Applied Industrial Technologies, Inc. (AIT) Q4 2018 Earnings Conference Call Transcript

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Applied Industrial Technologies, Inc. (NYSE:AIT)
Q4 2018 Earnings Conference Call
August 10, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the fiscal 2018 fourth quarter and year-end earnings call for Applied Industrial Technologies. My name is Mariamma, and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you wish to ask a question at that time, please press * 1 on your telephone keypad. Prior to asking a question, lift your handset to ensure the best audio quality. Please note, this call is conference is being recorded. I will now turn the call over to Julie Kho. Julie, you may begin.

Julie Kho — Corporate and Media Relations

Thank you. And good morning, everyone. This morning, we issued our earnings release and supplemental investor deck detailing latest quarter results. These documents are available in the investor relations section of 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 provided in our press release and 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 addition, this conference call includes the use of non-GAAP financial measures.

These measures are explained in our press release and in the supplemental presentation material and are subject to the qualifications referenced in those documents. 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 Dave Wells, our Chief Financial Officer. I will now turn the call over to Neil.

Neil Schrimsher — President and Chief Executive Officer

Thank you, Julie. And good morning, everyone. We appreciate you joining us. I’ll begin with a brief summary of results for the quarter and full-year. Our net sales for the fourth quarter grew 31.7% to $897.7 million from $681.5 million in the same quarter a year ago. Net income for the quarter was $40.4 million or $1.03 per share compared with $52.9 million or $1.34 per share in the fourth quarter of fiscal 2017. As noted in our press release and supplemental financial deck, prior-year results include a favorable, non-routine tax benefit of $22.2 million, or $0.56 per share. Excluding this benefit, fourth quarter fiscal 2018 EPS increased 32.1% compared to the prior year. EBITDA for the quarter was a record $87 million or 9.7% of sales, up 48.9% from the prior-year quarter. Net sales for the full year were a record $3.07 billion, an increase of 18.5% compared with $2.59 billion last year. Net income for our full fiscal year was $141.6 million or $3.61 per share.

Adjusted EPS, exclusive of $0.13 per share one time, FCX transaction-related charges was $3.74 per share. This represents a 31.6% increase compared to adjusted EPS of $2.84 in fiscal 2017 which excludes the non-routine tax benefit mentioned previously. Overall, fiscal ’18 proved to be an exciting and successful year, with our 95-year anniversary celebration as the backdrop, we are very pleased with our record financial performance and continued progress in enhancing our differentiation as a value-added industrial distributor through our dedicated associates, enhanced business systems, strategic investments, and best-in-class suppliers, we continue to strengthen our capabilities, including our critical core products offering, expanding value-added services, leadership in engineered fluid power and flow control solutions, growing geographic reach, and channels to market. Additionally, our FCX Performance team members continue to demonstrate strong customer focus and engagement, and we are extremely pleased with our progress today.

Across our organization, we are excited for the new fiscal year and the opportunities to drive continuous improvements and further grow our business with current customers and new end-users. Now, at this time, I’ll turn the call over to Dave for a closer look at our financial results.

David Wells — Vice President, Chief Financial Officer and Treasurer

Thanks, Neil. And good morning, everyone. I will begin with further details on our most recent quarter financial performance and then briefly further recap full-year 2018 results. After that, I will move on to provide some insight on our fiscal year 2019 outlook. As a reminder, the supplemental investor deck issued this morning, recapping key financial performance talking points is available for additional information. As Neil mentioned, sales for the quarter ending June 2018 increased 31.7% over the prior-year quarter. Organically, our top-line grew 9.3%, inclusive of a 1.1% benefit from the one half incremental selling day in this year’s fourth quarter. Acquisitions increased sales by 22.1% while the impact of foreign currency exchange added another 30 basis points of favorability. Excluding the impact of the FCX Performance acquisition, sales per day increased 2% sequentially from the quarter ending March 2018.

Fourth quarter sales in our service center based distribution segment increased by $58 million or 10.2% year-over-year. Acquisitions within this segment increased sales by 20 basis points. And foreign currency fluctuations had a favorable impact of 30 basis points. Excluding the impact of acquisitions and currency translation, sales increased by 9.7%, driven by an 8.5% days adjusted organic increase and 1.2% benefit from the incremental half business day in this year’s quarter. Moving to our fluid power and flow control segment, fourth quarter sales increased $159 million or 133.8% as compared to the prior year. Acquisitions within this segment, namely, the addition of FCX Performance generated 126.1% of the year-over-year segment growth. Excluding the impact of acquisitions, the segment generated 7.7% organic sales growth for the quarter, inclusive of an 80 basis point benefit from the differential and selling days year-over-year.

From a geographic perspective, sales in the quarter for our US operations were up $199 million, or 34.4% year-over-year with acquisitions driving an increase of 25.9%. Excluding acquisition impact, sales from US operations increased by 8.5%, comprised of 7.7% days adjusted organic growth and .8% benefit from the incremental half sales day in the quarter. Sales from our businesses outside of the United States, which increased 17% versus the prior-year quarter, grew 14.2% organically with strong performance across all geographies and represented a balance of the increase over prior-year sales. Moving on to gross margins, our gross profit percentage for the quarter was 29.4%, up 60 basis points year-over-year. Our first full quarter of FCX acquisition results drove 80 basis points of margin expansion year-over-year. Excluding the accretive benefit of the FCX acquisition, gross profit margin for the core business was 28.6%.

While this was 20 basis points lower than the prior-year quarter, I will remind everyone that our prior-year fourth quarter comp included a net 50 basis point benefit to gross margins from LIFO Layer liquidation. We are pleased that our gross margin performance, excluding FCX results, improved 28 basis points sequentially, driven by our various margin improvement initiatives. Additionally, if we look at the last two quarters of fiscal 2018, our second half results reflect a ten basis point expansion in organic margins, despite the LIFO income benefit recognized in the prior year. Our selling, distribution, and administrative expenses on an absolute basis increased $45 billion or 30.6% when compared to the same quarter in the prior year. Acquired businesses accounted for 26.9% year-over-year growth while fluctuations in foreign currency rates increased SG&A for the quarter by 40 basis points compared to the prior year quarter.

Excluding the impact of acquisitions and currency translation, SG&A spend for the quarter increased only 3.3% year-over-year, driven primarily by the impact of annual merit increases and higher performance-based incentives. Resulting EBITDA for the quarter was $87 million or 9.7% of sales. Excluding the impact of the FCX performance acquisition, despite the tough year-over-year gross margin comps, leverage of incremental volume and continued diligence in SG&A spend helped to drive a 19.4% flow through to pre-tax income on incremental year-over-year volume in the legacy business. In line with our guidance, the effective income tax rate was 33% for the quarter, as we completed the final remeasurement of certain deferred taxes from the blended 28% fiscal year 2018 rate to the go-forward 21% US statutory rate. We now expect our effective tax rate for the upcoming fiscal year 2019 to be in the range of 24% to 26% as we fully step down to the lower US statutory rate.

Our consolidated balance sheet remains strong with shareholders equity of $815 million. Following the culmination of the FCX Performance transaction and borrowing to fund the acquisition, our capital allocation priorities remain focused on delevering and continuing to increase shareholder value by maintaining our track record of consistent dividend payments. As such, there was no share repurchase activity in the quarter, and we extinguished another $68 million of the initial $112.5 million revolver draw taken to fund the FCX Performance acquisition, bringing our outstanding revolver draw to $19.5 million and leverage to 2.9 times EBITDA under the current credit facility covenants. Cash generated from operating activities was $99.4 million for the quarter, $13.3 million improved from the prior-year quarter. Fourth quarter results demonstrated continued traction generated by operating working capital management initiatives.

Strong quarter performance include the benefit of a $15 million reduction in inventories and 280 basis point reduction in past-due customer receivables in the legacy business. To recap, our fourth quarter performance reflects success and continued execution of our strategic priorities. Looking at the resulting fiscal year 2018 highlights as context for our fiscal year 2019 guidance, we had record revenues of $3.1 billion, up 18.5%, inclusive of the five months of FCX Performance results and up 8.3%, excluding the acquisitions. Continued execution on gross margin expansion initiatives, combined with leverage of our systems investments and operational excellence initiatives grew 18.5% flow through to pre-tax income on incremental volumes exclusive of the impact of the FCX acquisition. EBITDA for the year of $278 million was 9% of sales, inclusive of a 20 basis point dilutive impact of one-time FCX acquisition charges.

Finally, fiscal 2018 adjusted EPS of $3.74 per share, which excludes the $0.13 dilutive impact of the FCX acquisition one-time cost increased 32% year-over-year as compared to fiscal 2017 adjusted EPS of $2.84 per share which excludes the non-routine tax benefit previously noted. Our 2018 was a record year on many fronts. And we look forward to building on this momentum as we move into fiscal 2019. Transitioning now to our outlook for fiscal 2019, as noted in our press release, we are forecasting a sales increase in the range of 16% to 18% and expect earnings per share in the range of $4.48 to $4.68 per share. Full-year impact of the FCX acquisition coupled with growth in the new flow control space drives a portion of this growth. Excluding FCX, sales from our legacy operations are forecast to be in the range of up 5% to up 7% year-over-year.

Our EPS guidance reflects a year-over-year increase in the range of 24% to 30%. The non-repeated one-time costs associated with the FCX acquisition of $0.13 per share coupled with approximately $0.20 per share benefit from an inclusion of a full year of FCX results generate a portion of this year-over-year increase. The fiscal 2019 forecast also reflects an approximate $0.30 per share benefit from the step down to the new US statutory tax rate from the fiscal 2018 blended rate coupled with an operational improvement of $0.24 to $0.44 per share, driven by continued sales growth, margin expansion and productivity initiatives, as well as execution on FCX acquisition synergy opportunities. As previously noted, we anticipate that our effective tax rate will be in the 24% to 26% range for the 2019 fiscal year.

Cash provided from operations in fiscal 2019 is projected to reflect further traction from our collections and inventory initiatives, coupled with the incremental benefit of the lower US tax rate, resulting in anticipated cash generated from operations in the range of $230 to $250 million. Capital expenditures are expected to be in the range of $26 to $28 million for the coming year. Combined non-cash depreciation and amortization expense will total nearly $88 million for fiscal 2019.

Additionally, full-year interest expense is projected to range from $43 to $44 million. Our capital allocation priorities will continue to focus on delevering and continuing to increase shareholder value by maintaining our track record of consistent dividend payments as well as executing on accretive acquisitions in our strategic served markets. In summary, we’re pleased with our progress in fiscal year 2018 and look forward to continuing that momentum and execution into fiscal 2019. With that, I will now turn the call back over to Neil for some further insight on our longer-term strategic vision and projections along with some final comments.

Neil Schrimsher — President and Chief Executive Officer

Thanks, Dave. At 95 years, Applied is well positioned as the technical MRO distribution leader. With our working together, winning together mindset, we remain committed to building on our strong foundation and leveraging our expanding capabilities to further generate benefits for all our stakeholders. Our collective execution of our long-range strategic plan will propel us forward to achieving our new, five-year, 2023 objectives including growing revenues to greater than $4.5 billion through mid-single-digit organic growth and accretive acquisitions, adding an average of $100 million in sales per year, resulting in compounded growth approaching 9% over the five-year strategic plan horizon and improving our EBITDA margin to greater than 11% through sales and margin expansion, including continued focus on accretive value-added services and expansionary products, leveraging our system investments and operational excellent initiatives and continuing our cost discipline.

With our long-range objectives in mind, we are maintaining continuity in our five strategic elements to generate profitable growth. Core growth: growing our core sales and marketing capabilities across our 600 plus locations, leveraging our local presence to expand with existing accounts and new customers. Product expansion: driving results beyond our base offerings with opportunities across all our product groups including maintenance supply and solutions and value-added services. Fluid power and flow control: building upon our North American leadership, leveraging our value-added services and expanded product offering for OEM customers and gaining increased share of MRO end users. And operational excellence: driving continuous improvements across the business and realizing the full potential from our enhanced systems. And finally, acquisitions: staying active and extending our business reach and expanding Applied’s capabilities to serve industrial customers in our geographic markets.

We are confident we will continue to build upon our strong foundation and our accelerating momentum, generating ongoing success and value for all our stakeholders. With that, we’ll now open up the lines for your questions.

Questions and Answers:

Operator

Thank you. We will now begin the question and answer session. If you would like to ask a question, please pick up your handset and press * and then the No. 1 on your telephone keypad. If you would like to withdraw your question, press the # key. We’ll pause for just a minute to compile the Q&A roster. Your first question comes from Adam Uhlman with Cleveland Research. Your line is open.

Adam Uhlman — Cleveland Research Co. — Analyst

Hey, everybody. Good morning. Congrats on all the new records.

Neil Schrimsher — President and Chief Executive Officer

Thanks, Adam.

David Wells — Vice President, Chief Financial Officer and Treasurer

Thanks, Adam.

Adam Uhlman — Cleveland Research Co. — Analyst

I wanted to start with the guidance for this next fiscal year. Could you talk about your expectations for your organic gross margin performance and how we should be thinking about the FCX business and their gross profit performance?

Neil Schrimsher — President and Chief Executive Officer

Sure. Speaking of starting with the organic gross margin performance, we had very good traction as we looked at the back half of 2018, despite some of the material cost increases as we caught up with those. We would expect, and as we’ve talked about, continue to target ten to 20 basis point margin expansion in the core business. Then you think about the accretive benefit of the FCX results. We had socialized a $0.10 to $0.20 per share EPS impact as we talked about the ’19 projections for FCX as we culminated the transaction. We’ve talked I think in the past about nine or ten or — lower amortization around the midpoint assumption there. So, we’re seeing some improved volume and some margin performance right at the target expectations with the mid, 33.5% to 34% on the FCX margins which, here again, mixes us up a bit, driving to expectations for the EPS for the FCX contribution between the amortization true up and actual results there plus the slightly improved performance in the 26% to 27% EPS range.

Adam Uhlman — Cleveland Research Co. — Analyst

Okay. Gotcha. And then within that, I think I heard you say that amortization’s expected to be $88 million for this next fiscal year. Did I hear that correctly?

[Crosstalk]

David Wells — Vice President, Chief Financial Officer and Treasurer

That’s a combination of depreciation and amortization. Both D and A.

Adam Uhlman — Cleveland Research Co. — Analyst

And that compares to the $16 million that you had in the fourth quarter?

David Wells — Vice President, Chief Financial Officer and Treasurer

So, we had $32 million of amortization. I’m sorry. I’m looking at a full-year number. Yes. That’s correct. So, fourth quarter got —

Adam Uhlman — Cleveland Research Co. — Analyst

Why would amortization be stepping up so much this next year?

David Wells — Vice President, Chief Financial Officer and Treasurer

Okay. So, the $88, here again, was depreciation and amortization.

Adam Uhlman — Cleveland Research Co. — Analyst

Okay. Gotcha. I’ll follow-up offline on that. Thanks.

Operator

Again, it is * 1 on your telephone keypad to ask a question. Your next question comes from Ryan

Ryan Cieslak — Northcoast Research — Analyst

Hey. Good morning, guys.

Neil Schrimsher — President and Chief Executive Officer

Good morning, Ryan.

David Wells — Vice President, Chief Financial Officer and Treasurer

Morning, Ryan.

Ryan Cieslak — Northcoast Research — Analyst

I just wanted to start it off on the organic growth. Coming off of, again, another nice quarter of 8% organic growth on a daily basis. So, just maybe if you can talk us through how initial first quarter trends are looking. I know comps are being more difficult. But any thoughts on how maybe July and early August has shaped up for you guys for the organic growth standpoint?

Neil Schrimsher — President and Chief Executive Officer

I’d say July has really continued as expected, upper-single-digits increased year-over-year. Sequentially, some step down as we get fiscal year-end and quarter year-end comparisons. And also, considering business seasonality and planned shutdowns that can occur in July and August, really starting off as expected to for the handful of days that we’re into the month.

Ryan Cieslak — Northcoast Research — Analyst

Okay. Great. And then Neil, fluid power continues to show us some nice growth. But it was below what I was looking for here in the quarter. I think maybe below just normal sequential trends as well. Anything happening in this quarter or something that you would call out maybe relative to your expectations that has stood out to you that maybe wasn’t as strong as you would have thought? Or is there something I’m missing there?

Neil Schrimsher — President and Chief Executive Officer

I think maybe Dave will touch on — and we’ve talked in the past on some of the segment changes and classifications that maybe influence that comparison. As I look at the fluid power business within the period, I see double-digit growth with those operating companies. 10% plus. I would say over 80% of the groups are performing at or exceeding their plans. If I look at the backlog year-over-year, it’s up 20%. And so, they would have finished the year teens positive year-over-year and continuing momentum going in. And if I look at the projects and the work that we’re doing for our customers, we’ve got a lot of active involvement in how we’re enhancing precision machine control and also, energy-saving type sustainability projects that help on the MRO aftermarket side for customers as well. So, hey, we like where we’re at and the progress that’s going on in fluid power.

David Wells — Vice President, Chief Financial Officer and Treasurer

And just to elaborate, Ryan, we’re getting a little bit of noise from the prior-year proforma work as we cleaned up the statement. So, as we would look at the fluid power business year-over-year from the business reporting, management reporting standpoint. As Neil indicated, double-digit growth. And still looking at the backlog position, it is up 20% year-over-year. So, still very solid fundamentals there against the tougher comps.

Ryan Cieslak — Northcoast Research — Analyst

Okay. And then the last one for me, and I’ll hop back in. Any update on how to think about the targets and synergies you guys laid out earlier in the year with FCX? I think it was around $30 million or so. Maybe how to think about how that flows through here into fiscal ’19? And maybe just again, some progress or update on progress with what you’re seeing there. That’d be great.

David Wells — Vice President, Chief Financial Officer and Treasurer

You bet. So, I think we had socialized $30 million, to your point, of synergies over the five-year horizon. We had talked about those not being equally weighted. So, 40% or so coming in the first half of that five-year, 60% and the back half. I think we’re pleased. We’re tracking to expectations. I think, as we talked last quarter, we’ve got the A-team integration and synergy workstreams. And continue to be very pleased with the energy and the traction on the execution there. So, I think we’re right in line with expectations there. You’re seeing that flow through to some improvement in terms of the ’19 EPS, as I indicated, contribution from the FCX business.

Ryan Cieslak — Northcoast Research — Analyst

Okay. Thanks, guys. I’ll get back in line.

David Wells — Vice President, Chief Financial Officer and Treasurer

You bet.

Operator

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

David Stratton — Great Lakes Review — Analyst

Good morning. And thank you for taking the question.

David Wells — Vice President, Chief Financial Officer and Treasurer

Good morning.

David Stratton — Great Lakes Review — Analyst

When we look at your 30 industry groups, I was wondering if you could give some detail there on what you’re seeing. And then also, broader speaking, some of the puts and takes of the end market uptake you’re experiencing right now.

Neil Schrimsher — President and Chief Executive Officer

Yeah. If we look back at the quarter on those industries, we would have had 22 with increases, those increases. I think up a little bit from the prior quarter. Probably continued positives that we would see around primary fabricated metals, oil and gas, aggregate, machinery OEMs, chemicals and food. So, I think consistent those that are doing well, continue with strength. And maybe it’s broadening in the sectors. And if I think about industrial production overall, I think we’re seeing those increases really broadly across all of those segments. And we’re seeing that in our results.

David Stratton — Great Lakes Review — Analyst

And then can you break out any impact that you’re seeing from either currently enacted tariffs or maybe future tariffs that have been talked about in the news as of recently? Any impact there that we should take into consideration?

Neil Schrimsher — President and Chief Executive Officer

Yeah. I don’t know if I can touch on all the recent ones. At times, it can be a little hard to keep up. But I would say with what we are seeing, I think we’ve done a very effective job. And I think that’s reflective in our margins as we look back and as we move through this portion of the calendar year. No doubt, we need suppliers on the 232 tariffs on steel and aluminum. We see impact on some direct importing materials or indirectly on pricing around US produced commodities. And then on the 301 tariffs of those 800 plus different groups, that would be impacting some of our supplier base. Directly, ourselves, we’re a very low direct importer from China. But we see that coming in. And I think we’ve done an effective job recognizing that inflation in products and in ourselves to the marketplace.

David Stratton — Great Lakes Review — Analyst

Great. Thank you. And then one final. And I don’t know if I missed this on the call. But did you give a CapEx projection for the year?

David Wells — Vice President, Chief Financial Officer and Treasurer

Yes, we did. $26 to $28 million is what we had stated as the CapEx expectations for the year.

Neil Schrimsher — President and Chief Executive Officer

And just color behind the number, I like the deployment. We’ll have some general things at times I don’t like. But a lot of that investment will be around shops and services that enhance productivity or be around technology and systems, advancements that further help productivity, I think, which drives our overall competitiveness. And so, those things are contributors to how we continue to manage SG&A effectively.

David Stratton — Great Lakes Review — Analyst

Great. Thanks for the extra insights.

Operator

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

Steve Barger — KeyBanc Capital Markets — Analyst

Hey. Good morning, guys.

Neil Schrimsher — President and Chief Executive Officer

Morning, Steve.

David Wells — Vice President, Chief Financial Officer and Treasurer

Morning, Steve.

Steve Barger — KeyBanc Capital Markets — Analyst

So, I was trying to write down all those numbers as you went through them. But if I got it right, you’re thinking free cash flow is maybe $230 million. Is that what it works out to?

David Wells — Vice President, Chief Financial Officer and Treasurer

You’re in the range there. We talked $230 to $250 of operating cash flow, $26 to $28 of CapEx. So, depending on how those, Steve, fall within the range, we could broach the $230. But that’d be at the high end.

Steve Barger — KeyBanc Capital Markets — Analyst

Yeah. Obviously, a big number. I’ve been trying to just do the math here. Given the cash on hand and the $230 million of free cash flow, you’re gonna be down at maybe two times net debt to EBITDA at the end of next year if I’m doing the numbers right. Does that mean you’re ready to think about acquisitions again? Or how do you think about the balance sheet and the use of cash?

David Wells — Vice President, Chief Financial Officer and Treasurer

Yeah. The interest projection I gave you does assume that we would stay in the tier that we just tipped to as we went to the 2.9 times net leverage under the credit facility. So, we would continue to, as we’ve talked, look at these bolt-on acquisitions in line with our strategic objectives. And really, as we’ve talked, keeping the balance sheet being put to use and ultimate long-term target of mid-twos in terms of the leverage ratio going forward to strike that balance.

Neil Schrimsher — President and Chief Executive Officer

So, I’d say, Steve, we have continued to be active in the M&A. We work our priorities. We have a productive pipeline. And we’d have prospects or targets in ongoing, continuing dialogue but also valuation and diligence as well. So, we haven’t paused. We’ve remained active. And as we go through this fiscal year, we expect to close acquisitions.

Steve Barger — KeyBanc Capital Markets — Analyst

Okay. Just thinking about the guidance. The implied incremental operating contribution margin for the year I think is in the mid- to high-9% range. Are there any one-time costs or higher costs that you’re not thinking about being able to capture embedded in that guidance? It just seems a little conservative, given the growth.

David Wells — Vice President, Chief Financial Officer and Treasurer

No, you’re getting it. We’re still lapping because, if you stop to think about it, there’s seven months of growing amortization expense with FCX embedded there. So, if we look organically, we’re mid-teens in terms of the core AIT business. If you look at —

[Crosstalk]

David Wells — Vice President, Chief Financial Officer and Treasurer

And that does include SG&A stepping up a bit more beyond just a marriage to 3.6% as we think about making some growth investments on customer-facing resource to drive some incremental volume and pursue some opportunities that we see. So, it does allow for some of that growth investment on the SG&A side and the ten to 20 basis points of core margin expansion. As we think about the FCX business, I think the best way to think about it — if we look at the incremental EBITDA year-over-year there, seven — you’ve got full 12 months plus the five. Actually, 17. It’s only 5% flow through on the EBITDA contribution. So, once we lap the amortization costs, obviously, we’re gonna see that flow through mix up as we talked about last quarter with the more accretive margins that we see on the FCX side of the business.

Steve Barger — KeyBanc Capital Markets — Analyst

Yeah. For the organic growth in the quarter, how much was price? And how much is built into the outlook, whether the 5% to 7% or the 17% total sales growth?

Neil Schrimsher — President and Chief Executive Officer

So, we touched on some of the inflation that we’re seeing before and for us. And I think we’ve said it. So, we’ll say it again. In our break/fix MRO, what would have about a third of our SKUs that repeat over the year so that you can get a real tight price measurement in that. Two-thirds, either because of break/fix or they’re part of a sub-assembly or part of equipment going into a service, you may not have a perfect match coming in. But with that said, our belief is we’ve had price input to sells at about 1.5%, probably not 2%. As we think going forward, it continue at that level. Or it might increase. And I think that, as we think about over the full fiscal year, will play out. We just believe today we’re performing well. And if it increases, we know how to operate. If it moderates, then we know how to operate in that environment also.

Steve Barger — KeyBanc Capital Markets — Analyst

Understood. Very good. Thanks.

Operator

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

Ryan Cieslak — Northcoast Research — Analyst

Thanks, guys. Just a couple follow-up questions for you. I wondered if you could just maybe touch on the oil and gas businesses following the 2014 acquisitions and where they stand today as a percentage of your revenue. Obviously, today, I would think that those businesses contributed some nice growth for you guys on an organic basis in fiscal ’18. What’s the expectation that’s embedded in your guidance for those businesses going into ’19 at this point?

Neil Schrimsher — President and Chief Executive Officer

Yeah. Back at the quarter, they would have performed mid-, upper-teens year-over-year and positive for the full-year, almost 30%. So, nice activity and performance. And looking back in this year, we’ve done a nice upgrade of bringing them on to the ERP systems as well which will serve us very well going forward. And we love the markets and deposits in play that they participate in, and obviously including the Permian because we think about 19 in those businesses. Hey, expectations again are mid-teens. We think we’ve got a lot of capability. They’re also value-added services to build on and some nice momentum. So, that would be our expectations as we look at the fiscal year coming forward.

Ryan Cieslak — Northcoast Research — Analyst

Okay. And Neil, I know there’s been a lot of headlines coming out of the Permian as it relates to maybe some constraints on takeaway capacity. Remind us if that is — would that have any impact on you guys in terms of what you’re selling into there? Or what’s your thoughts around that and maybe what you’re seeing as well at this point?

Neil Schrimsher — President and Chief Executive Officer

Well, I think what we’re seeing right now is there’s still very good activity. There could be more. I think the Permian’s at 3.2 million plus barrels a day. It probably could grow, will grow to 5.5 million a day by 2023. To help that, capacity needs to improve which is — as they look at pipelines going to Corpus or going to Houston, that’s gonna be very good for FCX and that business. But also, as that moves to more artificial lift extraction and requiring more mechanical parts, that’s good for our business and the service connected around that. So, it’s a large producing area. If it’s stand on its own, if it was part of OPEC, I think it would be second-largest producer behind Saudi. So, a lot of output’s coming through. And I’m just a believer that market response and those capacity constraints will get addressed in time. But it’s still a productive environment right now.

Ryan Cieslak — Northcoast Research — Analyst

Okay. Good color. And then just a follow-up, just another housekeeping question. I wanted to follow up on Adam’s question earlier, Dave, with the depreciation and amortization. So, I’m showing here in the June quarter, the most recent quarter you reported of roughly $16 million of depreciation and amortization. Is that the right run rate going forward? I’m just trying to reconcile the $88 I think of full-year guidance that you gave.

David Wells — Vice President, Chief Financial Officer and Treasurer

That is. So, there is some potential upside there as you think about the full-year at $88 we discussed.

Ryan Cieslak — Northcoast Research — Analyst

Okay. I’ll get back in line. Thanks.

Operator

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.

Neil Schrimsher — President and Chief Executive Officer

At this point, I just wanna thank everyone for joining us today. And we look forward to talking to many of you as we move throughout the quarter.

Operator

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

Duration: 43 minutes

Call participants:

Julie Kho — Corporate and Media Relations

Neil Schrimsher — President and Chief Executive Officer

David Wells — Vice President, Chief Financial Officer and Treasurer

Adam Uhlman — Cleveland Research Co. — Analyst

Ryan Cieslak — Northcoast Research — Analyst

David Stratton — Great Lakes Review — Analyst

Steve Barger — KeyBanc Capital Markets — Analyst

More AIT analysis

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