Welcome to the Fiscal 2017 Second Quarter Earning Call for Applied Industrial Technologies. My name Tara and I'll be your operator for today's call. At this time, all participants are now in a listen-only mode. Later, we’ll 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.

Thank you, Tara, 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 Web site 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 Web site 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. I will now turn the call over to Neil.

Thank you, Julie, and good morning, everyone. We appreciate you joining us today. Let me begin with the recap of our news release this morning. Our sales for the second quarter of fiscal year 2017 were $608.1 million, a decrease of 0.4% compared with $610.3 million in the same period a year-ago. Net income for the quarter was $24.1 million or $0.61 per share compared with $23.9 million or $0.61 per share in the second quarter of fiscal 2016. At the midpoint of our fiscal year, we are encouraged by the improving sales per day developments and remains focused on expanding our capabilities with new and existing customers. Furthermore, we’re pleased with the continued operational enchantments and efficiencies throughout our organization, as these actions strengthened our market position. Based on our current results and our expectations for the remainder of the year, we are narrowing our full year earnings per share guidance to between $2.50 and $2.60 per share, and our full year sales guidance to between down 2% to up 1%. Also today, we announced that our Board of Directors increased the quarterly cash dividend to $0.29 per common share. This represents the eighth dividend increase since 2010, and a cumulative increase of more than 70% in the quarterly dividend over this period. We're committed to driving the growth and continued success of Applied, generating shareholder value through our business performance, strategic acquisitions and returning cash via share buybacks and dividends. At this time, I'll turn the call over to Mark for more detail on our financial results.

Thank, Neil. Good morning, everyone. I'll provide some additional insight regarding our second quarter fiscal 2017 financial performance. Our sales per day rate during the quarter was $9.97 million 1.3% ahead of the prior year quarter and 2.1% greater than our rate in the September quarter. We had 61 selling days in the December 2016 quarter compared to 62 days in the December 2015 quarter. This resulted in a 1.6% headwind when comparing sales in the current quarter versus the prior year quarter. Acquisitions had a positive impact on sales of 1.3% during the quarter, and foreign currency impacts decreased sales by 0.5%. Excluding the effects of these items, our organic operations experienced the 0.4% sales increased in sales per day 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 26.9% fluid power products and 73.1% industrial products. Second quarter sales in our service center-based distribution segment decreased $5.9 million or 1.2%. Acquisitions added $7.8 million or 1.5% and foreign currency fluctuations reduced sales 0.5%. After tax bring in the decrease in sales days, acquisitions and currency translation, organic operations in the service center-based distribution segment experienced a 0.6% decrease in sales per day. The majority of this decrease relates to our operations that sell to the upstream oil and gas industry. Taking a closer look at our operations that sell to upstream oil and gas customers while these specific operations experienced 7% decline in sales from the December 2015 quarter, on a run rate perspective, we saw a 20% increase in sales compared to our September 2016 quarter. We expect our overall sales per day run rate to upstream oil and gas customers for the March 2017 quarter to improve when…

Thanks Mark. In summary, I'd like to reinforce the couple of points. First, our disciplined approach to driving operational enhancements and efficiencies are providing meaningful benefits across the business today, and position us for ongoing value creating as markets improve. And second, we’re committed to helping ourselves, pursuing strategic opportunities that extend our business reach, expanding our product, service and solution offering, and creating opportunities with existing and new customers. Our foundation of quality brands innovative solutions and dedicated customers service afford us great potential and room to grow. With that, we’ll open up the lines for your questions.

Thank you. We’ll now begin the question-and-answer session [Operator Instructions]. And our first question comes from the line of Matt Duncan from Stephens. Please proceed.

First question, obviously, we've seen some improvement in December from some of your peers. So I was curious if you could talk a little bit about the month-to-month sales trend that you’re seeing in the business, both through the quarter and inherent to January?

So, I would say for us, as we move through the last quarter, the sales per day trends improved from October to November, and really for us through a large part of -- a mid part of December. I think, as expected, we had some seasonal softness in comparison to around the holidays but we finished buying. And then, overall in January, I'd say the quarter trends are continuing. We're showing modest improvements, I'd say, around year-over-year 1% with a few days to go.

And then as you look at business and talk to customers, are there particular customer end-markets or geographies maybe that you would call out is that you’re more optimistic on others. Are there places where you are seeing little bit more strength than others? Just curious if you kind of break the business down for us, that would be great.

Yes, but we think about our top industries. I think this past quarter, we had a few more positive, I think 14 out of the 30, still positives around those construction related industries. I think as expected lumber wood products, building materials. I think also in cement in aggregate, and as you talked with customers, there is probably some optimism around infrastructure type projects. They don’t see all of those today, but there’s belief that there will be investments, and those will be going forward. Food has been steady and a good comparable. And then also in oil and gas and refining, as some of those related industries, just a little step-up or a pick-up in activity, and probably a little bit of optimism. And it's still early. We touched on year-over-year, we still had a decline. Sequentially, as we move through the quarter in those businesses, we had improvements. So we think, as we go through the back half of our fiscal year and into 2017, we would expect some continued improvements in those markets.

And then specifically last thing from me, just in that oil and gas business. Are there certain energy plays where you’re seeing more strength than others? My collection is that you guys are fairly strong in the Permian, and that seems to be an area where rig counts really kind of ramping back up here. So is that really where you’re seeing that business pick-up?

That would be the highest amount of activity. And obviously, rig count has started up in Canada, and cold weather will cooperate. I think that's to be determined. But out of the plays, the Permian would be the strongest.

Thank you. Our next question comes from the line of Jason Rodgers with Great Lakes Review. Pleased proceed.

Just looking at your guidance, if we think the top-end of that, it's showing basically minimal earnings growth in the second half versus a year ago. I was wondering why that is the case, given that the core operations are now showing some growth, oil related headwinds are lessening and the environment seems to be a little bit better. Is that due to just the SD&A increase? And as a follow-up, where do you expect the SD&A to be as a percentage of sales in the second half?

Let me start with that question. I think when you look at our second half of the year let's talk about the top-line expectations. Obviously, we narrowed our guidance for the full-year. But if you say the minus 2% to plus 1% from a sales guidance perspective, if you just take the mid-point of that, you are like 0.5% in a negative -- or negative 0.5%. And to end-up at a negative 0.5% for the year, we would basically have relatively flat sales per day in the second half compared to where we experienced in the December quarter, or about -- you’re just doing the math, it's 0.2% increase in sales per day for that. To get to the top-end of our sales guidance which would end-up at plus 1%, that’d be about 3% improvement in our December quarter sales per day for the remainder of the year. And so from an overall perspectives and view, we have -- you look at those numbers and compare that to what we had in sales a year-ago and they are very comparable, and so the top line is very similar with those. Our expectation on gross profit percent of revenue we mentioned in the call, is we expect to be consistent with the 28.4%-ish numbers that we had in the first half in the second quarter. So we have those numbers for that. And we’ve talked about the small step up the SD&A that’s expected in the second half of the year versus the first half of the year. So, I don’t actually have the SD&A, as a percentage of sales, for that. We look at it from gross dollar perspectives, is how it's going to flow through. And within our second half of the year, we do have some additional IT projects investments that are more weighted to our second half versus our first half for the year. Obviously, when you reset calendar year, you do have impacts on payroll taxes for FICA and unemployment taxes. And then, obviously, with the annual merit increases for associates effective at the beginning of the calendar year too.

And just follow-up the energy markets, you mentioned you’re expecting a sequential increase in the current quarter. Would you expect the magnitude of that increase sequentially, and on a year-over-year basis to be similar as what you saw here in the second quarter?

That's a hard one to call. What I will say is in our September quarter, we had 25% run-rate improvement from the June quarter, and we had another 20% improvement from September to December. And so, we just believe those improvements will continue to the magnitude of the percentages that remains to be seen.

Thank you. Our next question comes from the line of Adam Uhlman with Cleveland Research. Please proceed.

Congrats on getting back to growth, nice to see. The one area that seems to be pretty strong still is on fluid power. I was wondering if you could talk through, maybe what you’re seeing there, the pipeline of project wins that have been helping the Company for a little bit of time period, could you just maybe…

We're pleased with the business and the performance, and encouraged about our prospects looking forward. They get into those businesses. They’re doing very well in translating their value added capabilities to our customers. We're doing that with mobile and industrial OEMs, but also with large industrials combining with our service center network. With those solutions, we’re adding more technology to traditional solutions. So it's helping our customers lower their owning and operating cost and enhancing performance. Our pipeline around those type projects is larger. Our overall backlog is larger. And so across those segments, those fluid power companies are performing well. Now we a mix, we have a mix of those up, and those aspiring to be up as we work through that. And then the service center network is leveraging more and more of that capability with the key customers and that's helping us also.

And then could you talk through, you had mentioned earlier about looking to grow with existing and also new customers. Can you talk about what you’re seeing with your active account base, is it growing year-over-year yet or…

So we'd see positives around active accounts, and we would be working with our teams, not only just in pure count but also the debt with the accounts in the number of product categories. And while still early, I mean the other avenue that will help us with this is applied.com. Mid to late August launch, we’re we encouraged by the site, feedback, the customer experience. We updated for mobile applications recently in that November time frame. And so, we’re encouraged with those. I mean our view is that’s just one additional channel that customers are going to interact with us, and it supports us in service centers in that connection and along with our other channels coming across. So, our selling teams are focused on winning with the current customers, and we think we’ve got a lot of capability and room to go, but also adding new customers to the mix.

Any idea of how large that channel could be profiled within the next year or two?

You’re saying specifically in applied.com?

Yes.

I’d say for us early or may be to be determined. I think we said before, percentage of our sales coming through electronic, which can be a lot different meanings has been high teams. We expect it to grow, but it will be supportive of the other channels. We are working on additional customer experience. We’re working customers that use our systems for punch-outs with theirs, and that’s a case-by-case basis to get them up and running through that. And we’ll have some other search engine optimization and some things planned yet in the second half of our fiscal year, and as we go throughout 2017. So we’re quite not ready to quite a make a call on how big it gets. I think it just continues to develop every quarter as we go forward.

Thank you [Operator Instructions]. And our next question comes from the line of Ryan Cieslak from KeyBanc Capital Markets. Please proceed.

My first question is on pricing, I think, you said it was minimal in the quarter. But I would be curious just to hear, may be what you’re seeing here into the early part of the year, or sharing from some of your suppliers with regard to potential price increase this year, and how that compares to what we’ve seen in the last couple of years?

So, I would say that comparison to past years or the start to a calendar year, I would say, it's very similar. You’ll have suppliers that will come in with annual type increases more modest amounts. And so, we haven’t seen really a greater number or a swell of those. So, I think it has been steady as it has been in past periods at this time of year.

And then on the gross margins in the quarter, I know there were stable year-over-year but they were little bit below, or I was looking for and may be even just sequentially relative to what you typically see. Was there anything, Mark, in the quarter with regard to how the gross margin came out relative to your expectations? And I know you gave guidance for the back half for the year. But just again, anything unusual in the gross margins this quarter?

Obviously, when we look at the gross profit percent, we will have variations from quarter-to-quarter, especially when you compare this year to prior year, things of that nature. What we are try to look at and what we've talked about in our guidance is that that our expectations is that, we as an organization, should be able to deliver about 30 basis points improvement in gross profit percent year-over-year. And for our fiscal 2016, we ended up at 28.1%. Our Q1 of this year was 28.5%, and we had 28.4% this quarter. We expect that to continue for the remaining after the year. So that for the full year, we are targeting to still hit our 30 basis point improvement. And obviously, we have opportunities to do better in the second half if we’re going to work hard to try to make those things happen, but there is always pluses and minuses as you go through the year.

And then my last question is just going back to the fluid power business, really nice improvement there for you in the quarter. And I know the comp was easy, just to be curious, Neil, you mentioned the backlog and some other things going on within that business. Is that type of your run rate with regards to the year-over-year improvement, is that -- do you think it's sustainable in the back half? Or how should we be thinking about fluid power, just directionally, over the next couple of quarters?

Let me jumped in here before Neil's talk, talk to you a little bit about the math. And we believe our sales per day rates at the fluid power businesses segment is accomplishing in the December quarter. It can continue in the second half of the year. I haven’t done the math as to what that percentage change for Q3 and then Q4 for things. So, I don’t have that answer if that's going to really be a big positive or big negative.

I just know from an operating standpoint and review with the teams, there is some variation in the groups on performance, many-many doing well. Others with strong activities go only to get themselves into the positive column. As a total mix, I expect this to continue to improve as we go through the second half. We've got a lot of capability. We’re delivering it to our customers very well, creating a nice backlog of projects, we don’t perfectly control those timing of the releases. But they are encouraging, I think as we go throughout the year 2017.

Thank you. And our next question comes from the line of Chris Dankert with Longbow Research. Please proceed.

I guess just first off you've done a great job as far as managing SG&A through the downturn here. I was wondering, you are also in the streamline of business. But is there anything in particular you would be looking to call out as far as any further cost cuts, cut back and spending consolidation, or anything -- any initiatives there you would be looking to point out?

I don’t know that we've got things to call out. I mean, fundamentally, we view continues improvement and restructuring as a part of business. And then a few quarters ago, we grouped a bunch of those. But we continue to look at our site locations, and say are we in the right locations. We have multiple locations in some markets. So we've done some combination, and the outcome of that is we're in bigger facilities with more scale, more capability. And we think that helps us, and we shared a little redundancy cost from being in multiple properties. And I think across our distribution centers, our service centers and our shops, we’ll work on lean projects, identifying ways and how we reduce or eliminate that waste. Those start to come to our results. And then we say, from a central functions and supports standpoint, we have our work flow more productively, how we use some of our technology and tools, and that’s going to allow us to have a same amount of back office people for more and more volume. And investment spend as we make them go forward are going to be more forward facing resources that touch customers and help us grow. It’s not one project that we’re banking all improvements on. I think our teams across, our leaders across, are looking at how we stay cost accountable and how we can generate productivity every week, every month, every quarter.

And then I guess thinking about, it looks like we're starting to see some lay as far as on demand goes. Has there been any discussion about your adding headcount to kind of help drive more share gains? In this environment, is it a bit too early to be thinking about that?

I think, we consistently or regularly look at where we have opportunities to make investments in resources, the other that we're doing. As we work through to reduce hours on back office activity, that’s giving us forward facing capacity in people to do more things that impact and touch customers, whether they'd be with orders or with quotes, or with follow ups or technical service. So, those are helping us, and don’t necessary require a resource add; and the other that we’re doing in some of our talent initiatives on training and development something our resources to be productive but also impactful with our customers. And we talk with our customers everyday about how we generate value add with them, and so how we can get documented hard cost savings and lower there owning and operating costs of their business.

And then one more quick question, if I could sneak it in here. I guess, the top you’d used earlier has kind of been the whole cross-border tax discussion. Any kind of estimate or breakdown of what your COGS percent would be from imports?

Let me chat little bit about that, because for the most part, we buy product in country for the countries we operate in. So, in the U.S., we buy products from U.S. organizations that are providing it to us. In Canada, we buy it from their Canadian organizations. And so, we as a Company record generally don’t do importing. And that’s really done by our suppliers if they do it. And so that would just be an impact for them.

Thank you. At this time, I'm showing we have no further questions. I'll now turn the call over to Mr. Schrimsher for any closing remarks.

I just want to thank everyone for joining us today. And we look forward to talking with many of you throughout the quarter.

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