Applied Industrial Technologies, Inc. (AIT)

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Applied Industrial Technologies, Inc. (AIT)

F1Q09 (Qtr. End 9/30/08) Earnings Call

October 27, 2008 11:00 am ET


David Pugh - Chairman and CEO

Ben Mondics - President and COO

Mark Eisele - VP and CFO


Matt Duncan - Stephens Incorporated

Jeffrey Hammond - KeyBanc Capital Markets

Adam Uhlman - Cleveland Research

Joe Mondello - Sidoti & Company

Richard Marshall - Longbow Research

Brent Rakers - Morgan Keegan

Greg Halter - Great Lakes Review

Holden Lewis - BB&T Capital Markets



Welcome to the Applied Industrial Technologies first quarter 2009 financial earnings teleconference. All lines will be in a listen-only mode until the formal question-and-answer session. At that time, instructions will be given. At the request of Applied Industrial Technologies, today's conference is being recorded. If you should have any objections, you may disconnect at this time.

Applied issued its first quarter earnings release early this morning before the market opened. You may retrieve a copy of the release by visiting the company's website at A replay of today's teleconference will be available for the next two weeks as noted in the news release.

Before we begin the teleconference, I would like to remind everyone that there will be discussions regarding Applied's business outlook and there will be forward-looking statements. 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 identify in Applied's most recent periodic report and other filings made with the SEC. Accordingly, actual results may differ materially from those experienced in the forward-looking statements.

Our speakers today include David Pugh, Chairman and CEO of Applied, who will discuss Applied's overall performance during the quarter. We'll also hear from Ben Mondics, President and Chief Operating Officer, who will discuss operational activities and Mark Eisele, Vice President and Chief Financial Officer who will discuss the financial performance in detail.

I would now like to turn the call over to David Pugh, Applied's Chairman and CEO.

David Pugh

Glad you could be with us considering all the other things you could be covering in the global economy. When you take a look at our first quarter, it was a bit of a rollercoaster ride. We achieved record sales for several reasons, which Mark will cover a little bit later on. We didn't translate those sales into expected levels of earnings. As the quarter progressed, we experienced an economy that was putting on the brakes in a hurry, especially domestically and especially in the latter part of the quarter.

This slowing economy has caused many of our customers to cancel or just simply delay capital spending projects that were aimed at improving their production capability and capacity. And the movement in the supply and demand equation has been reflected in greater price pressure and that affects the bottom line.

By my experience, in my history, the rapidity of this economic downturn is remarkable and not exactly in a great way for us, considering where we are currently positioned with market segments.

The economic indices that we normally track, such as the Purchasing Managers Index, the Industrial Production Index, manufacturing capacity utilization, all of those have fallen. These declines are in keeping with the economic climate that's generated by our current financial crisis. Housing starts are at their lowest level in 17 years and it looks like we are staring a recession square in the face and unless we have a significant positive reaction to the financial initiatives that are being put forth by the Federal Government, we expect the next 12 months to be quite a challenge.

Now, while we weren't satisfied with our earnings performance during the quarter, there were some bright spots. We achieved a solid 6.9% operating margin. Now although this is down slightly from prior periods, it's not a sign that we've thrown caution to the wind in order to gain sales. It has more to do with a mix shift from small customers to large national accounts and with costs associated with our acquisition of Fluid Power Resource.

Cost controls and pricing discipline are still in place and coupled with excellent asset management, they have given us an exemplary cash generation. We did see good performance by certain customers in markets that haven't slowed as much as those related to housing and transportation. Ben's going to share a little bit more about that when he's on.

In August, we did complete a major acquisition of Fluid Power Resource and seven of its Fluid Power distribution businesses in the United States. They contributed one month of their performance to our top line. This acquisition really strengthens our presence in the distribution of Fluid Power products.

As we stated before, with regard to the economy, you can't control the wind but you can adjust your sails. Our management team is confidently working on short-term changes that are going to help us cope with this looming recession and even longer-term changes that are aimed at softening the blow of future market gyrations such as we are now seeing.

Ben is going to add more details about the market segments and their effect on our top line in his comments but operationally in total I want to assure you, we are still strong and we continue to improve. It's in times like this that I truly appreciate the quality of our processes and the controls that are in place for oversight.

Last quarter, when we finished up, I shared that the pressure on our sales line was of a temporary concern. Since we all watch a constant stream of economic news today, I know it's not surprising that my concern is no longer temporary. It seems there is a global recession and it remains to be seen how deeply it's going to go and how long it's going to take to shake it.

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