Ladies and gentlemen, thank you for standing by. Welcome to the Fiscal 2017 First Quarter Earning Call for Applied Industrial Technologies. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded, Wednesday, October 26, 2016. I would now like to turn the conference over to Julie Kho. Please go ahead, ma'am.

Thank you, Kelly, 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 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 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 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 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 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 and 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 would like to turn the call over to Neil.

Thank you, Julie, and good morning, everyone. We appreciate you joining us today. I would be remiss if I didn't start my commentary by saying we are in exciting times in Cleveland. Early in the summer, the city successfully hosted the Republican National Convention. And now it's October. We're in the World Series competing for our second sports championship this year after quite a drought. Cleveland is experiencing some great momentum and proof of what hard work and teamwork can produce. Now, turning to our results. We had a solid start to fiscal 2017 with positive impacts from operational improvements, restructuring activities and our Working Together, Winning Together approach to business, serving our customers, enhancing our value-add capabilities and delivering on our commitment to generate benefits for all Applied stakeholders. First quarter fiscal 2017 net sales were $624.8 million compared to $641.9 million in the first quarter 2016, a decrease of 2.7%. Despite the reduction in sales, net income of $27.4 million increased 12.7% from last year's $24.3 million as a result of our focus on cost controls and operational efficiencies. EPS of $0.70 increased 14.8% from last year's $0.61 per share. Before we get any further into the numbers, I'd like to spend a few minutes discussing some highlights of the quarter. We're in the early stages of our multi-phased e-commerce plan that is focused on better serving current customers and reaching new end-users. In late August, we celebrated the launch of our new applied.com e-commerce site. The transformed site includes a modern and intuitive design, enhanced search and navigation capabilities and improved order and account management. The initial response has been positive, not only in terms of customer feedback, but we're also seeing good results in site traffic, customer registrations and order trends. The reimagined applied.com is one of our five channels to market, along with the 550 plus operating facilities that are close to and connected with local customers, providing greater uptime and productivity. Our fluid power service and repair network, with over 65 locations, provides value-added services to mobile and industrial OEMs and expertise for MRO end-users. We also reach and serve customers with a fully functional electronic and printed catalog, while our Maintenance Supplies & Solutions business has on-site vendor managed inventory specialist to productively manage C-Class MRO supplies. As customers continue to consolidate their industrial spend with fewer better suppliers, we're confident more and more customers will do greater business with Applied across these multiple channels. We're also pleased to announce that our board of directors recently authorized a new share repurchase plan for up to an additional 1.5 million shares of the company's common stock. This additional authorization reflects confidence in our business strategy, our financial strength and our ongoing commitment to optimize capital allocation and drive returns to shareholders through dividends, share repurchases and accretive acquisitions. I'll now turn the call over to Mark for more detail on our financial results.

Thank, Neil. Good morning, everyone. I'll provide some additional insight here regarding our first quarter fiscal 2017 financial performance. Our sales per day rate during the quarter was $9.76 million, 2.7% below the prior year quarter and 1.4% below our rate in the June quarter. We had 64 selling days in both the September 2016 and September 2015 quarters. Acquisitions had a positive impact on sales of 2.4% during the quarter and foreign currency impacts decreased sales by 0.3%. Excluding the effects of these items, core same-store operations experienced a 4.8% decrease in sales compared to the prior year. This 4.8% decline consists of a 2% decrease attributable to traditional core operations with the remaining decrease related to sales from our operations serving the upstream oil and gas markets. We believe the impact of vendor price increases was minimal during the quarter. Our product mix during the quarter was 27.5% fluid power products and 72.5% industrial products. Fourth quarter sales in our service center-based distribution segment decreased $12.9 million or 2.4%. Acquisitions added $8.9 million or 1.7% and negative foreign currency impact reduced sales 0.3%. Core same-store operations in the service center-based distribution segment experienced a 3.8% decrease. The majority of this decrease relates to our operations that sell to the upstream oil and gas industry, as our other traditional operations had a decrease of only 1.4%. Taking a closer look at our operations that sell to upstream oil and gas customers, while we experienced a 35% decline in our sales from the September 2015 quarter, on a run rate perspective, we saw a 25% increase in sales compared to our June 2016 quarter. We expect our overall sales per day run rate to upstream oil and gas customers for the December quarter to be at or slightly better when…

Thanks, Mark. We know there are many analogies between sports and business, just as teamwork is taking center stage right now with our Cleveland sports teams, it's also clearly evident throughout Applied. In the current industrial economic environment, we know we must help ourselves through our business performance, expanding our product, service and solutions offerings and creating opportunities with existing and new customers. We're in the early innings of our fiscal year, building on our strong foundation with opportunities for growth, both organically and through acquisitions. Our talent and technology investments will also positively impact our associates and in turn, provide benefits for all Applied stakeholders. At this time, we'll open up the lines for your questions.

Ladies and gentlemen, please stand by. The conference will resume shortly. Please remain on the line. Go ahead, sir. We can hear you. Please go ahead. So our first question comes from Matt Duncan from Stephens, Inc. Please proceed with your question.

Hey. Good morning, guys. This is Will on the call for Matt. Congrats on the quarter.

Good morning, Will.

Good morning. I wanted to start a little bit more with trends in the quarter. Can you talk about how they fluctuated months-to-month and more specifically from June to July? Did you see softness around the July 4 holiday and improvements from the middle of the months forward? And then lastly, on the trends, any color that you're seeing in October would be helpful too.

Sure. I'd say on our sales per day trends – did include expected seasonal softness in July with improvements then in August and even stronger in September. Order trends for October, as expected, developing a little softer than September. However, we still have a handful of days to go. And I'd say year-over-year October is just kind of down low single-digits, which, again, is what we expected looking at the comparables. And, again, that's got still a handful of days for us to positively impact it.

Okay. And on the oil and gas, it sounds like things really improved there quickly. Can you talk about where that ramp really started and are we sustaining that sequential benefit? You did say it's going to go into this quarter that we're in now. But was it a fast ramp that you saw in the middle of the quarter or has it been happening as oil prices have moved to the $50 range and we've seen more rigs come on through the quarter?

Yeah. I would say it's been more steady and so we would expect the next quarter to be similar, maybe slightly better. We'll see how it plays out. But if we look back at August in rig count and then kind of now to October we would see improvements in the U.S. still significantly off of what it was a year ago but we see that improvement. We see a little bit of improvement in that in Canada. And so, I think, for us, it translates to sales if we think about upstream oil and gas. New drilling can still have challenges, but some greater strength out of those operating wells on the upstream production side.

That's helpful. Can we move over to operating expenses for a moment? Can you talk more about what exactly you're doing there to get such a nice leverage that we saw in the quarter? And then this next quarter, we have the traditional seasonality. But can you quantify for us the restructuring actions? How much you expect to offset the seasonal slowdown that we're going to see with fewer selling days and how you expect that to flow through the remainder of the fiscal year?

So, I guess, I can start. I would say as we look at the upcoming quarter and with the seasonality, we would expect similar, maybe a little bit of a potential increase in SD&A as we move through it. With that said, right, we continue to work our restructuring initiatives and just continuous improvement. But then as we think through or look forward to the second half, we just know we'll have some increased SD&A expenses coming at us. Some of those relate to talent initiatives that we have going on. We are working what we call our management development and planning process deep in our organization. So what we do to anticipate talent requirements, tracking the right candidates, recruiting, developing. So, in talent acquisition, we've established a talent network, new recruiting website, got a centralized recruiting team using HR analytics. In our performance management, we've got a new system. We're expanding it globally, so, for our associates to establish clear goals, timely dialogue with them and then on the talent development side new learning management system. And so we'll do the typical product and application training, but we're also doing more on skills and competencies for leadership. And so as we think then about compensation and benefits, in our second half, we'll have normal merit increases linked to this performance dialogue. And then in healthcare, I think, all in all, we've done a nice job. There continue – can continue to be challenges in that environment. But we're going to make some moves, kind of, some wellness initiatives. It will have biometrics screenings and some proactive management of expense in healthcare that near-term may have a little bit more cost, we think, going forward for the business, very good for our associates and very good for the business from a competitive standpoint. So, Q2 for us may be a little bit of increase in SD&A and then more of these coming into the second half because we'll also have some planned expense around some IT projects as well.

Great. Thank you, guys.

Our next question comes from David Stratton with Great Lakes Review. Please proceed with your question.

Congratulations on the quarter and thanks for taking the question. FX seems to be dwindling and I know that we already were told to expect it to dwindle by the end of the year. And can you give us some more insight on that? Is that still the expectation going forward?

Yes, David. That's exactly the expectation. If you look at foreign exchange rates, let's say, for September and if those would stay relatively stable through December, when we look at our overall sales, we would expect to have a 0% impact of currency translation in the December quarter. Then if you keep going on through the rest of the fiscal year, you'd actually see a small positive impact probably in the March quarter and then more flattish in the June quarter. So, our view is, for the entire year, we may end up at virtually zero on FX. Obviously, it depends upon how the rates move from today forward, but that's our perspective. We're seeing some stability.

All right. And then the tax rate where you gave the full year guidance. Is that all increase due to the new accounting requirement? And what was the bottom-line of that adjustment for the quarter?

Right. With the change in the accounting for share-based compensation, we did see that positively impact our tax rate during the September quarter by 40 basis points. And, obviously, that's a discrete item and don't know what the impacts, if any, will be on the future quarters.

All right. And then just kind of one follow-up here. The 30 groups you usually track, what were your top performers? And are you seeing any fundamental shifts taking place in those groups?

I'd say, overall, the results this past quarter were consistent with the prior, I think, 12 industries showing increases, perhaps comparables around some of the mining segments in metals and non-metallic being a little better. But real positives around construction related industries, the aggregate, cement, building materials, lumber wood products, and food stays consistent or positive as well.

All right. Thank you.

Our next question comes from Ryan Cieslak with KeyBanc Capital Markets. Please proceed with your question.

Hey. Good morning, Neil and Mark.

Good morning.

Nice quarter following a nice win last night.

Yes.

Just, first, I wanted to go back to the SD&A cost comments. And, I think, last quarter, you mentioned you were expecting that line item to be relatively flat for the full year on a year-over-year basis. And I just wanted to get a sense of – it sounds like that's changed a little bit. What's the reasoning behind maybe making some of these decisions post how you guys were thinking at the end of your last fiscal year? And, directionally, how do we think about that? Should we assume then low-single-digit type of increases for SD&A? Or just any color around that would be helpful.

Yeah. Let me jump in and try to talk more specifically about that. When we look at our second half of our fiscal year versus the first half of the fiscal year – Neil went through several bullet point items that are going to have an impact that will have a change. One other item just to mention that he didn't have on his list does include the normal restart of payroll taxes and unemployment taxes during the month of January. So, that does have an impact when you look at run rates of SD&A expense as you go throughout the year. And so, that will be an uptick in January when you compare it to our Q3 and Q4. So, when you consider all these items on an overall basis as compared to our SD&A run rate during the September quarter, we could see upwards of a 4% overall increase in SD&A during the second half of our fiscal year. Obviously, there's many moving parts and we continue to actively manage all aspects of SD&A to maintain tight cost controls. But since we called this out in our press release and we talked about it here, we wanted to sort of give you a ballpark about what that might be.

Okay. That's helpful. Then just to clarify. The 4% increase would be relative to the first half or is that year-over-year you're talking?

Relative to the first half, to the SD&A rates that we saw in the September quarter, like Neil mentioned, as we forecast the December quarter compared to September, we'll see some similarity. We do see some small upward pressures happening in the December quarter. But when you look at this compared to the second half, we could see upwards of a 4% increase compared to current run rates.

Okay. That's helpful, Mark. And then on the gross margin side, again, really nice trends we continue to see there from you guys. And it sounded like there was a small LIFO benefit in the quarter. I just was wondering if you could quantify that. And then just how to think about some of the initiatives that you guys continue to work on there and how that might impact gross margin trends sequentially into the coming quarters?

Yeah. I'll start out with that. On the LIFO side of things, we saw a little under 10 basis points, maybe 8 basis points or 9 basis points improvement from LIFO. And that's just from our normal quarterly double extension of our inventory products year-over-year and the impact that that has on LIFO. We did not see any LIFO layer liquidations during the quarter. And we don't have any layer liquidations forecast for the rest of the year either.

Then I'd say, on the go-forward, we just continually believe that we have opportunities for improvement. Our teams are focused on using the tools, using the data, make appropriate decisions, how we reduce variation across mix or groups of customers, how we reduce variation around some of the product categories. And then, mix will be positive for us. As we do well in local accounts and smaller, medium users, that's a positive on the mix. And as we grow in expansionary type products and consumables, that's a positive mix for us as well.

And, Neil, just to follow-up on that. You mentioned the local accounts. What's maybe driving that? Is there something new internally that you guys are focusing in on the way your approaching those markets or maybe just some additional color on that?

Yeah. I'd say, in each of our service center operations and teams, we go through very good account planning. And we want to represent what is in the local and industrial economy plus serve larger national strategic accounts that we will have. And we're doing a good analysis to say where are we in that position, how far penetrated are we with some of those accounts with current customers, and then what's our opportunity to grow. But we also look for new customers that we know there's available. We know we have capabilities, perhaps we've served recently or in the past, how we've picked some of those back up. And so good focus on not one or the other, large or small medium accounts. Our belief is be focused on your total local market and we'll do very well.

Okay. Great. And then the last one for me and then I'll hop back into the queue. I appreciate the color on the month-to-month sales trends. The October commentary you gave, any impact that you could think of from Hurricane Matthew? And then just secondly to that, any discussions around what you're hearing from your customers today, if their tone has changed any? And I know, in the past, you've given some commentary on backlog, particularly on the fluid power side. Any update on that would be helpful as well.

Sure. I'd say, for the weather, I know there's impact. But I think it starts to smooth out as we go through the month from a macro standpoint in that. I think, on our fluid power business, we continue to perform well. Backlog is productive. It's showing some growth to be determined on some of them when they fully release. And I think I've shared before, right. You don't wish for slowdowns in segments, but boy, they do create opportunities to link with especially those OEMs on their products and how you may help them and grow your content and their solutions. And so just for their current business, you do better. And then as they ramp, we'll grow even more so. Our backlog reflects that. As we start to combine technology into some of those solutions, add some controls to that, it's helping us in hydraulic and pneumatic applications. And then we're looking to leverage or use our fluid power capabilities in those companies with our MRO users as well. And so when there's capital projects, when they need to do major investments or overhauls, we're very capable to participate in those. And so that starts to show up in our backlog and it will flush out as those products move forward.

Okay. Thanks, guys. Best of luck.

All right. Thanks.

We have no further phone questions at this time, sir. I'll turn it over to Mr. Schrimsher for any closing remarks.

All right. I just want to thank everyone for joining us today. We look forward to talking with you and seeing many of you throughout the quarter at upcoming events. Thank you very much.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and we ask that you please disconnect your lines.