organically, how much of an impact pre-buys, and that sort of thing, might have that would necessarily be sustainable to the back half of the fiscal year? Mark O. Eisele: Right. I'll address that, Holden. Yes, we talked after our September earnings release that we believe that we would see improved supplier support for the rest of the fiscal year. And we did see that in our second quarter, and we expect that to continue in Q3 and Q4. And so that was a large portion -- I don't have the numbers right in front of me, but I think it's probably the majority of the increase in our gross profit percentage, is for that. And we don't see that taking a step backwards in Q3 or Q4, but at those levels. Some of the pre-buying, as you called it, when we get suppliers for that inventory increase, that obviously stays on the balance sheet until that product rolls through to the income statement and to hit the income -- to hit the benefit for the bottom line. So we are forecasting that our inventory levels will go down a little bit for the third and the fourth quarter. I mentioned in the call, $20 million. And so, some of that benefit from the pre-buying of the inventory that's from a supplier support perspective will flow through to the income statement in the March and the June quarters, which will help that as well. Holden Lewis - BB&T Capital Markets, Research Division: Okay. And then just last, a housekeeping item. I assume by your comments, that you had 62 sales days in Q2. Can you tell me how many sales days you're having in Q3 and Q4? Mark O. Eisele: Yes. Q3, we have 62.5 days, and the half-day relates to good Friday for us which is a half-day holiday. And that compares to 64 days a year ago. So we'll be down 1.5 days in Q3. In Q4, we have 64 days this year, and last year, we had 63.5 days because Good Friday fell in the fourth quarter a year ago.

Our next question comes from Derek Jose from Longbow Research. Derek Jose - Longbow Research LLC: I was wondering if you could talk a little bit about customer inventory levels and kind of the opportunity you may see there for the rest of the year or going into fiscal 2014? A lot of your distribution peers have said that customer inventory levels are at very low historical points. And I'm just kind of wondering, is an inventory restocking cycle of any kind built into the top end of your range, or is that simply a modest return in demand? Mark O. Eisele: Derek, I'll jump in on this. I think it's modest. For the most part, our customers do not have a lot of inventory of our type of product because it's a break-fix type business that we sell into. So we would not necessarily be selling directly to help them stock more of our product in their place of business. So that's not a big impact. But the challenge, and the opportunity for us, is that if our customers, when they make inventory for themselves to sell, if they're keeping that at low levels, that means they're keeping their production at low levels and therefore, their machines aren't breaking as often and they don't need the replacement parts from us. So that, if and when they say they're going to get back to more normal inventory stocking levels, that bodes well for production, and that therefore bodes well for our opportunity to sell. Derek Jose - Longbow Research LLC: Okay. And your assumption that the top end is kind of a -- just a moderate increase in production.? Mark O. Eisele: Yes. And also, we've stated in the past, on some of these indices that are published like the capacity utilization indices, we have stated that we could lag that by several months potentially. And that index has gone up in the month of November, month of -- up in the month of December. So we think that's also a good indication of our prospects for the first 6 months of fiscal 2013. Derek Jose - Longbow Research LLC: Okay. And then on long-term operating margins, if I'm thinking about the company, if I'm looking at the back half of the year, and I'm thinking that we're seeing minimal revenue growth, but we're still seeing improvements in gross margins, and it seems like that the ERP system is gradually kind of taking hold. Longer-term, do you see a normalized operating margin, say, closer to 7.5% or 8%, versus kind of the 7% we've seen over the past few years? Mark O. Eisele: I'll respond to that also. I think we expect to see improved margins, and we expect to see improved margins year-over-year. And we did state in our -- over the summer, in our 3-year look forward, what I call in EBITDA margins, up to the 10% level. So we still think that there's room to go for improvements. Derek Jose - Longbow Research LLC: Where do you think the biggest opportunity, in terms of improvement is, the SG&A line or the COGS line? Mark O. Eisele: I think, it's -- I think, it relates to pricing. It's all areas of the income statement. I think, the pricing the customers, our buying of the products. Benjamin J. Mondics: It's a combination. Mark O. Eisele: A combination... Benjamin J. Mondics: A combination of scale and putting more revenue through existing operations, some improvement in gross margins and holding the expenses in check.

Our next question comes from Joe Mondillo from Sidoti & Company. Joseph Mondillo - Sidoti & Company, LLC: Can you guys restate the acquisition and currency effect on the top line? Mark O. Eisele: Yes. Acquisitions were 4.4% during the quarter. The foreign currency translation was a benefit of 0.4%. Joseph Mondillo - Sidoti & Company, LLC: Okay. Second question, regarding your -- I was wondering if you could speak about your end markets, specifically that forced euponics [ph] part of the business. Are you seeing any sort of benefit of this housing boom? And also, how much does agriculture make of your business? Benjamin J. Mondics: I'll take the first part of that, Joe, this is Ben. Good question on the housing piece. I think we mentioned on the last call, that we were seeing an uptick and we were seeing it in our end markets. And it's definitely continued. So we are seeing an impact on the industries we serve. So the lumber and wood products segment that we serve is doing very well, and then there are a variety of industry segments that are impacted by housing overall. It has a very large impact on the overall economy. So good growth there. We're also seeing some good growth in transportation equipment segment. So even though the overall activity in the December quarter was sluggish, we had 18 of the 30 industries we track were up in the quarter. And housing and transportation were the 2 strongest. Joseph Mondillo - Sidoti & Company, LLC: Okay. And agriculture, is that anything significant to your business? Neil A. Schrimsher: I don't know the -- we've got the number in front of us. When we think about the Fluid Power business and some of the services and solutions that they provide. We've got agricultural presence. And then for those OEMs that are building some of those solutions, they're looking for more electronic controls on some of the equipment. So we see benefit in some of our Fluid Power subsidiaries that are focused on some of these ag markets, and we'd see benefit. But -- and these are midsized -- I don't have that as a rolled-up number in front of us. Joseph Mondillo - Sidoti & Company, LLC: Okay, no problem. My next question, regarding acquisitions, just sort of bigger picture. It seems like you've spent $30 million 2 years ago, $15 million last fiscal year. You've ramped it up to almost $55 million, I guess, or somewhere -- it's around there, in the first 2 quarters of this year. So you're obviously, sort of taking more of an aggressive approach. It seems like it's still may be a little conservative to maybe some competitors. But just bigger picture, sort of, what the fragmentation in the industry looks like compared to a few years ago? What that gives you for opportunities? And then what is your sort of annual goal, internally, for acquisition spend? Neil A. Schrimsher: Yes, it's still a highly fragmented space. And if I compare industrial distribution to many other forms of distribution, it's still probably some of the most fragmented. I think, the 4 of 5 biggest players in this space are still probably only 1/3 of the business for the market available. So there's 2/3 that's still pretty fragmented. So there is a lot of opportunity. We've got clear priorities from an M&A standpoint that we're executing, too, and we'll continue to be a disciplined acquirer as we go across. We think we've got the opportunity to raise some of our sights on those. But we're probably not unlike some of the others on what has been or turned out to be the average size of acquisition in time. But we'll work and see if we can make that number a little larger going forward. Joseph Mondillo - Sidoti & Company, LLC: So are you actually trying to be more aggressive on the acquisition, or is it just a coincidence of how the pipeline played out in the last 2 quarters? Neil A. Schrimsher: Well, I think we've been active in our pursuit. We're staffed, we work our pipeline well. Management's involved in these. And I think the environment creates some of those. We continue to look at what are the right fits to our priorities that we've identified, geographically, in our business segments, and we work them. So you never perfectly control the timing, but I would say, we'll likely, at least in count, be as active in the second half of the year as we were in the first half of the year. And I would expect that we've got -- we continue to have the opportunity in the business performance and cash generation to be as active in our fiscal '14 as we were in '13. Joseph Mondillo - Sidoti & Company, LLC: Okay. And then last question, just regarding the hurricane in October, November. Just wondering, you guys have a decent concentration in New Jersey, Pennsylvania area, did that have any negative or positive effect, do you think? Benjamin J. Mondics: Probably some negative. We had some of our locations affected and were shut down for a few days. But traditionally, we see the pick-up in the following weeks. So it all happened within the quarter. So we didn't see a big impact. Neil A. Schrimsher: And then, I think, for customers that were taken out for a while, right? We participated in their help of restoring their business and their productivity in that as well. So I'd say, for us, not a huge impact either way.

Our next question comes from Jason Rogers from Great Lakes Review.

Just a follow-up on one of the questions of the previous caller, is there a way to estimate what percent of your revenues are housing-related? Benjamin J. Mondics: Yes. It's a challenge. We've talked about that and some of the segments are very easy. Lumber and wood products, a large percentage of that goes into housing. Some of the other ones, when you get into the aggregates and asphalt and durable goods -- and our best estimate is we're, probably, about 10% of our business is impacted by housing and the activity in the housing industry. So it could be a conservative number. It could be low double-digits, it could be high single-digits. But roughly 10%.

Okay, that's helpful. The only other question I had was on CapEx, if you have any change to your fiscal '13 plans? Mark O. Eisele: No. Our plans are still the same. And as I recall, we announced, over the summer, that our CapEx plan was in the, around $13 million to $14 million for the whole fiscal year and we've spent about 1/2 of that so far. On the other half.

Our next question comes from Brent Rakers from Wunderlich Securities. Anjali R. Voria - Wunderlich Securities Inc., Research Division: This is Anjali Voria for Brent today. I apologize if this has already been asked, but I was wondering if you could perhaps give us an update on your strategic growth initiatives? Perhaps, of you've made any sales personnel adds or product sku [ph] adds outside of acquisitions, or if there are any other growth initiatives you would call attention to? Neil A. Schrimsher: No, we continue to work our strategic plan and our growth initiatives as we've laid out -- what we look to do around our core business of selling more to current customers, reaching new customers. We've been active in giving our field teams some electronic tools to help them do that, some data reports that would show them where some of the opportunities would be. Mark talked earlier about some of the inventory that we're putting in place, some of the sales collateral in tools that help them from an execution standpoint. And I'd say, our supplier engagement is very high as well, as we look to team with them to reach customers and bring some of these applications. So those continue, we're working our own product expansion in 2 to 3 focused areas. We outlined Fluid Power as a strategic initiative that we have and we continue to execute on that. On the OE side with our subsidiaries, and then what we do with MRO, we had some addition with some specialists in that area, some technical support resources. We just had the teams together, probably a week ago, so good planning for the second half around Fluid Power. We work continuous improvement, and I think we're starting -- we see that in the margin and the results. And then acquisitions, we've been active and we plan to stay active, and use the balance sheet and the good cash generation. So it continues. The strategic plan is just a good evolution and we're running it. Anjali R. Voria - Wunderlich Securities Inc., Research Division: Okay. That's great. And if I could just ask one housekeeping question. What did you enter headcount at the end of the quarter? And also, on the other income line, is that primarily the unrealized deferred comp? Mark O. Eisele: The -- I'll respond to the other income line, Anjali. The unrealized or the unrealized gains or losses on our deferred compensation plan are down in that number. It was a small number during the fourth quarter because equity markets were basically flat in the fourth quarter. The majority of that number during our fourth quarter was currency translation expense items for that. And we'll have that detailed in the footnotes to our 10-Q, when we issue that. Benjamin J. Mondics: On the headcount, we -- at the end of December, our headcount was a little over 5,100 and increase over the prior year was all from acquisitions.

At this time, I'm showing we have no further questions. I will now turn the call over to Mr. Schrimsher for any closing remarks. Neil A. Schrimsher: Okay. I want to thank you for joining us today. We appreciate your interest, to your investment in Applied, and we look forward to talking with you throughout the quarter. Thanks for being with us.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.