Julie A. Kho - Manager-Public Relations Neil A. Schrimsher - President & Chief Executive Officer Mark O. Eisele - Vice President, Chief Financial Officer & Treasurer.

Matt Duncan - Stephens, Inc. Jon E. Tanwanteng - CJS Securities, Inc. David M. Stratton - Great Lakes Review Ryan Cieslak - KeyBanc Capital Markets, Inc. Adam William Uhlman - Cleveland Research Co. LLC.

Ladies and gentlemen, thank you for standing by. Welcome to the Fiscal 2015 Fourth Quarter and Year-End Earnings Conference Call for Applied Industrial Technologies. My name is Suzie, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

Please note that this call is being recorded. I will now turn the call over to Julie Kho. Julie, you may begin..

Thanks, Suzie. And good morning, everyone. 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 two weeks as noted in the press release.

Before we begin, I would like to remind everyone that we'll discuss Applied's business outlook during the conference call and make statements that are considered forward-looking.

All forward-looking statements, including those made during the question-and-answer portion, speak only as of the date hereof and are based on current expectations that are subject to certain risks, including trends in the industrial sector of the economy, the success of our various business strategies, and other risk factors identified in Applied's most recent periodic reports and other filings made with the SEC, which are available at the Investor Relations' section of our website at applied.com.

Accordingly, actual results may differ materially from those expressed in the forward-looking statements. The company undertakes no obligation to update publicly or revise any forward-looking statement whether due to new information or events or otherwise.

In compliance with SEC Regulation FD, this teleconference is being made available to the media and the general public, as well as to analysts and investors. Because the teleconference and its webcast are open to all constituents, a prior notification has been widely and unselectively disseminated.

All content of the call will be considered fully disclosed. Our speakers today include Neil Schrimsher, Applied's President and Chief Executive Officer; and Mark Eisele, our Chief Financial Officer. At this time, I will turn the call over to Neil..

Thank you, Julie. And good morning, everyone. We appreciate you joining us today. To recap the numbers from our release this morning, our net sales for the quarter were $677.5 million, up 3.5% from $654.6 million in the same period a year ago.

Net income was $28 million or $0.70 per share compared with $29.7 million or $0.71 in last year's fourth quarter. Our full year results were sales of $2.75 billion, an increase of 11.9% compared to $2.46 billion last year.

Net income for our full fiscal 2015 was $115.5 million or $2.80 per share compared with $112.8 million or $2.67 per share in fiscal 2014. As we moved through fiscal 2015, we experienced deceleration in industrial demand, headwinds from energy markets, and the unfavorable impact of foreign currency translation.

While the combination of these factors kept us from realizing our initial expectations for the year, we did achieve the highest level of sales and earnings per share in company history. In addition, we returned a record $119 million, a 55% increase, to shareholders via dividends and share repurchases.

While we're pleased to note these accomplishments, we are not satisfied. With the unexpected economic slowdown in the second half of our fiscal year, we quickly took action to reduce our operating expenses, and we'll continue to be focused on effective cost controls and operating discipline in this economic environment.

Moving into fiscal 2016, while the current industrial economy present some challenges, we know we have growth opportunities with current and new customers.

We're pleased with the recent acquisition of Atlantic Fasteners, a distributor of industrial fasteners and related supplies, a nice addition that builds on our Maintenance Supplies & Solutions platform. Looking forward, we expect the current economic headwinds to continue through the first half of our fiscal 2016.

For the full year, we are forecasting a sales change in the range of negative 2% to up 1%. This includes an expected negative impact from foreign currency translation of 2.5% for the remainder of calendar 2015 and nearly 1% negative for the first half of calendar 2016.

We expect earnings per share for the full fiscal year to be in the range of $2.80 to $3.05 per share. I'll now turn the call over to Mark for more details on our financial results..

Thanks, Neil. Good morning, everyone. I'll provide some additional insight regarding our fourth quarter fiscal 2015 financial performance. Our sales per day rate during the quarter was $10.7 million, 3.5% above the prior-year quarter and 1.1% below our rate in the March quarter. We had 63.5 selling days in both the June 2015 and 2014 quarters.

Acquisitions had a positive impact on sales of $42.6 million or 6.5% during the quarter and foreign currency translation impacts decreased sales by 2.4%. Therefore, overall core same-store operations experienced a 0.6% decrease in sales compared to the prior year.

This decrease is fully attributable to subsidiaries serving the upstream oil and gas markets as traditional core same-store operations had a sales increase in the quarter of 1.7%.In addition, we believe the impact of vendor price increases was minimal during the quarter.

Our product mix during the quarter was 27.5% fluid power products and 72.5% industrial products. Fourth quarter sales in our service center-based distribution segment increased $24.8 million or 4.7%, which is net of unfavorable foreign currency translation of $12.7 million or 2.4%.

All of the $42.6 million of acquisition impact in sales is within the service center-based distribution business segment. Our traditional core U.S.-based service center operations did experience a 1.9% sales increase in the June quarter compared to the prior-year fourth quarter.

The sales in our fluid power businesses segment decreased $1.9 million or 1.5% in the quarter. This decrease related entirely to the impact of unfavorable foreign currency translations for the fluid power businesses, which decreased sales by $2.5 million or 2%. From a geographic perspective, sales in the fourth quarter from our overall U.S.

operations were $34.8 million or 6.8% higher compared to the prior-year quarter. $31.7 million of this increase came from acquisitions. Our Canadian operations had sales from acquisitions during the quarter of $6.1 million.

The Canadian operations, including the Reliance operations for May and June, experienced a sales decrease in local currency of 11% and had $9 million of negative foreign currency translation, resulting in an overall combined change in sales for our total Canadian operations of $14.1 million below our prior-year amounts.

All of the local currency sales decline pertain to Western Canadian operations, which were negatively impacted by the energy markets.

Consolidated sales from our other country operations, which include Mexico, Australia, and New Zealand, had an overall increase of $2.2 million or 5.9%, which included sales relating to acquisitions of $4.8 million and a negative foreign currency impact of $6.1 million.

The remaining increase relates to improved local currency core operation sales in Mexico. Our gross profit percentage for the quarter was 28.3%, 40 basis points above the prior-year fourth quarter and 70 basis points above our run rate in the March quarter.

This increase from prior year is attributable to increases in the relative level of supplier support, smaller required LIFO reserves on our U.S. inventories, and lower relative levels of scrap expense. Increases above our third-quarter gross margins include the above items, along with an increase in the core U.S. service centers' point-of-sale margins.

Looking forward, we expect our gross profit percentage in fiscal 2016 to be slightly above our fiscal 2015 annual rate of 28.0% and similar to the 28.3% rate experienced in our fourth quarter just ended. In addition, we had no benefit from LIFO layer liquidations in fiscal 2015 and do not anticipate any in fiscal 2016.

Our selling, distribution and administrative expenses as a percentage of sales was 21.2% for the quarter, 20 basis points above the prior year's fourth quarter, which results entirely from the incremental intangible asset amortization. On an absolute basis, SD&A increased $6.2 million in the quarter or 4.5%.

SD&A increased $11.6 million from our acquisitions, decreased $3.6 million due to foreign currency fluctuations and decreased $1.8 million from core operations. This core operations' SD&A decrease represents a 1.3% reduction in our core year-over-year SD&A spend.

This fourth quarter SD&A expense included a $1.6 million charge for severance related to head count reductions. We expect our SD&A run rate in the September quarter to be lower than the June quarter, which should be over $5 million below the prior year's September quarter. Our effective tax rate for the fourth quarter was 37.1%.

This rate is higher than normal due to three discrete items flowing through the tax provision during the quarter which increased the quarterly rate by $1.5 million or 3.4%. These are all onetime items and are not expected to repeat. We believe our tax rate for fiscal 2016 will be in the range of 34.0% to 34.5%.

Our consolidated balance sheet remains strong, with shareholders' equity of $741.3 million compared to $800.3 million at June 30, 2014. This decrease in equity is due to stock repurchases of $76.5 million during fiscal 2015 and the foreign currency translation of our non-U.S. entities balance sheets into U.S.

dollars, which had a negative impact on equity of $58 million for fiscal 2015. Our after-tax return on assets for the year was 7.9%. Inventory at year-end is $362.4 million, down $18.7 million from our March quarter. This decrease is virtually all related to declines in operational inventories in the United States.

Compared to last year-end, inventories are up $26.7 million, of which $32 million relates to acquisitions. Cash generated from operating activities was $115.2 million for the fourth quarter and year-to-date was $154.5 million. These improved cash flows in the fourth quarter were anticipated.

We saw improved cash flow in the quarter of $19.4 million through lowered operating inventory levels, $16.8 million from collections of receivables, and $36.5 million through additional levels of accounts payable.

Looking into fiscal 2016, we expect another solid year of cash provided from operating activities which should exceed our net income amounts. We will continue to keep a focus on our selling, distribution and administrative expenses in fiscal 2016.

As previously discussed in our press release, we expect sales in fiscal 2016 to be from down 2% to up 1% and to generate earnings per share of $2.80 per share to $3.05 per share. In the fourth quarter, the company purchased 406,000 shares of its common stock and open market transactions for $17.3 million.

During the full fiscal year, the company purchased 1.7 million shares million shares for $76.5 million. At June 30, 2015, the company had remaining authorization to purchase slightly over 1.2 million additional shares and we expect to remain active in executing stock buybacks now and on a go-forward basis.

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

Thanks, Mark. Overall, Applied is well positioned for long-term success.

We have a strong foundation, expanding capabilities, market-leading positions and a clear strategic plan that we are executing including expanding our business capabilities with investments in products, services and technology solutions, along with operating experience in our ERP systems.

We're extending our business reach via strategic acquisitions in all served geographies and enhancing organizational effectiveness, streamlining our structure and introducing many exciting talent management initiatives.

We recognize our requirements going forward, and we're focused on having the right associates, reaching the right customers, utilizing the right processes and driving the right actions, all supported by the right resources to generate value for all our stakeholders. With that, we'll open up the lines for your questions..

Thank you. We will now begin the question-and-answer session. And our first question coming from the line of Matt Duncan with Stephens. Please proceed with your question..

Hey, good morning, guys..

Good morning..

Neil, can you talk a little bit about the sales trends that you're seeing in the business month-to-month? Do you think things are starting to kind of bottom out a little bit on the energy side, or are we still seeing some headwinds there?.

Yeah. So if we look back at the quarter, I think month-to-month throughout the quarter, we saw modest positive progressions. I think Mark talked about the traditional core being up. I think from an oil and gas side, we'd say sequentially down in the teens. I think that's perhaps consistent with the rig count movement.

If we think about to the start of the calendar year, the 50% rig decline, I think we're doing better. I know we're doing better than that, but we separate it, right? The greatest pressure, the volatilities around the upstream drilling and completion, the businesses that are upstream production service-focused are doing better.

And so we saw that stability in our Q3 to Q4. And then, I think from the July standpoint, we saw kind of some seasonality that we see with the shutdowns and timeout and sales probably in the mid-single-digit decline range from that standpoint..

Okay. Very helpful. On M&A, just on Atlantic Fasteners, can you tell us any more about how big that business is? And you guys did a pretty good job paying down some debt with that good cash flow in the fourth quarter.

How are you looking at M&A going forward as well?.

Yeah. So, it's a good-sized – it's a fair-sized business. It's smaller than our average acquisitions had been over a period of time and maybe some of our most recent ones, obviously, but it's a good addition for us. We like the Maintenance Supplies & Solutions platform, the extension into the Class C consumables.

Last year, we took those products into our Fontana DC. This is a good New England addition for us. The sales team and managements coming over, they'll be part of our MSS business group. So, we think it just fits into our overall product expansion efforts that we want to have with current and also with new industrial customers.

From an M&A standpoint, hey, we're committed to staying active. I think since 2012, 15 acquisitions. We were busy in our fiscal 2014 and in fiscal 2015, and we want to be as busy in fiscal 2016. And I'd say the pipeline, it fits our priorities.

It fits our priorities around bearings and power transmission, fluid power, fluid conveyance, oil field supplies and Maintenance Supplies & Solutions. And then, I'd say we'll continue to look at right, smart adjacencies, either geographic or in product categories.

But they'll make sense to our industrial customers, and they'll fit the supply base that we have..

Okay. All right.

And then, Mark, just to make sure we get that Atlantic Fasteners deal in the model the right way, how big are their annual sales?.

They have an annual run rate that should have an impact to us on a consolidated basis of a little less than 0.5%....

Okay. Very good. Thanks, guys..

...overall..

Okay. Thanks, guys..

Thank you. Our next question coming from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question..

Good morning, guys. Thanks for taking my questions..

Good morning..

Can you talk about the – where you think expectations haven't been met from an internal execution perspective versus external factors? It seems mostly that you've been dragged along by the macro; I just want to get your view on the relative split..

A, group meet, B, plan in that area. If I look across specific service centers, regions, and even in the last quarter a couple of areas, we had some performing very nicely. So, in that, right, we know we can. Our job then is to broaden that and be more consistent. So we know we've got challenges or headwinds in the environment.

But if I put that around, there's still a lot of un-served market and we can do more with existing customers and we can expand our reach to new customers as well. So that's how I'd characterize it, right? There are positives within it. We'll recognize those.

But from an overall standpoint, we're not satisfied, but we're going to be working hard coming into the year..

Okay. Thanks.

And then, what level of economic growth, both overall and I guess, separately, in oil and gas, are you building into FY 2016 outlook?.

We've looked at each of the entities and operating units that we have by themselves and had obviously discussions with them and everyone has a different perspective. So, for instance, our oil and gas subsidiary organizations, they're going to have some tough comps for the next two quarters.

And then, when we see the last two quarters, they'll have better comps and our expectations is that we should be doing a little bit better in our third and fourth quarters than we did during fiscal 2015 for those organizations. And so, each one of these has different perspectives.

And so, we're looking to have some overall core growth within the organization and within the overall economic perspectives..

Okay.

And finally, just could you give us a little bit more color on the M&A pipeline? Should we assume that, given market headwinds and maybe the prospect of rising interest rates, are you seeing more incremental opportunities or better valuations out there?.

Yeah. I don't know that I'd call it more, but I also wouldn't call it less. And so, we know our priorities that characterize the pipeline as robust. We're busy and, I mean, we want to busy then throughout the year. And I've said before, right, you never perfectly control the timing, but we will stay busy.

I think this economic environment right now I don't know that it creates more opportunities, clearly not creating less than it would. And if it stays this way for a period of time, perhaps, in time, it creates a few more opportunities, but I wouldn't say that's impacting the pipeline right now..

Okay. Great. Thank you very much..

Thank you. Our next question coming from the line of David Stratton with Great Lakes Review. Please proceed with your question..

Good morning. One question....

Good morning..

...revolves around the Atlantic Fasteners. And historically, I know you said that you have a very, very small market share in fasteners, and I was wondering what this does to that.

And also, is this going to be an area that's going to receive much more attention going forward being fasteners?.

Well, I think it's been a part of our Maintenance Supplies & Solutions business. We like that business. It fits our industrial customers. We say we represent 18 product categories across, and we're intent on expanding those with current and new customers. So we've made investments in MSS and moving inventory into existing DCs.

We'll continue to look at this. This was just a nice addition to further move into, one, a geographic area, and also if we look at in-customer base, they do a very nice job in vendor managed inventory solutions, both with MRO customers and what might be termed as MROP on the production side.

And we think that logically ties in into kind of initiatives and continuous improvement we'll with those industrial customers, right, as we go through and work with them on lean and material flow, this is just a good extension in that area.

So fasteners will be a piece of it, but all the rest of those industrial consumables, kind of those C-Class supplies..

Thank you..

Thank you. Our next question coming from the line of Ryan Cieslak with KeyBanc Capital Markets. Please proceed with your question..

Thanks. Good morning, Neil and Mark..

Good morning, Ryan..

Just first off, a point of clarification. The comments you made on July sales trends, I think you said that a decline in the mid-single-digit range. Was that specific to the energy business or is that sequentially? I just wanted to get a little bit more color on that trend in July..

So I'd say July year-over-year total, that would be mid-single digits from that July standpoint, right, because obviously, we know when it's in the books. And then, we would see kind of improvements as we move from there. It's early in August, but we would see improvement.

So for us, maybe not all surprising as it go from closing of fiscal year into a new one, but that's the year-over-year metric..

Okay. That's helpful. Thanks.

And then, Neil, when you think about the sales guidance for fiscal 2016, I know you guys have some more difficult comps coming up here in the first half, how should we be thinking about the cadence of core sales growth throughout the year given that the variation in comps and just how things are looking right now with regard to overall industrial demand near term..

Yeah. So, we think, hey, it's a challenging environment with the deceleration of some demand, oil and gas net headwind. So we think our tougher comps, the tougher part of the environment is early in the year. We expect to continue to improve and gain traction as we move along.

So, our toughest comps are going to be in our first quarter then in our second quarter. And we think things then continue to improve a little bit going out from there. So, we think we're realistic in the environment that we have, but our internal plans and our initiatives and our actions are obviously to do better..

And then, Neil, you'd mentioned some your growth opportunities you're looking at here as you into the new year for you guys. Maybe if you could just provide some additional color on that.

Is that more – in some of your traditional verticals, are you seeing some opportunities organically on the MRO side, maybe just some color around, maybe some new growth opportunities you guys might have here in the new fiscal year?.

Yes. So we think our opportunities, one, around the core or with current customers to expand our offering with them – kind of greater penetration, reaching new customers, we think we know we have the opportunity in targeted vertical markets, but also to improve in local markets in the footprint of each one of our service centers.

From the product expansion standpoint, there we're focused. We'll be focused on MRO fluid power products. We'll be focused on other consumables that make logical sense where we already exist with customers.

And then on the fluid power side, we're really using our capabilities in those investments on midsize OEMs from a technology standpoint, right? We will combine electrical and controls into those hydraulic and pneumatic offerings for mobile and industrial customers.

And then we'll take that service and repair capabilities in those offerings also to support some of the best MRO opportunities with larger customers that we have as well. We think those things help us. And then, operationally, we're going to be focused on just continuous improvement.

We know we made progress as we move throughout the year around inventory, around receivables and payables. We think there's more we can do in working capital. And then we'll be focused on also right actions around margin. And then, for us, that really means kind of reducing price variability.

And so the combination of customer mix we think helps us as we go through the year and also the expansionary products come in at expanded margins, so product mix can help us as we work through what we admit is going to be kind of a tough macro environment, especially the start..

Okay. That's really good color. I appreciate it. And then also just on the ERP initiatives, certainly a lot of the implementation now behind you.

Just maybe if you could talk about how you expect the new ERP system to benefit or impact you guys here in the fiscal year, and maybe is there any significant benefit implied in your guidance you laid out here today?.

I think it's in the total. I think the areas that it helps us would be real-time visibility around data and transactions help us further make improvements in working capital in each one of the components.

And then from a transaction side in thinking about establishing the right guides and levels and reduce price variability around products or customers from a local standpoint. I think those are the areas that it gets us.

While we had some of that before, it just gives us faster visibility to it, and we know when we're making good tradeoffs and decisions and when we have opportunities for improvement..

Okay. Great. The last one for me and I'll get back in the queue. Mark, how should we be thinking about free cash going into the fiscal year? A very nice free cash generation this quarter. Obviously, some benefit on the working cap side.

How should the trajectory of free cash look here in the coming quarters?.

Yeah. I think that our view is for all of fiscal 2016 that our cash provided from operating activities should be solid. It should be greater than the net income dollar amounts that we have. Our view on CapEx for the fiscal year is for CapEx spending in maybe the $13 million to $15 million range.

And so that gives you an idea that our CapEx should be smaller than our depreciation expense again in fiscal 2016, just like it was in fiscal 2015 for things. And so yeah, we're looking for that for the whole year.

Now when we look at our individual quarters, we think again that the cash provided from operating activities will be more heavily weighted in the second half of the year, providing the good guys and the first half of the year will be a little less.

And that's what our traditional, I guess, seasonality or what we would call within cash flows has worked in the past, and we expect that to be again this year. So lighter in the first half of the year, heavier in the second half of the year..

Okay. Thanks, guys. Best of luck..

Thanks..

Thank you. Our next question is coming from the line of Adam Uhlman with Cleveland Research. Please proceed with your question..

Hi, guys. Good morning..

Good morning..

Good morning..

Turning back to the commentary on July, I might have missed it, but I think you said that your total revenues were down mid single-digits for the month.

So would that mean that your core operations are now declining double-digits year-over-year? And then I'm wondering if you could put that into perspective of what the June year-over-year growth rate was..

No. I mean, the core operations are not declining double digit, Adam. The vast majority of our acquisition revenue from a year ago came on July 1, and so that's now baked in the numbers.

So we have a very small amount of acquisitions that will happen for the first four months of fiscal 2016 with the old Ira acquisition that we purchased at the end of October. And so the mix is that we're seeing some of the normal seasonality with our July sales within our core operations and so they have been slightly down.

But I wouldn't say it's anything more than the mid single-digits that we talked about..

Okay. Got you. Thanks for that clarification.

And then could you expand on what you're seeing by industry within the major verticals, how many of them are you seeing year-over-year sales growth, and where are you seeing the declines?.

Sure. So, of our kind of top 30, 13 of them were up. I think increases would be in the expected categories like automotive, utility, food, and some of the construction-related ones like lumber, wood, aggregate, and so forth. Declines, as you would expect, in oil and gas.

And I think mining may be stable off of a lower base and then some of the machinery manufacturers, but a large group or category and I think that varies to where they play in market. So if they're into some of those that are down or a little more global participation, I think those are the ones that we would see being down.

Others that are serving some of the more – the earlier segments that we talked about are faring better right now..

Got you. Thank you. And then the gross margin progress this quarter was very strong, particularly compared to most of the other distributors in the space. I'm wondering if we could dig in more about what exactly is working from the core service center operations that help you expand the gross margin.

And then if maybe you have any comment or detail on the difference between mix as well as just price, costs, that would be helpful..

Yeah. I mean, our view overall is that we think kind of macro price was not a big contributor. Mix in our business, a lot of what we sell, break/fix MRO, we sell one time a year. So I think some traditional metrics around product mix doesn't fit in.

With that said, as we expand product categories and drop in some of the consumables and other things, those can be – those will be – those are helpful from a margin standpoint. Customer mix and some of the initiatives around doing well with small, medium accounts as well as large accounts can be helpful.

And then it's just making good, smart decisions, kind of talked about earlier, right, reduce that pricing variability, set good guidelines and flow. We represent so many products. I mean, clearly, we're best off when we establish those guidelines and adhere to them in moving forward.

And I think all of our teams, too, are still focused with our customers. How do we add value? How can we lower their owning and operating costs so that value-add, one, helps our customers and, two, can help us in kind of that product price delivery..

Great. Thank you..

Thank you. At this time, I'm showing we have no further questions. I will now turn the call back over to Mr. Schrimsher for any closing remarks..

Thank you very much. I just want to thank everyone for joining us today, and we look forward to talking with you throughout the quarter..

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating, and you may now disconnect. Have a great day..