Welcome to the Fiscal 2017 Fourth Quarter and Year-end Earnings Call for Applied Industrial Technologies. My name is Julie, and I'll 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 conference is being recorded. I will now turn the conference over to Julie Kho. Julie, you may begin.

Thanks, Julie, and good morning, everyone. Our earnings release was issued this morning before the market opened. If you haven't received it, you could 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 this 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 various industry sectors and geographies, the success of our various business strategies and other risk factors identified in Applied's most recent periodic report and other filings made with 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, all prior notifications has been widely and unselectively disseminated, all content of the call would be considered fully disclosed. Our speakers today include Neil Schrimsher, Applied's President and Chief Executive Officer, Mark Eisele, our Chief Finance Officer; and Dave Wells, our Vice President of Finance. I will now turn the call over to Neil.

Thank you, Julie, and good morning, everyone. We appreciate you joining us. I'd like to welcome Dave Wells to his first Applied earnings call. As previously announced, Dave will succeed Mark Eisele upon his retirement effective August 31. We're pleased to have Dave on board, providing his extensive industrial experience and financial acumen, and we look forward to his leadership. Now, moving on to our results. Our net sales for the quarter were $681.5 million, an increase of 7.5% compared with $634 million in the same period a year ago. Net income for the quarter was $53 million or $1.34 per share, compared with $26.1 million or $0.66 per share in the fourth quarter of fiscal 2016. Net sales for the full year were $2.59 billion, an increase of 2.9% compared with $2.52 billion last year. Net income for our full fiscal year was $133.9 million or $3.40 per share compared with $29.6 million or $0.75 per share in fiscal 2016. As noted in our press release, our current year results include a favorable one-time tax benefit in the fourth quarter of $22.2 million or $0.56 per share related to the write-off of the company's investment in one of our Canadian subsidiaries. Prior year fiscal 2016 results included a non-cash goodwill impairment charge of $1.62 per share recorded in the third quarter. In the fiscal year, we generated a $164.6 million in cash from operations, our second highest level in company history, while returning $52.9 million to shareholders via dividends and share repurchases. Our performance reflects the positive strides we made throughout fiscal 2017, including continued sequential progress in the fourth quarter. We've moved past the challenging environment in fiscal 2016 to realize the benefits from serving our customers' operating needs, driving continuous improvements in our business, and enhancing our technical value-add capabilities; benefits that strengthen our market position and pave the way for ongoing value creation. Overall, we're pleased with the return to growth, continued operating discipline, and progress in executing our strategy. Our value-driven continuous improvement culture includes productively serving current customers and reaching new accounts through our multiple channels to market, including: 430-plus Service Centers, promptly meeting local customer requirements; 70-plus Fluid Power sales and service facilities, providing engineered systems solutions, and value-added services for mobile and industrial OEMs and MRO end-users; digital and printed catalog, serving as a valuable purchasing and resource guide; our Maintenance Supplies & Solutions vendor-managed inventory specialists, productively managing C-Class MRO supplies; and our Applied.com e-commerce site, providing fast access to technical product information and complete quote, order history and shopping capabilities to streamline purchasing. As customers continue to consolidate their industrial spend with fewer more capable suppliers, we are well positioned for greater business across these multiple channels, providing choice, convenience and expertise, generate success for our customers and value for all our stakeholders. At this time, I'll turn the call over to Mark, for more detail on our financial results.

Thanks, Neil. Good morning, everyone. I'll provide some additional insight regarding our fourth quarter fiscal 2017 financial performance. Our sales per day rate during the quarter was $10.73 million, 8.3% ahead of the prior-year quarter and 1.1% greater than our rate in the March quarter. We had 63.5 selling days in the June 2017 quarter, compared to 64 days in the June 2016 quarter. This resulted in a 0.8% headwind when comparing total sales in the current quarter versus the prior-year quarter. Acquisitions had a positive impact on sales of 0.8% during the quarter and foreign currency impacts decreased sales by 0.4%. Excluding the effects of acquisitions and currency translation, our organic operations experienced a 7.1% sales increase in sales compared to the prior year. In addition, we believe the impact of vendor price increases was minimal during the quarter. Our product mix during the quarter was 29.7% fluid power products and 70.3% industrial products. Fourth quarter sales in our service center-based distribution segment increased $29.2 million or 5.6%. Acquisitions added $1.7 million or 0.3% and foreign currency fluctuations decreased sales 0.4%. Excluding acquisitions and currency translation, organic operations in the service center-based distribution segment experienced a 5.7% increase in sales. Turning to our operations that sell to upstream oil and gas customers, we experienced a 73% increase in sales in the June quarter, compared to the prior-year quarter. From a run rate perspective, we saw a 3.4% decrease in sales compared to our March 2017 quarter. This small decrease relates to the seasonal nature of our business in Canada as our U.S. oil and gas operations did experience sales improvements from the March quarter to the June quarter. Our fluid power businesses segment experienced the sales increase of $18.2 million in the fourth quarter or 16.2% year-over-year. Acquisitions added…

Thanks, Mark. It's truly a pleasure to be a part of the Applied team and such a great business. I look forward to picking up and carrying the torch to move the business forward. Transitioning out to our outlook for fiscal 2018, as noted in our press release, we're forecasting a sales increase in the range of 3% to 5% for the new fiscal year, and expect earnings per share in the range of $3 to $3.20 per share. We expect further gross profit margin expansion and anticipate delivering another 20 basis points to 30 basis points improvement in gross profit margin in the coming year. As a result of continued disciplined spending and further leverage of our productivity initiatives and ERP investments, we foresee overall SD&A increasing at a rate slightly lower than our rate of sales increase. We anticipate that our effective tax rate will return to the 34% to 34.5% range for all of fiscal 2018. Cash provided from operations in fiscal 2018 is projected to reflect another solid year of performance with a slight increase over the near record year which we had (15:59) in fiscal 2017. Volume fall-through and modest improvement in collections and inventory turns will combine to deliver this further improvement. Capital expenditures are expected to be in the range of $18 million to $19 million, depreciation expense should be near $16 million and intangible amortization expense in the area of $23 million for fiscal 2018. Applied had modest share repurchases in fiscal 2017, but we expect to ramp purchases in fiscal 2018 to be back in line with historic levels to beat our objective of slightly reducing share count over the course of the year. In order to achieve this, we're targeting quarterly share repurchases in the range of $10 million to $15 million per quarter. Returning cash to our shareholders through share repurchases and dividends remains a priority in our capital allocation strategy to drive shareholder value. In fact, looking back over the past four years, we've executed share repurchases totaling nearly $159 million and reduced our average diluted shares outstanding by over 8% to 39.4 million shares at the close of fiscal year 2017. Before I turn the call back over to Neil for some final comments, I would like to reiterate how pleased I'm to have joined the Applied team. Most importantly, I thank Mark for his tremendous support and assistance during the past few months of transition. The firm foundation that Mark has helped to build during his time in the role coupled with his tutelage as I've shadowed him over the past three months who truly enabled me to hit the ground running in September as I step into the CFO role. I wish Mark all the best in his retirement, and a heartfelt thanks. Now, back to Neil for some closing comments.

Thanks, Dave. I too would like to express my sincere thanks to Mark. It's been a real pleasure to work alongside him these past six years and I speak on behalf of the entire organization when I thank him for his contributions over his 26 years with Applied, truly a great run and outstanding career. We offer our best wishes to Mark and Marilyn (18:10), for a very happy and healthy retirement. Looking forward, we have more work to do, and we're excited to build on our business momentum for continued growth in fiscal 2018. Across our organization, we have more than 5,500 associates, who are committed to driving the continued success of Applied, providing innovative products, solutions, and specialized services that enable our customers' success. In fiscal 2018, we maintained continuity and focus on our long-range strategic plan, including the five elements. One, core growth; growing our core sales and marketing capabilities across 550-plus locations, leveraging our local market presence and plans to expand with existing accounts and new customers. Two, product expansion; driving results beyond of our base offerings with opportunities across all our product groups, including maintenance supplies and solutions, and other consumables. Three, fluid power; building upon our North American leadership, leveraging our value-added services and expanded products offering for OEM customers, and gaining increased share of MRO end-users. Four, operational excellence; driving continuous improvements across the business, and realizing the full potential from our ERP systems. And fifth, acquisitions; with a productive M&A pipeline, staying active in extending our business reach, and expanding Applied's capabilities to serve industrial customers in our geographic markets. Nearly, 95 years since our beginning, we are well positioned and committed to achieving our next level of growth and generating benefits 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. . Your first question comes from Ryan Cieslak with Northcoast Research Resource. Please go ahead. Your line is open.

Hi. Good morning, guys.

Hello, Ryan.

First off, I just want to say congrats to Mark. It's been a pleasure working with you and really best of luck in the future endeavors. And, Dave, same to you. Congrats on the new role and looking forward to working with you.

Thank you.

Thanks, Ryan.

So, the first question I just maybe wanted to get started at is, if you could give some additional color on how maybe the quarter progressed on the top line perspective by month. And then what you maybe are seeing so far on a year-over-year basis here into the early part of the first quarter?

Sure. So, Ryan, our sales per day trends for the overall fourth quarter improved 1.1% from the third quarter. May was slightly below April. We finished up in June. July was positive year-over-year probably mid-upper single digits. So, as expected, down sequentially from June with seasonality, and month-to-date August, we started well over these initial seven to eight days.

Okay. And then just to dovetail off of that, thinking about the sales guidance then for fiscal '18 up 3% to 5%, maybe what are some of the puts and takes there with regard to maybe what you're assuming for the oil and gas end markets? It seems like obviously somewhat of a deceleration from maybe where you're running right now, but I'm assuming that's maybe just more difficult comparison, but maybe just some color on some of the puts and takes in that guidance?

I'd say, overall if you think about the first half of our fiscal year, the last part of the calendar year, we'd be thinking in that 5% to 6% range. If you think about the second half of our fiscal year or the first half at the end (22:48) of calendar 2018, 2% to 3%. And so oil and gas, we expect oil and gas continues kind of at its rate right now. And then as we get into 2018, we think it has the opportunity for some growth above that. So the comparable on that business in our first quarter, it will print nicely. We see that continuing. With oil price, at pr around 50%, I think supplies are down a little bit. For us, it's a location game. Our upstream business in ongoing production in productive deposits and plays, including West Texas, is where the business is doing well. And I think, Mark pointed out earlier, sequentially our U.S. business improved in that quarter, and we think we've got opportunity in the year ahead.

Okay, great. And then just lastly and I'll jump back into queue. On the gross margin side of things, outlook for the fiscal 2018 sounds like you guys are looking for ongoing margin expansion, which is good to hear and certainly, particularly within this market, good to see. What maybe are some of the things that are continuing to drive that improvement for you guys? Is there something new, Neil, this year that we should keep in mind, or is it just a lot of the same things that you've talked about in the past that's supporting the gross margin here in this environment?

I think it's a lot of continued focus and execution. We still believe we got good improvement opportunity using tools and analytics to reduce variation around customer groups and product groups. And looking back, we've done that, so we believe going forward, we still have that. We've got an opportunity around customer mix to positively help our margins, especially as we participate in local economies with those accounts, and then in product mix, as we continue to grow across our product base and mix up into consumables, value-added services. Those are margin additive, margin accretive to us. So it's no one activity, no one lever continuing that work across the footprint of our business is where we say we can grow margins 20 basis points to 30 basis points as we look into this fiscal year.

And then, Neil, just quickly, when you strip out the LIFO benefit in the current quarter or the fourth quarter here...

Right.

...the adjusted margin assumes you guys are – or implies you guys are still running a little bit below where you are in the first half of the year. Anything that came up or it was different than how you were thinking about the gross margin and how that essentially played off in the quarter?

Ryan, I'll jump in and chat about that. You take out the net LIFO benefit and we get up to that 28.3% for Q4, we were running around 28.4% in the first half of the year. So we look at that as just a little bit of normal variability and that we're basically performing at the similar levels with the core operations.

Okay, great. Best of luck, guys. Thank you.

Thanks.

Your next question comes from Steve Barger with KeyBanc Capital Markets. Please go ahead. Your line is open.

Good morning, guys. This is Ryan on for Steve.

Good morning.

Good morning.

Just wanted to talk about the guidance of 3% to 5%. How should we think about incremental margins on that top line growth?

Well, Ryan, this is Mark. I think we're going to look at a lot of those margin improvements in very similar ways that we've talked about in the past. In the past we talk about organic sales growth providing incremental margins of up to 14%. Now for the first 1% or 2% of that sales growth, we do have some SG&A growth that goes along with it in the traditional manner, so that you don't get quite that 14% leverage on maybe the first percentage point or so of the sales increase. But our expectations are that the sales growth that we're projecting for fiscal 2018 is helping drive and leverage up those incremental margins to get to the improved EPS growth that we're showing in fiscal 2018 as well.

Okay. And then my next question. Just comparing the top line growth you're seeing to your peers who are tied to Fluid Power, I mean you guys are on top of the list. Do you think it's more of a factor of you guys gaining share or is it more so just your oil and gas exposure?

I think across our businesses, we are doing a very nice job with mobile and industrial OEMs combining technology to these traditional offerings. So helping them improve their products, their performance, the functionality of those, and it's helping them grow their business. And then we're taking that forward into the industrial environment, helping customers lower their owning and operating cost, energy-saving products that help with sustainability. I think across our Fluid Power group of companies, we're getting growth, showing growth out of – probably three-fourths (28:39) of those and there's another few of those that are very, very close that we expect that will be tipping as we go through this fiscal year. So I think it's a combination. We're providing a lot of value to our customers combining technology to traditional hydraulics and even pneumatics, and it's yielding benefits for us.

Ryan, this is Mark. Let me jump in also and piggyback on what Neil chatted about, because the increase that we're seeing in our Fluid Power businesses, that's not really tied to the oil and gas increases. Our oil and gas sales increases are all within our service center based distribution business segments. So I don't want you to think that that's really driving the Fluid Power increase in that segment. So we're seeing those increases in the overall industrial economy and the mobile economies that Neil chatted about.

All right. Thanks. Good color. And my last question, just want to go back to the LIFO liquidation and primarily the scrapping of the bearings. I mean can you give a little bit more color on that? I mean, whether the product is obsolete or was there a recall or is it just a factor of you guys maybe just getting rid of SKUs?

Right. Ryan, this is Mark. I'll chat about that, too. Operationally, we review inventory activity and potential scrap on a monthly basis, and also much of our scrap represents inactive, but potentially usable product, where we do not have a viable sales outlet. So in the fourth quarter, we conducted a deeper review around aged bearing products for form, fit function along with salability to determine final scrap specific items. And there was no reduction in our overall excess and obsolete inventory reserves in the fourth quarter and these reserves have increased throughout fiscal 2017. And the point we'd like to make when we look forward is, for fiscal 2018, we don't really expect an unusual amount of overall scrap expense like we saw in the fourth quarter, as well as we don't really expect major increases in any inventory reserves during the year as well.

All right. Good. Thanks and congrats on the retirement, Mark.

Thanks. Appreciate it.

Your next question comes from David Stratton with Great Lakes Review. Please go ahead. Your line is open.

Good morning. Thanks for taking the question.

Good morning.

Really quick to touch on inventory, flat sequentially, what are you seeing as far as going forward, any other opportunities for inventory improvements that you've been pursuing recently?

Well, Dave, this is Mark. I think we always have opportunities to continually look at our inventory levels and have improvements. When we look forward into our fiscal 2018 plan, we are expecting our inventory turns to improve compared to fiscal 2017. And the fiscal 2017 turns did improve compared to fiscal 2016. So, I think the bottom-line concept is, we believe that we'll be able to deliver the fiscal 2018 sales with keeping inventory flat. And if we can get it to be a little bit down, that's great, but that's basically the perspective and so with that, our inventory turn percentages could improve by almost 10% compared to the prior year.

I'd say also, up and down our supply-chain, I mean we're looking to link with our suppliers. And on the high velocity types, right, how do we stay productive with one another and feed those quickly, that gives us some inventory relief, then that we can make investments into perhaps some slower moving items that are important to our customers. And then fully (32:57) leverage, utilize our distribution centers that feed our service center locations than on a nightly basis. So, we'll continue to have the right local inventory in service centers, close to the customer and then be very close with those distribution centers coming across. So, it's like, I guess, in the avenue (33:19) and continuous improvement, we think we've got a good path going into 2018, and really beyond to improve our inventory position and our overall turns.

I think our recent investments as well in technology and ERP platform really provide some tools to help us on that front as well, with the visibility in driving that inventory management, there are still opportunities to lever there.

And the LIFO liquidation, was that a strictly an inventory management benefit or was there any demand component in that?

It was primarily inventory management completely.

Okay. And then, looking at the CapEx forecast for the year, can you give any color around where you see the best use of those funds and what we should expect in that terms?

I'd say our CapEx still stays modest and it's really around technology investments that can help our teams with the tools going forward, be it little bit around systems, some equipment around some of our service and repair facilities, but it will stay at a really modest level, as we think about it for the fiscal year.

Great. And then, I guess, it wouldn't be a quarterly call, if I didn't ask about the 30 industry groups and what you see there?

All right. So, similar, 18 were up in the past quarter, positives around oil and gas that we've talked about year-over-year and sequentially in the U.S. Other related industries, infrastructure, aggregates, cement positives; seeing positives in machinery OEMs, transportation equipment and paper and food, those are probably the ones in the 18 and I think the others start to narrow a little bit more too. So, I think all-in-all, we saw good activity in the quarter and it's a good base as we move into fiscal 2018.

Thank you very much.

Your next question comes from Chris Dankert with Longbow. Please go ahead. Your line is open.

Hi, good morning, guys. I guess, congrats again, Mark and welcome, Dave.

Thanks, Chris.

I guess, first off, kind of touching back on the 18 out of 30, I mean, was metals and mining part of that, that group that was up in the quarter or that's still kind of lagging a bit?

I don't have the list in front. I would say probably close into it in the plus, minus category, so I'd say near the line, not as standout either way.

One of those on the bubble (36:16). Got you.

Right.

Then you said pricing was kind of a nominal impact on the quarter, but I guess moving into the first half of fiscal 2018 here, I guess any thoughts on pricing, raw material inflation and kind of how customers are positioned for that right now?

We think we could see some continued inputs or increase, as we move through the full fiscal year. So, looking back, modest impact. Going forward, we will have some supplier increases that will be coming through. So, likely as we go through the full fiscal year, to have some inflation, but to-date again looking back and we've had some of the increases, it's been more modest. As we think about the full year ahead, perhaps there's going to be a little bit more of that realized.

Got it. And would it be fair to say that positive pricing would be towards the upper end of guidance at this point and like flat being more the midpoint?

I don't know if we would conclude on that. I would say we still have a very, very modest overall push with our sales guidance for supplier price increase or price supplier price increases to us. And when we continue to look back, we've had over two years of virtually no net impact of supplier price increases and we have a very small view of those potentially happening during fiscal 2018. Although like what Neil said, we do talk with our suppliers and we see some of the possibilities for more supplier price increases happening as the year marches on. But with that said, it's still probably going to be modest, probably below 1% total impact on us.

Got you. And if I could just kind of zoom out high-level for a second here. In the past, you guys have mentioned that, I think Fluid Power especially, there was some increasing connectivity, more data and analytics associated with some of the Fluid Power products that you were selling. I guess, is there any way to quantify the growth in those products or mix as far as what percent of products are, I guess, connected versus more of the historic legacy products?

It's really combining or connecting electronics to those legacy products or if you think about mobile and industrial OEMs, more controls, more features, inside cabins are at the point of control, which in some cases could be off the equipment. So, I don't have a good mix. I mean, right, Fluid Power is a big workforce in the industry, so you're still keeping the fundamentals to do the work. I just think the controls going around it to enable or have those happen are becoming a little bit smarter and a little bit better user interface, so more friendly for the ultimate user and I think it's helping these OEMs improve their products that they are taking forward to their ultimate customers.

Got it. Thanks for taking my questions guys, and best wishes for the retirement, Mark.

Thank you.

Your next question comes from Steve Barger with KeyBanc. Please go ahead. Your line is open.

Hey guys, I had just one more follow-up. Just on the pricing environment, I mean, with the current demand you're seeing right now, I mean, could you guys maybe push price beyond the supplier price increases? Just kind of trying to get a sense of what kind of environment you need to see where you could go beyond just the supplier price increase?

So, Steve, I'd say, it is in our margin outlook and guidance that we're providing. And it is part of our review that we go through and reducing pricing variation that we have and make sure that we're appropriately value-pricing to those. So, if we start to get a little bit more material input and inflation, that may create the opportunity going forward, but probably need a little bit more input for that. And so, as we look back, maybe a little less of that in the environment we've been very focused on, we have to help ourselves. And so, we help ourselves in using tools, reducing variation and doing the things that positively help mix, both customer and product.

All right. Thanks guys.

Okay.

Your next question comes from Ryan Cieslak with Northcoast Research. Please go ahead. Your line is open.

Yeah. Thanks. Just a really quick follow-up housekeeping question if I can. Is your guidance assuming share buybacks, I think you mentioned in the prepared remarks there were some share buybacks by quarter you were expecting here going forward, does that include that? And then also, what does the top line assume in your guidance with regards to any impact from foreign currency? Thanks.

The guidance does assume as we talked about share buybacks of $12 million to $15 million per quarter, which puts us more back on track with our historical levels and there's nominal currency impact in terms of the forward view in the guidance.

Okay?

There are no further questions at this time. I will turn the call back over to Neil for closing remarks.

Okay. I want to thank everyone for joining us today and we'll look forward to seeing many of you throughout the quarter ahead. Thanks a lot.

This concludes today's conference call. You may now disconnect.