Applied Industrial Technologies, Inc. (AIT)

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Applied Industrial Technologies (AIT)

F2Q09 Earnings Call

January 26, 2009 10:00 am ET

Executives

Richard Shaw – Vice President, Communications and Learning

David Pugh - Chairman and Chief Executive Officer

Mark O. Eisele – Vice President, Chief Financial Officer

Ben Mondics - President and Chief Operating Officer

Analysts

Matt Duncan - Stephens Incorporated

Analyst for Jeffrey Hammond - KeyBanc Capital Markets

Joe Mondello - Sidoti & Company

Brent Rakers - Morgan Keegan

Greg Halter - Great Lakes Review

Holden Lewis - BB&T Capital Markets

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Applied Industrial Technologies second quarter 2009 financial earnings conference call. All lines will be in a listen only mode until the formal question and answer session. At that time, instructions will be given. At the request of Applied Industrial Technologies, today’s conference call is being recorded. If you should have any objection, you can disconnect at this time.

I would now like to introduce Mr. Richard Shaw, Applied’s Vice President, Communications and Learning.

Richard Shaw

Thank you, John, and good morning, everyone. On behalf of Applied Industrial Technologies, I’d like to thank you for joining our fiscal 2009 second quarter conference call this morning.

You should have already received our earnings release that we issued this morning before the market opened. If you’ve not received it, you can retrieve it by visiting our website at www.applied.com. A replay of today’s broadcast will be available for the next two weeks as noted in the archive information that’s contained in the news release.

Before we begin I would like to remind everyone that we will discuss Applied’s business outlook during this conference call and make statements that are forward-looking. All forward-looking statements are based on current expectations regarding important risk factors, including trends in the industrial sector of the economy, the success of our various marketing strategies, and other risk factors identified and applied to most 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.

This conference call is the copyrighted property of Applied Industrial Technologies and any copying, rebroadcast publication, posting, transcription, or distribution of any portion of the call without Applied’s express written prior consent is prohibited.

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

Getting us started today is David Pugh.

David Pugh

Thanks, Rick. Good morning. It looks like we have a pretty healthy group listening this morning. Let me open with a mild disclaimer because this is a different environment in which we’re operating. Today you will not be receiving the level of definitive information to which you’ve grown accustomed simply because it’s unknowable at this juncture. That’s not an apology, it’s just fact, because we’re not alone.

In a recent survey of 270 leading CFOs, 70% of them said they couldn’t forecast beyond the current quarter with any degree of accuracy and almost 20% of those guys said they couldn’t see beyond two weeks and an equal amount said they were currently in the dark as to what would be happening.

That doesn’t really scare me because I feel we are agile enough to continue to identify and maximize opportunities quickly. So if we seem to be in an abbreviated mode today, it’s for good reason.

Having said that, if you looked at our news release this morning, as we indicated, the industrial economy in our second quarter continued to decline at a continually increasing rate. The economic indices that we normally track, such as the Purchasing Manager’s Index, the Industrial Production Index, the Manufacturing Capacity Utilization, have all fallen to levels we haven’t seen in over 25 years and reflecting that slow down, our sales for the quarter excluding acquisitions were down 11.9% from the prior year and even with the acquisition, we were still down by 1.7%.

The consumer demand continues to decline and there are inventory adjustments occurring throughout the supply chain. At the risk of sounding like the master of the obvious, this is a very difficult business climate, and the economic indicators that we watch would suggest the market has yet to hit bottom. There are various forecasts out there of new economic events that would take the market even lower.

As a result we’re making appropriate adjustments to our cost structure while maintaining a high level of customer service. Our efforts are focusing heavily on asset management and maximizing subsequent cash flow to protect the interests of our shareholders as we navigate through an increasingly turbulent storm. In conditions like this, the timelines for improvement in marginal assets including suppliers and customers necessarily shrinks.

In spite of the tough economy, our operating margin of 5.7% was very good in our eyes. Our goal and what we’re targeting is to keep that operating margin at 5% or better during these difficult times.

Another positive was our continued success with government sales which continues its double digit growth. Since we started that initiative about three years ago, we have continued to grow it very, very quickly. Today we’re in an excellent position to benefit from increased government spending on any economic stimulus program aimed at creating jobs. We will continue to push this effort as we continue on in our planning.

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