Applied Industrial Technologies, Inc. (AIT) Q1 2014 Earnings Report, Transcript and Summary

Good morning, and welcome to the Fiscal 2014 First Quarter Earnings Call for Applied Industrial Technologies. My name is Brandon, and I'll be the operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn it over to Ms. Julie Kho. Julie, you may begin.

Thank you, Brandon, 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 2 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 report 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 statements whether due to new information or events or otherwise. In compliance with SEC Regulation FD, this teleconference is being made available to the media, to the general public, as well as to analysts and to 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. As we reported in our news release this morning, sales and earnings for the first quarter of fiscal year 2014 were $605.3 million, down slightly from $610.5 million in the same quarter last year. Net income for the quarter was $26.8 million or $0.63 per share compared with $29.5 million or $0.70 per share a year ago. These results were below our expectations, as weaker industrial demand continued. Our earnings were impacted by the lower volume, along with our continued strategic investments across the Service Centers, Fluid Power businesses and Applied MSS. We are continuing to experience weakness in our top line sales into October, including certain industry segments like mining, machinery and pulp and paper. We do expect improvements beginning in calendar 2014, which coincides with traditional seasonality in the second half of our fiscal year. In the first quarter of our fiscal year, we've been active, including ERP Go-live activities in 2 large U.S. service center sales areas, expanding our fluid power sales, service and repair capabilities in domestic and international markets; and with some fluid power system conversions. And in Applied MSS, launching new handheld order technology for our vendor managed inventory specialist, as well as moving to a common platform and consolidating business facilities. As we reported this morning, based on the current industrial economic activity and near-term outlook, we are revising our full year fiscal 2014 sales guidance to a range of $2.43 billion to $2.49 billion. Our full year fiscal 2014 EPS guidance is revised to a range of $2.65 to $2.95 per share. Now while some near-term economic uncertainty lingers, we do remain confident about our ability to perform in the industrial economy based on our strong market position, dedicated associates and our focused plan to generate profitable growth. In addition, we have continuous improvement opportunities for enhanced efficiency and within our operations and in our SD&A expense. All across Applied, we're committed to expanding our value-add with our customers, extending our market reach and products, services and geographies and enhancing our capabilities to serve our customers and to generate shareholder value. We're confident that we're driving the right actions and making the appropriate investments to benefit all our stakeholders. I will now turn the call over to Mark for a discussion on the financial results.

Thanks, Neil. Good morning, everyone. I'll provide some additional insight regarding our first quarter fiscal 2014 financial performance. Our sales per day rate during the quarter was $9.5 million or 2.4% below the prior-year quarter, and 5.5% below our rate in the June quarter. We had one additional selling day in the September 2013 quarter compared to the prior year. On an overall basis, sales decreased 0.9%. Acquisitions had a positive impact on sales of 3% during the quarter, and foreign currency fluctuations decreased sales by 0.4%. Therefore, overall core same-store operations experienced a 3.5% decrease in sales compared to the prior year. On a sales per day basis, our decline in core same-store operations was around 5%. In addition, we believe the impact of vendor price increases was minimal during the quarter. Our product mix during the quarter was 29.5% fluid power products and 70.5% industrial products. First quarter sales in our Service Center-Based Distribution segment decreased $5.8 million or 1.2%, which primarily relates to sales decreases at our foreign operations and to a lesser extent sales to certain customer industry groups. The Service Center-Based Distribution segment also had acquisitions, with a positive impact on sales of 3.3%. The sales in our Fluid Power businesses segment increased $0.5 million or 0.5%, of which approximately 1.8% was due to acquisitions. From a geographic perspective, sales in the first quarter from our overall U.S. operations were 0.3% higher compared to the prior-year quarter, and experienced a positive impact of $9.8 million or 2% from acquisitions. Our Canadian operations benefited from $2.4 million of sales from acquisitions during the quarter, and experienced a combined sales decrease of $4.5 million or 6%. Consolidated sales from our other country operations, which include Mexico, Australia and New Zealand, also included an acquisition benefit of $6.1 million and ended up with an overall decrease of $2.3 million or 6.3% below the prior year. Our gross profit percentage for the quarter was 28.1%, 120 basis points above the prior year's first quarter. This increase can be attributed to the positive impact of recent acquisitions, operating at gross margins above our traditional core business, as well as improved supplier support. Our selling, distribution and administrative expenses as a percentage of sales was 21.5% for the quarter, 180 basis points above the prior year first quarter. On an absolute basis, SD&A increased $10 million in the quarter or 8.4%. Acquisitions added $7.1 million to our SD&A in the quarter, and having 1 additional business day added $2 million. Taking these into account, our core operational SD&A per day run rate was only 0.8% higher on a year-over-year comparison. As Neil referenced earlier, we do have plans to improve efficiencies and control costs moving throughout the year. Our effective tax rate for the first quarter was 33.8%. We still believe our tax rate for fiscal 2014 will be around 34.0% to 34.5% for the entire year. Our consolidated balance sheet remains strong, with shareholders' equity of $774.6 million. Our after-tax return on assets for the first quarter was 10.2%. Inventory at September 30 is above our June levels, primarily due to increases in our U.S. service center operations related to buys with certain strategic suppliers and to a lesser degree increased stocking levels in advanced of our continued ERP rollout throughout the U.S. service center network. Cash generated from operations was $17 million for the quarter compared to $23.9 million in the prior-year quarter. We expect improved cash flows from operations over the remainder of the fiscal year. We purchased 60,700 shares of stock for $3 million in the open market during the September quarter, and we expect to remain active in executing stock buybacks throughout our fiscal year. Now I'll turn the call back to Neil for some final comments.

Thanks, Mark. As stated earlier, our sales and net income were below expectations and we're not satisfied. While we cannot control the macroeconomic environment, we can make sure Applied is well-positioned for the opportunities that are available to us, now and into the future. As a leadership team, we know we have opportunities to grow, to improve margins via product and customer mix and to control costs and improve our efficiencies. We're well-positioned with a strong foundation, expanding capabilities and a straightforward strategic plan to execute. At this time, we'll open up the lines for questions.

[Operator Instructions] And from CJS Securities, we have Jon Tanwanteng on the line.

Given where we are on the new revenue outlook, can you give us some updated thoughts regarding your long-term targets?

Jon, I'd say on the long-term targets, we're not adjusting or changing. I mean, so we say those are 3-year targets to get to $3.5 billion. Obviously, in some of that, we would expect a little bit better market as we go through that. And as we've stated before, acquisitions are a part of our plan to get there.

Okay. And then just on the subject of M&A, can you talk about the market there and what the pipeline looks like? What's been the biggest stumbling block in finding more large deals there?

Yes. So I don't know a stumbling block but as you know, right, we've closed no acquisitions in calendar 2013 to date. We are busy. The M&A team, me personally as well. I'd say we've got a strong pipeline. We want to be as active every year as we were in calendar 2012. And so that was 8 acquisitions and $150 million. We're working around our clear priorities. We continue to raise our sights on kind of the prospect size. We've got the financial capability, the operating know-how to move in this. So we do not expect that we will close this fiscal year with no transactions.

Okay, great. And then I guess when you talk to your customers, what's been the biggest macro concern or maybe common theme among them? And then, what have they told you would it take to get them more confident?

So I think it's different. And so in our international markets, a lot of mining exposures. We think about Australia, as we think about Mexico and even Western Canada, potash and the oil sands. So that exposure on that side. It's a weak environment that people are looking to improve maybe as we move throughout this fiscal year. And then I think in the U.S., it's just kind of steady and stable. We've seen indices around being a little bit more positive, but not translating fully into the results. And I think some of that is the activity that has been in more traditional segments with heavy industrial content like machinery, medical -- or metals, I mean, and chemical production, not really materializing. Industrial production, probably for the quarter, averaged out about 1.2%. So I think most would say that's kind of a steady to flat activity. MCU's been steady. The ISM, while encouraging, at the expansionary and new orders and I believe production both above 60, those start to build some belief and some confidence that 4- to 6-month lag, along with traditional seasonality that we see in the second half of our fiscal year, that, that starts to show up in the marketplace and in the sales results.

Okay. And then finally, are there any levers that you can pull with regards to gross operating margins? Does the rollout of ERP system factor into that as well?

I think I would say our operating margins, as we look at it, product mix and customer mix, right. So we see a positive from acquisitions that we've made as we look to grow some of those product categories and around maintenance supplies and solutions, those are additive. And then I think overall to our business that we've got opportunity to improve bottom line results on the operating efficiencies and SD&A cost containment.

From Stephens, we have Matt Duncan on the line.

First question I've got with regard to the month-to-month sales trend you saw through the quarter and then into October and specifically on October, Neil, a lot of your peers have been saying that they've seen growth pick up some in October, but it sounds like maybe that's not happening for you guys and I'm curious what the disconnect might be there?

Yes. So I'd say in the first quarter, I'd say, we'd see some improvements in September. I'd say, for us, not all holding month-to-date in October. Positives around our U.S. Fluid Power business, maybe a little bit in Mexico. I think some of our other international operations, a little bit more of the same. And then from the U.S., maybe some variability around the segments, but it's been more steady. So we factor that in as we think about the rest of the quarter. We'll come into November. We'll come into December around plant shutdown times around the holidays and in certain customers that creates opportunities and other customers that's just downtime, out time. And so that's what we think we'll see more of the pickup in our second half of our fiscal year starting in calendar 2014.

Okay. And in terms of sort of reinvigorating the growth of all that, can you talk some about what some of the target investments you guys are making are in the business? Or what changes you're making to try and get growth picked up a little bit here?

So I'd say, one, being kind of in the quarter, a lot of activity. And so, 2 launches with the go lives around sales areas, in essence, and one going and one preparing. In our Fluid Power business, we built service and repair capabilities that we're levering up in Canada. We're augmenting the U.S. footprint with some capability, as well as in Mexico. We're also looking to link that capability with our MRO sellers and bring the full value of Applied both in bearings, power transmission and fluid power to that customer base. I think and, in addition, we'll be looking to accelerate maintenance supplies and solutions with that customer base as well. We came into it with really a 10-point integration plan that we completed ahead of schedule. And so we've consolidated facilities. We're in a common DC in one of our locations. We consolidated facilities in Cleveland. We're on a common system platform, and we have all of those inventory specialists now with the same handheld technology, which is going to help them in productivity and efficiency as they go serve more of our customer base.

Okay. And last thing for me, just going back to M&A. Can you talk a little bit about what the valuations are that you're seeing out there? And then remind us what kind of multiples AIT is comfortable paying both for the smaller deals and for a larger more strategic acquisition?

Yes. I think on the multiples, I mean, I just leave it, right. We've got know-how, experience in the space and we know what our traditional ones have been. We know how they vary maybe based on size of the prospect or candidates. So hey, I'll leave the multiple discussions as we're a little bit more active throughout the year.

Okay. From Longbow Securities, we have Eli Lustgarten on the line.

Can we talk a little bit about what you're hearing from your customers some of the end markets. I mean, obviously, we know mining has been a big problem across the board. I mean, that's how [indiscernible]. But can you give us some insight what you're hearing from your customers as they go towards the end of the year and into next year? I mean, is everybody in a holding pattern? Can you give us some color specifically by maybe classic end markets that we get some idea what's going on?

Yes, Eli, there's probably some variability on it, especially from some of the international markets to the U.S. But I think U.S., in particular, I think it's steady and stable. People are looking to continue to operate. They will serve their customers. They will make modest investments, if it's got productivity attached to it and most are still doing pretty well from their own cash standpoint. But I don't think they're looking to make the most significant investments right now. And perhaps that turns with the calendar year and they see some greater pickup in some of their businesses. I think most are mindful of the broader economic indices but I think many would say, right, some of those ISM manufacturing statistics aren't necessarily translating into day-to-day business results. I think there's some belief. There's some optimism with the typical lag that's going to happen. But I don't think they're moving forward with the most significant side. Now in our Fluid Power side, I'd say more of our segments on the industrial, even some of the ag customers, they're making some investments. On their product platforms, they're looking at technology and content and then they're looking at what new platforms that they can be developing. But I think in ag, right, they're going to have a mindful eye on -- how the markets turnout and what subsidies may look like going forward. As we look at business activity in that space, productivity has been good. Mid-, long-term, projects on backlog have been growing. So that's been a good spot.

I guess I was trying to get some idea whether anything is -- any of these specific end markets, I understand the macro environment. But construction and construction equipment continually, the OEM side and most of the construction equipment seems to be very inactive, and mining is a disaster, ag is starting to slow down and flattening out. I'm just trying to get some color by specific end markets as opposed to just the macro kind of view. Or is there anything noticeable or maybe the case there isn't anything noticeable that everything just seems to be the same? I mean, that's what I'm trying to...

Yes, I'd say everything would be similar. We track 30 segments and I'd say 15 of those 30 are positive or show signs of positive, therefore, the other half, not. I think machinery and metals would show some decline. And I think the ones you'd expect still around housing, lumber, wood products, aggregate, those have shown some positives.

And can you talk a bit -- a little bit, you said there was no noticeable pricing before. Can you talk a little about pricing expectations as we go into the rest of this year, and particularly into 2014? We're now hearing a little bit of pricing moves and some of your other competitors have taken some pricing moves. I'm just trying to get some idea, even in fluid power, the OEMs are now talking about pricing towards the end of the year. So just trying to get some idea.

Yes, I would say we'd see modest increases from manufacturers in the timing. And we believe just like in the past, we have the ability to pass those along. And so I think they're modest and they start to phase in. And I'd say, so all in all in this kind of steady environment out there, that there's not undue pressure on price or margins in that.

And my final question, you, I think, indicated that you increased your inventory for the rollout of ERP system or so. Does that stay up all year? Or will that come down later in the year? Can you give us some idea what you're doing?

I think what's going to happen with that, Eli, it's going to roll through the country as we do the rollouts throughout the U.S. during the year. So we'll see certain areas of the country where the rollouts are fading into the past and their inventory levels should be coming down. But other levels should be coming up because we plan on finishing the U.S. rollout close to the end of fiscal 2014. Our overall view on inventories is they may go up a little bit from September to December, but then we would expect a march downward starting January going through June. So that our view is that the June levels should be at or below where we are at the September 30 numbers.

And how much more you're spending on ERP this year than last year in the whole IT systems?

The real view on the ERP system is we basically finished building the system during fiscal 2013. And the expenditures we're doing today are relating to the rollouts and so it relates to training, travel, things of that nature. So we probably have some incremental expenses in this quarter for that. That will continue on for the next couple of quarters. And then will roll off. But all the traditional expenses of running the system are just built into our day-to-day operations at this point in time. So we have depreciation expense, we have maintenance fees for SAP to maintain the software. And then the people that are running the system have changed from doing the development to doing the maintenance of it, too.

I was just wondering what the incremental cost was for this year over last year?

Yes. I think as we disclosed in the prior year, the overall cost was around $15 million running through our income statement. And as we said before, it'll be just a little bit less than that during fiscal 2014 as it just sort of run through the various departments.

From Cleveland Research, we have Adam Uhlman on the line.

I guess just -- I'll start with a clarification on the near-term sales trends don't sound all that bad. Did you see any hit from the government shutdown on your government business?

No. I'd say really no direct hit. Does it play into customers mid- and long-term sentiment? Perhaps. But I'd say for us, no, no real direct tie or impact.

Okay, got you. And then, Mark, last quarter we had talked about keeping spending levels through the year at about the June quarter levels. Is that still a fair assessment of where SD&A is going to run for the year?

Yes. We obviously continue to look at our run rate with SD&A. And at the June quarter, I don't have the number right front of me, but I think it was a little bit higher than what we had at the September quarter. And our expectation is that we're going to keep a tight rein on the SD&A amounts so that we can make sure that we're delivering the numbers that we want to deliver in this sales environment where our sales have obviously come out below our expectations.

Adam, I'd say especially in the international markets, the leaders are being accountable and responsible, looking at their sales run rates and also costs. And I'd say within the quarter, each of those groups and business leaders made their assessments and started their moves and actions in the quarter. And we think in the U.S., that, hey, it's going to kind of improve as we go into the second half. We do think we've got some expense to control in that area, but it's going to be less or much less around any resource or staffing.

Okay, got you. And then on the -- it sounds like you moving forward with a common system to support the MRO rollout. I guess how would you rate yourselves on where we stand today on that cross-selling opportunity of selling the MRO products with your -- the legacy branch space?

I would say, there, we are in the very early innings with a lot of capability. The guys have done a very nice job in packaging and branding and positioning, their investment in some of the resources and vendor managed inventory specialists. A lot of good work going on, on beaming on accounts and targeting. So I think it's early, but we're encouraged about the prospects that we have there.

From KeyBanc Capital Markets, we have Jeffrey Hammond on the line.

Just a couple of questions on the cost side. I mean, you mentioned the investment spending. Is that something that is a higher level in the first half and tails off? Or is that just a highlight that, hey, we're investing in some of these growth opportunities and that'll continue?

I think it's a combination of those, Jeff. I think we do have some situations that happened in the first quarter that would potentially tail off, like Neil mentioned earlier within our Applied MSS platform and we did bring the 2 separate entities together under a common platform from a computer system and moved into a single distribution center from 2 distribution centers. And so we had some incremental costs for that, that will not continue. And so things like that are those onetime investments that are going to help us in a great way long-term going to market, but did have a little bit of a drag on the SD&A.

Okay. And then, it didn't seem to show up in your gross margin, but I think some of your competitors have talked about kind of a more competitive pricing environment given this kind of ongoing malaise. What are you seeing along those lines?

I'd say that it's still not a bad pricing environment. And I think clearly, we know our cost to serve and value that we offer. We look to factor that in how we help our end customers reduce their overall costs. And so we think there's margin, but there's margin opportunities as you bring better solutions, service around it in doing it. So I'd say we don't feel pressured in that and then we feel we know how to operate in the environment.

Okay. And then maybe to ask the trend question a little bit differently and I think, Mark, you gave some color on Canada and Australia individually. But can you give us a sense of what the international businesses were down in this quarter, in this past quarter versus U.S.? And maybe how those trends diverged into October?

Yes. The international business, their trends were much worse than the U.S. So in the -- my conference call comments, when I went on the geography, when you peel back those numbers and you take into account the acquisitions, you can very clearly see that in Mexico, Australia and New Zealand, our core sales were down significantly. They were down way into the double-digit percentages. And Canada was close to that. So the U.S. is experiencing a much milder sales core same-store sales declines, but it was still a decline. And obviously that's something that we continue to work on.

So that trend continued in the...

Well, I'd say for Australia and New Zealand, I think the trend has continued, right? They've had 26 consecutive months of manufacturing decline. I think GDPs at kind of 0.6%. Now that -- with that said, right, did have a little bit of macro turn. We've been active in product expansion. We've implemented 3 product ways of power transmission, product expansion and going to be over next month. We're working through what we're going to do in wave 4. So we're bringing more to our customers there, broader solutions, broader capability. There, too, right, we've worked on footprint and systems a little bit. But that has continued. And as we look at it going forward, we expect that to start to turn in the back half of our fiscal year. If you kind of look at Canada, I understand some of the variation. I mean, I think the economy has got a little bit of challenge. The Eastern provinces probably tied to the U.S. and we don't have the biggest footprint, 18 locations, maybe looking to add a location or 2 organically kind of grow into some of the area. The West, our variation is around prior projects in potash, some prior projects in oil sands, that those are now going to more traditional MRO buys at lower levels, just lower level of activity in that versus prior projects. So I think that's driving part of that. We plan to be with the team there as well. They're doing a lot on their costs, but they're also looking at their product expansion and things they can do with their customers as we move through the rest of the fiscal year.

From Janney Capital Markets, we have John Baliotti on the line.

Neil, the -- we've talked about this in the past but given this continued sluggishness, is the conversation you're having with customers are they being more strategic about how they're spending? And if they are, is there some still some de-stocking that they're kind of working through so we're not necessarily seeing their consolidation?

So I'd say it's still I think similar to the last time. I think we've got less exposure around consumables that could go fluctuate up or down and kind of stock, de-stock activity. We are having a lot of activity or discussions with our customers about consolidating spend with fewer best suppliers as they go through that. And we are growing our representation with them and we've been strong in bearings and power transmission, more focused around fluid power, particularly on the MRO side with those customers. And now with kind of maintenance supplies and solutions, we think there's more we offer with them and utilizing the vendor managed inventory technologies that they would look to. So I look in those side, they will consolidate spend, which creates great opportunity for us going forward.

Do you think that then because of what's underlying there in terms of the benefits that you're providing them that your -- the growth rates when we finally start to see some more general macro improvement, whether it's mining, machinery, pulp and paper and those industries, that we should start to see a little bit more of a disproportionate benefit with AIT?

They would. Those give us the opportunity to grow better, much better than market.

Okay. And I guess, finally, your gross margin, despite the fact that you weren't happy with the top line, it seems like you're able to, at least the gross margin line, you did a nice job there and we know that the expenses on the SD&A line had gone up. But it just sounds like based on the parameters for the year that again, you're probably would rather see higher revenues. But it seems like you're still able to keep your margins in check. Is it fair?

Yes. So I'd agree. And we think about it internally within our business, our selling teams, no one has a plan or focus to be less than prior year. So as we think about it going forward, we don't think about it as Q1 times 4. We think there's more sales, you're right on margins we think they're more due. We may think there's an opportunity to be a lot closer to that run rate on the SD&A side with some of the opportunities that we're identifying. But that's going to be the focus going forward. There's a little bit more market there. That's only going to help us.

From Sidoti & Company, we have Joe Mondillo on the line. Joseph Mondillo - Sidoti & Company, LLC: Most of my questions have been answered, but I just wanted to ask you, in this type of environment, we're seeing such slow growth. I'm just wondering if you can comment on sort of inventory management? You mentioned the inventories were up year-over-year, looks like about 12%. Just wondering just given the slow growth, how, if at all, does it change your inventory management and expectations on how inventory trends throughout the year?

Yes. So I think Mark touched on some of the things around -- ahead of the go live. And from my side, those are not really inventory swells. I mean, we're looking to have the fewest amount of in-process transactions that we can have at cutover, it's just more productive and efficient for all of our associates as we do it. So ahead of those, it can create. Those normalize out. I think for our broader inventory management, I think we've got an opportunity to look at our stratification of inventory and say, "How do we get even more productive, especially around, a, velocity types and utilize our master, our distribution center network to feed our service centers, which were basically to nightly with 24/7 coverage?" So that -- I think that's our opportunity, better leverage the distribution center network, squeeze out some of that variability around the A types, reduce that safety stock, then it's going to free up dollars that we can use either for other items or to B and C type inventory investments, which would be valued by our customers. Joseph Mondillo - Sidoti & Company, LLC: Just looking at the rest of the year, do you think inventory is going to be a source of cash? Do you think it's going to be sort of neutral? Or...

Joe, when I look at the inventory, I think that between now and December 31, we may see a small increase in our inventory levels. But from December 31 to June 30, I would expect to see decreases. And so for the remaining 9 months, my perspective is it'll be better than what it is this quarter. So the use of cash, let's say, for this growth this quarter, should turn and be providing cash for the last half of the year, may not happen in the December quarter but should happen in the second half. And I think if you look historically at our numbers long term, back in the history, you've seen some of those trends, too, because the second half of our year is also is traditionally from a seasonally perspective stronger on a sales per day perspective than the first half. Joseph Mondillo - Sidoti & Company, LLC: Sure. And then just lastly, what are your expectations for CapEx for the year?

Our CapEx, as we talked about that as of year-end numbers, it remains the same. It's around $10 million. And so we spent about, what, $1.6 million this quarter. So we're sort of on track with our budget for CapEx.

From Wunderlich Securities, we have Brent Rakers on the line.

I was hoping you could maybe start with talking a little bit more specifics on the, I guess, the magnitude of the revenue outlook change for 2014. It seemed to be, again, given the pace in the quarter and given all we know, it seemed to be a pretty significant cut. Wondering if there's more than just macro in there? Or that's entirely macro changes?

Brent, this is Neil, I'll start. And I'd say for me, really, macro. So as we looked at run rate, maybe saw a little bit of an improvement in September, obviously, we're pretty far along in October, you see a little bit more of the same in that area. So kind of talked about maybe pockets around fluid power and some of the other things being positive. And then just knowing what we're going into timing, calendar-wise in November and December that didn't see the turn. Now we fully expect some of those indices that kick in to be a little bit of help in the back half of our fiscal year and we get our traditional seasonality. So today, didn't see it and so that's really what came into the guidance.

Okay, great. And then, I think the year-over-year numbers are, I mean, really tough to gauge if you're really seeing any kind of positive inflection point. But when you look at, let's say, September versus August month or October versus September, are these following very traditional patterns for AIT right now? Or are they a bit better? Or even a bit weaker than we've seen historically there?

I'll jump in on this one, Brent. I would say for the month of September, so we saw improved sales run rates compared to July and August. As we've talked in the past, July and August traditionally are 2 of our weaker months because of plant shutdowns in the summer, folks are on vacation so the factories aren't working as hard at that point in time. So we did see that traditional bump up in the month of September. As we mentioned -- Neil mentioned earlier on the call, we've seen the -- we haven't really seen an uptick in October compared to September. So that's continuing. But our September results, so we're not positive for the month of September when we look year-over-year on a sales perspective. So we were still running slightly down.

Okay. And then just maybe a couple of housekeeping ones. The Canadian, the extra month of contribution on the other income line, there is no other income statement impact. There is no revenue contribution from that, right?

That is correct. Yes. So the entire impact is collapsed into that one line item. So what you're seeing through the income statement in, like, say, the revenue, cost of goods sold, SD&A lines, is just a pure 3 months of activity for Canada. And so this "extra month" is collapsed into a net income number and is put down into the other area.

Okay. And then just maybe another one as well. I don't know if you, Mark, if you gave the headcount number at the end of the quarter?

It's 5,132.

Okay. And then I guess just related to the headcount, and I guess also tying in some of the growth initiatives, wanted to maybe get an update in terms of maybe where the size of the sales force is now kind of on an organic basis maybe versus where it was a year ago? And what kind of success you're having both retaining and then pursuing and hiring new salespeople?

I don't have those exact numbers with me, Brent. So I wouldn't want to comment and give you conjecture on that. I will say that our HR team has continues to actively work on recruiting and where the areas at the tip of the spear. Customer-facing areas are our #1 focus.

And I'm sorry, last, last question, I guess, kind of related to the growth initiatives as well. You've talked -- you guys have talked a little bit about some of the broad lines category and obviously the goals of building that out. Is there any way to maybe quantify either what that contribution is now? So if you combine Parts Associates and UZ and some of the organic initiatives, how big that is as part of your total now? And then maybe are you demonstrating superior growth rates from those categories versus traditional categories?

Let me answer that question maybe a little differently. I would say when we purchased Parts Associates in December, we've been pleased with their results and they have been at or exceeding their projected results since then.

And at this time, we will take our last question from BB&T Capital Markets, we have Holden Lewis on the line. Holden Lewis - BB&T Capital Markets, Research Division: Just wanted to get a few more pieces kind of about the gross margin to get a sense of what you're thinking throughout the year. I mean, it sounds like you're looking for general industry pricing to be just kind of a neutral for that line. But can you comment about what you're doing internally just to sort of instill and enforce pricing discipline, which may benefit you. And can you comment on kind of what you're assuming in terms of rebates and things of that sort that could be a benefit or a hindrance to the gross margin this year?

Yes. I'll start off on that, Holden. I would say that from a gross profit perspective, as we've said all along that we think there are 2 opportunities there. And those opportunities can be categorized as the opportunity for the point of sale margin with the customer and then the other opportunity is the cost of sale part of the equation with the supplier. We continue to see opportunities in each of those areas to improve our gross margin percent. So we're focused on both to make sure we buy as good as we possibly can to help the margins. And make sure we can sell in that fashion in the best way. So what I would say is the focus on selling to the customers is as we go live on to our SAP system in the U.S., we continue to work on our pricing modules and we see opportunities for locations before they go live as they get ready to do it, as well as opportunities after they go live and with the SAP functionality and various pricing modules, things that we can utilize in SAP. So we're just working those. That's just day-to-day hard work for that. And I don't know, Neil, if you want to expand on this?

No. I'd just say, Holden, the real focus there is use the technology, the visibility of how we reduce variation of items across customers and groups. And we have now the ability where we've deployed to have realtime visibility into those transactions and have good coaching and follow-up and development on those of how we appropriately respond to the opportunities. So I think it's using capabilities that we have around variation. Mark talked about what we want to do on the buy side of the equation and then I think we have opportunities around mix and especially as we do service, repair and combine that to traditional products and product mix around maintenance supplies and solutions, those are all helpful to overall margins. Holden Lewis - BB&T Capital Markets, Research Division: Okay. I guess, on top of that, you commented obviously how you were doing some buying ahead because of supplier deals. Any of that purchasing having a favorable impact on margins this quarter? Or are you expecting it to have a benefit on margins over the next quarter or 2? What's the implication to some of the pre-buys that you've been able to execute?

Yes. As we talked in the call here, we did have some strategic buys with certain suppliers. We did mention that we did have an improvement impact from supplier support for that. We expect that to continue throughout the fiscal year. So you don't necessarily get a direct impact on your income statement from purchasing inventory. It's when you sell the stuff you get the impact. So therefore, if we can continue to negotiate better, it not only helps today, it helps for the future sales as well. So we expect to continue to do both of those. And yes, we continue to see opportunities with many of our suppliers. We want to make sure we take advantage of the appropriate ones with the proper returns.

Thank you. I will now turn the call back to Mr. Schrimsher for any closing remarks.

I just want to thank everyone for taking the time to join us today, and we look forward to talking with you throughout the quarter.

Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.