Welcome to the Fiscal 2017 Third Quarter Earnings Call for Applied Industrial Technologies. My name is Tommy, and I will be operator for today's call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Julie Kho. Julie, you may begin.

Thank you, Tommy, 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 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 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 it's 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. I'll start by providing a recap from our news release this morning. Our sales for the third quarter of fiscal year 2017 were $679.3 million, an increase of 7.3% compared with $633.2 million in the same period a year ago. Net income for the quarter was $29.5 million, or $0.75 per share, compared with a net loss of $44.7 million or $1.14 per share in the third quarter of fiscal 2016. As you may recall, our third quarter of fiscal 2016 was largely influenced by a noncash goodwill impairment charge, and a $7 million restructuring expense. Our current year third quarter results reflect a solid quarter with continued sales per day improvements across our core operations and ongoing operational excellence activities throughout the business. Entering the fourth quarter of our fiscal year, we are increasing our sales and earnings-per-share guidance. We expect fourth quarter sales to increase 6% to 8% over the prior year quarter, and earnings-per-share for our final quarter to be in the range of $0.68 to $0.78 per share. This results in full year EPS expectations of $2.74 to $2.84 per share, higher than our previous guidance range of $2.50 to $2.60 per share. We're pleased with our recent acquisition of Centennial Fluid Controls, a distributor of hydraulic and lubrication components, systems and solutions. The additional of Sentinel complements and enhances the Applied Fluid Power Network of companies, which lead the industry in innovative fluid power technology and engineered system solutions. Acquisitions remain an integral part of our overall growth strategy and we continue to develop an active pipeline of opportunities that align with our strategy, extending our business reach, enhancing our capabilities and expanding with new and current customers to benefit all Applied 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 third quarter fiscal 2017 financial performance. Our sales per day rate during the quarter was $10.61 million, 6.5% ahead of the prior year quarter and 6.5% greater than our rate in the December quarter. We had 64 selling days in the March 2017 quarter, compared to 63.5 days in the March 2016 quarter. This resulted in a 0.8% tailwind when comparing sales in the current quarter versus the prior year quarter. Acquisitions had a positive impact on sales of 0.4% during the quarter. And foreign currency impacts increased sales by 0.1%. Excluding the effects of these items, our organic operations experienced a 6% sales increase 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 29.5% fluid power products and 70.5% industrial products. Third quarter sales in our Service Center Based distribution segment increased $30.8 million or 5.9%. Acquisitions added $1.3 million or 0.3% and foreign currency fluctuations increased sales 0.1%. Excluding acquisitions and currency translation, organic operations in the Service Center Based Distribution segment experienced a 5.5% increase in sales, which is a 4.7% increase in sales per day. Turning to our operations that sell to upstream oil and gas customers. After 8 quarters of year-over-year sales declines, we experienced a 51% increase in sales in the March quarter, compared to the prior year quarter. From a run rate perspective, we saw a 18.8% increase in sales compared to our December 2016 quarter. We've now seen 3 consecutive quarters, where our sales per day rates have increased. For the fourth quarter, we expect a stable sales per day run rate to upstream oil and gas customers…

Thanks, Mark. In summary, we're pleased with the return to growth and the ongoing progress in executing our strategy. With our annual planning process underway, we look forward to building on this momentum, generating a strong finish to the fiscal year, delivering on our commitments and setting the stage for the next level of growth in fiscal 2018. With that, we'll open up the lines now for your questions.

[Operator Instructions] We'll proceed with our first question on the line from Adam Uhlman with Cleveland Research.

Hi y'all, yes, I was wondering if you could start with the sales trend that you saw in the quarter. It seems like you saw a pretty meaningful acceleration in demand by month. And I was wondering if you could maybe flush that out for us? And then related to that, maybe the trends that you're seeing so far in April?

Okay. Sure. So, Adam, I'd say the sales per day trends really improved throughout the prior quarter. January to February, February on into March. April is running positive year-over-year. Really in the projected sales range. It is down from the month of March with a couple of days to go. But I'd say, somewhat as expected, considering holiday timing, spring break season, so forth.

Okay. Got you. And then, had there been any change in project activity that you've seen? Larger order sizes? Anything along those lines that maybe surprised you or felt different from the prior trend?

No, no real big project breaks as we go through. As we think about the margin, we saw some good performance with some larger customers. We did see some projects, so we think that's got a customer mix in our margin line. We think about our margins going forward in the fourth quarter. We think it's a return to really first half performance, not what was in Q3. So we're in those reviews and discussions with the team. Fluid power performed well in the quarter, but really, we expect that to continue. If I look at their April order trends, their backlog and their activity, we expect that going forward.

And we'll get to your nest question on the line from David Stratton from Great Lakes Review.

When we look at the energy end markets, can you kind of breakout where you're seeing where that 51% came from? Whether it's broad-based or are there specific end markets where you're seeing a turnaround?

I would say, in this case, broad-based across our groups. If you think about upstream, and upstream and drilling, we saw year-over-year performance in participating sequentially. Also, upstream in our businesses and our presence on the production side did well. So really in every one of those U.S. plays a little bit better. But the greatest activity in West Texas, and in particular, that Permian basin. In Canada, we've got less rig activity going on right now. I think it's below 100 operational rigs. So we think about it from February till now, down, down a meaningful number. But it is the seasonal aspect of operating in Canada. So with the spring thaw going on, there is less operational rigs. That'll continue through the spring thaw, really through the end of May. Roads will solidify. Activity will pick back up there as well. We're pleased that it's on really all aspects of upstream for us in many of the markets that we have a good position in.

And I'm looking out, are these changes, as far as you can tell, here to stay? Or is this a one-time thing?

I may have to ask you -- I may have to ask you on those forecasts. We know where the price of oil is at. We know inventory level was down a little bit. So I think this level of activity can stay for a period of time and we'll know how to operate. Obviously, if it gets better, we'll do better. And if it gets challenging, we know how to operate at that level as well. So I think our look forward is, in the near term, it's more at this level and then hey, we'll see how the broader economy develops.

Great. And then can you really quick touch on the 30 industries you track?

Sure. So in the past quarter, we would have had 18 of those industries showing increases. So oil and gas and petroleum refining would've been a couple of those. Machinery OEMs, industries connected around the construction, cement, aggregate, building materials. Food would would've been in that group and obviously, a few others. So I think, in total count, more were up this time period. So encouraging as well.

And we'll proceed to our nest question on the line from Steve Barger with KeyBanc Capital Markets.

This is Ryan on the phone on for Steve. Thinking into 2018, if we start to see this mid-single-digit growth, how should we think about incremental contribution margins going forward?

Well, I'll start a little bit on kind of we're in our planning process right now. So for us, say to be determined what it's going to look like on the volume side. But we will be working through that. We've said we expect that we can continue to lever very well when we demonstrate and get growth into the business. So hey, for us, it's early for us to be calling fiscal '18 as we go through this planning cycle.

But I think, like Neil said there Ryan, the highlight here is that we do believe that positive organic sales increases lever very well to our bottom line. And I believe that's exactly what we showed on our third quarter results today. And so if we continue to have positive results on a sales top line going forward and we should continue to see nice leveraging.

All right. Got you. And then were there any product lines that kind of stuck out to you guys during the quarter where you saw some good growth come from?

I think, really, good broad-based performance in our core products. We're focused on making progress in our expansionary products, leveraging kind of all of our channels to market, our service center-based, applied.com, working well with the service centers with our vendor-managed inventory specialists to grow Class C consumables. And then, hey, obviously fluid power did well. And I think there, our focus is, especially with the service centers, around the energy saving products of fluid power. So where we can help customers lower their operating cost and really have a nice sustainability impact for them as well. And then, I think in the fluid power company's business, it's just combining technology, electronics, software to traditional hydraulics to help those mobile and industrial OEM customers.

Okay. Good. Good. And then just thinking about your service center segment. I mean how do you guys view Amazon Business as a competitor? And how do you feel about them longer-term in the space?

Them as in those products or?

Yes. Yes, within the products you sell in the Service Center Distribution Segment.

Or maybe if you're just asking specifically across those fluid power companies. Hey, we love the space. We're doing really well and order trends are good. Backlog is productive. So we're working very closely with those mobile and industrial OEMs to really grow our content, help improve their products and solutions. And then on the industrial side, we've got a lot of service and repair capability that we can connect to those industrial customers to help solve their needs, just like we do on the bearing and power transmission side.

[Operator Instructions] And we'll get to our next question on the line from Chris Dankert from Longbow.

I guess, last quarter you were calling the expectation for about a 4% increase in SG&A back half versus first half. Looks like with the improved in demand, you guys have accelerated that a bit. Now it's closer to a 6%, 7% increase versus the first half. I guess how, do we think about SG&A in the first half of the year? And then have you seen any labor tightness trying to bring more salesmen on board?

Let me start with that from the overall SG&A perspective, and then we can dive into the actual sales rep activity. When we moved into the second half of the year, we did have merit increases for associates at the beginning of January. With our improved performance, we do have compensation incentives that are doing better, which is a good thing, from that perspective. That tied with our improved performance and so, that's impacting SG&A. Because we do have a nice blend of base compensation versus incentive compensation that flexes up and down with performance. So those were the primary trends. And so, your initial thought that gee, sales increase drove a little bit higher SG&A increase is true. And that really is primary related to the incentives perspectives. But we're still running on an overall total headcount of about 125 fewer people, if you exclude the acquisitions, than we had a year ago at this point in time. And so that continues to help us when we manage our SG&A headcount. So as we think about it going forward and as we're in our planning cycle, we'll remain disciplined on our SG&A. We, like always, will be looking for the opportunities for the right adds and the investments. Our preference on those will be forward facing, customer facing resources. And we'll be looking at just right productivity initiatives that help us operate productively, effectively and that we can handle higher rates of volumes, higher level of transactions with similar inside and support staffing levels.

Got you. And then I guess, just thinking about the comment to reduced inventory. I guess, given the better demand trends, is that just a matter of really levering the SAP investment and some of the efficiency initiatives? Because I guess I would have expected maybe not necessarily restocking, but an uptick in working capital given the improving demand?

I'd start. And I'd say we continue to look at connect and work with our suppliers, who in many instances have their own continuous improvement initiatives, work their cycle times to how we can take excess days or speed up in that cycle to improve inventory levels. And so, it gives us the opportunity, in some cases, to stock less or be more productive on high volume, high turning items and we can use some of those dollars in lower moving items that can be key to our customers, when they really need them. So part of this is our focus and our effort and our coordination with suppliers. And then I think, a little is a natural move down from December calendar year end activities. And we knew, we had the opportunity that we would have second half improvements. And that's what we're seeing coming, even with some higher increased sales levels.

And I'll just add on to this as well. When we think about our inventory turnover, our inventory turnover rates using a FIFO perspective. We see opportunities for improvement. The reason we see those opportunities is exactly what Neil was talking about, about how we're managing the supply chain internally as well as with our suppliers to enhance those. When we see the opportunity to improve turnover through the sales increase percentages that we're experiencing, we look back and see what inventory turnovers we had several years ago. And we had inventory turnover levels of around 4.5 terms on the FIFO basis, and we're right now a little under 4. Some of some of this is recapturing some of those turns that we had in the past.

And we'll proceed to our next question on the line Garo Norian with Palisade Capital Management.

Just following up on the inventory question. Are you guys working I guess closer with suppliers, maybe given them better visibility into the sell-through, is that part of the improvement?

I'd say, it's a lot of how we can work on delivery times and that we receive and take it through our facilities, our division centers more productively and then on in turn to our service centers. So it's much less on in-customer transaction and those type visibilities, just looking at where the hands-offs occur, and that we're doing them faster.

Got it. And are the prices from suppliers starting to reflect kind of some of those raw material increases that have been moving through the system? Or where does pricing kind of stand?

I'd say from a year-to-date standpoint, we haven't seen so much. We started -- we were seeing increases from suppliers. So I think, as we work through calendar 2017, we'll see a few more supplier increases and likely have some moderate inflation as we go forward here. As we look back at the results and the impact, prices has not been so large. But we think going forward in that time period, it will start to show up more.

Got it. And then I know we're early on, on seeing improvement in the business and end markets from a top line perspective. But are there any needs, potential needs for locations? Any kind of reversals of some of that consolidating activity that you had to do over the last couple of years?

No, as we think about our locations, one, we have kind of over 470 service centers and 65 plus fluid power service and repair. We like our number but we'll continue to evaluate. We think it's important to be close to customers, having our account managers that can go into the facilities, help them lower owning and operating costs. Especially in brake-fix MRO, we think it's important to be close to customers. So we really our prior moves were really, how would we combine some locations, strengthen them, maybe combine the number of resources that we would have in the facility. So even as we worked through those, we did not pull back from markets and as I think about our business activity now and planning going forward, we will likely have some combinations that we'll be making in facilities and markets, which will help our productivity. And we will be evaluating markets that we should be increasing our presence in. So ...

And at this time, I'm showing we have no further questions. I will now turn the call over to Mr. Schrimsher for any closing remarks.

I just want to take opportunity to thank everyone for joining us today, and we look forward to seeing many of you throughout the current quarter. Thank you, very much.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you, for participating. You may now disconnect.