Applied Industrial Technologies, Inc. (AIT)

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Applied Industrial Technologies (AIT)

F4Q08 Earnings Call

August 8, 2008 3:00 pm ET

Executives

David Pugh – Chairman and Chief Executive Officer

Ben Mondics – President and Chief Operating Officer

Mark O. Eisele – Vice President, Chief Financial Officer and Treasurer

Analysts

Jeff Hammond – KeyBanc Capital

Matt Duncan - Stephens Inc.

[Brent Rikers] - Morgan Keegan

Richard Marshall - Longbow Research

Brian Carlson - Atlantic Investments

Holden Lewis - BB&T Capital Markets

Adam Uhlman - Cleveland Research Company

Presentation

Operator

Welcome to the Applied Industrial Technologies fourth quarter 2008 financial earnings teleconference. (Operator Instructions)

Applied issued its fourth 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 www.Applied.com. 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 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 in Applied’s most recent periodic report and other filings made with the SEC. Accordingly, actual results may differ materially from those expressed 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 Mark Eisele, Vice President and Chief Financial Officer, who will discuss the financial performance in detail, and Ben Mondics, President and Chief Operating Officer, who will discuss operational activities.

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

David L. Pugh

It’s fun, and I’m pleased to announce that our fiscal 2008 was another record year for the company.

Our business focus on profitable sales growth has yielded our sixth consecutive year of record sales and earnings, and while the economy dips off a little bit in the second half, the things that were under our control, such as inventory management, other asset management, productivity improvements, cost controls, all were handled well and allowed us to post the strong financial result that you’ve seen.

You know, the sales did go up to $2.1 million, a 3.7% gain, and off of that 3.7% gain we took earnings per share up 13.5%. So our investments in information technologies and employee training programs continue to give us good operating efficiencies. The productivity that we’ve shown is reflected in the historically low SD&A as a percent of sales that we’ve shown for the year. We’re able to generate excellent cash at $110 million. It gives us a good cash balance at the end of the year and, you know, allows us to do some nice strategic things. In addition, we raised our dividend last year 25% to $0.60. So cash flow is going very well, and that��s going to position us to continue to run this company on a strong basis.

Now I’m sure you’ve noticed that the top line of the sales was a tale of two significantly different halves. The softness that we experienced in the second half relates to a continued decline in some market segments that are key to us. Today’s market is unusually dichotomous with regard to strength of segments. It’s pretty obvious that anything related to housing is a problem. Anything related energy is in a boom situation. And Ben’s going to add more details about our market segments and their affect on our top line in his comments, but operationally, I want to assure you we are still strong and we continue to improve.

The cost controls, the pricing discipline have kept our operating margins at great levels, and that, coupled with excellent asset management, has given us exemplary cash generation. So while the sales volume is of temporary concern, the rest of what we manage is well under control, and we feel like we have the plans to mitigate the market challenges that we’re going to face in fiscal 2009.

So here’s Ben to give you a few thoughts about that.

Ben Mondics

In last quarter’s teleconference we made the statement that our indicators were pointing to additional slowing in our fourth quarter. The indicators turned out to be true, as we saw continued issues in a number of the key industries we serve.

Despite a strong headwind, our associates worked hard to deliver good sales and earnings. The key to understanding our performance in the second half of 2008 lies in the industry mix of our sales. We have been very successful over the years in certain markets that match up well with our product and application knowledge. Today some of those markets are suffering, primarily due to the housing and automotive markets, and they have influenced our sales line and flattened it.

Not surprisingly, we saw decreased sales to the lumber and wood products industry. Through the second half of our fiscal year, our business to that segment was down double digits compared to the same period of 2007. Mirroring that decline was the performance of our customers in the transportation equipment segment. Some, but not all, of that sales decline was countered by strong increases in power generation, primary metals, food and metal mining.

Government sales also continued to produce double-digit increases and totaled over $72 million for the year. Our sales force continues to expand their efforts to include all types of government entities, local, county, state and federal.

Read the rest of this transcript for free on seekingalpha.com