Applied Industrial Technologies Inc (AIT) Q4 2019 Earnings Call Transcript

AIT earnings call for the period ending June 30, 2019.

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Aug 14, 2019 at 1:23PM
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Applied Industrial Technologies Inc (NYSE:AIT)
Q4 2019 Earnings Call
Aug 14, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Fiscal 2019 Fourth Quarter and Year End Earnings Call for Applied Industrial Technologies. My name is Mariama, 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. [Operator Instructions]

I will now turn the call over to Ryan Cieslak, Director of Investor Relations and Treasury. Ryan, you may begin.

Ryan D. Cieslak -- Assistant Treasurer

Thank you, Mariama, and good morning to everyone. This morning we issued our earnings release and supplemental investor deck detailing our fourth quarter and full-year results. Both of 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.

Before we begin, just a reminder that we'll discuss our business outlook 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 our current expectations that are subject to certain risks. These include trends in sectors and geographies, the success of our business strategy and other risk factors provided in our press release, our most recent periodic report and other filings made with the SEC. These are available at the Investor Relations section of applied.com.

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, events or otherwise. In addition, the conference call will use non-GAAP financial measures explained in our press release and supplemental presentation, which are subject to the qualifications referenced in those documents. The 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 on selectively distributed, all content of the call will be considered fully disclosed.

Our speakers today include Neil Schrimsher, our President and Chief Executive Officer; and Dave Wells, our Chief Financial Officer.

With that, I will turn it over to Neil.

Neil A. Schrimsher -- President and Chief Executive Officer

Thank you, Ryan, and good morning, everyone. We appreciate you joining us. I'll begin with a brief summary of the quarter and full year, then Dave will follow to review our financial results in more detail and also cover our initial guidance for fiscal 2020.

Overall, I'm proud of our team and performance in fiscal 2019. We delivered record sales, improved margins and increased free cash by 30%, all while positioning the Company to unlock further long-term value for shareholders through various strategic initiatives and investments.

As we enter the next decade and approach our 100-year anniversary, in many respects we're just getting started here at Applied, as our leading technical and solutions oriented model is ever more relevant across the industrial supply chain. Our fourth quarter results provide further evidence of our execution potential, as we were able to adjust to a slowing demand environment industry wide and deliver solid margins, record EBITDA and notable free cash improvement. This is despite ongoing inflationary headwinds, demonstrating our cost discipline, flexible business model and benefits from various self-help initiatives that remain ongoing.

Consistent with the recent macroeconomic industrial reports, we saw a slowdown in demand across a number of our end markets during the quarter. This was most notable in heavy machinery, mining, oil and gas, and process-related industries. While the industrial backdrop is proving more challenging near-term, we see sustained momentum from our industry position, operational strategy and cash generation potential. This leaves us well positioned as the cycle evolves.

In addition, throughout the organization, our expanding capabilities and enhanced differentiation are yielding results in the form of new opportunities that positively impact our market position and customer base, providing material contributions to the future growth of Applied. We further accelerate our differentiation through targeted acquisitions that build on our capabilities to expand with new and current customers.

Just announced this morning, we've signed a definitive agreement to acquire Olympus Controls, an automation solutions provider, with five locations and annual sales of approximately $45 million. Olympus offers a full range of value-added automation expertise for OEMs, machine builders, integrators and end-users from design, assembly and integration to the distribution of motion control, machine vision and robotic technologies. Their addition is a strong complement to our business, further broadening our capabilities, customer opportunities and technical presence across varied industrial segments.

Overall, this is an exciting transaction for us. Olympus is best in class in machine robotic automation and provides a strong platform to further enhance our value proposition and growth profile long term. We welcome them to our Company and look forward to their contribution.

Additionally, we see emerging opportunities to expand our innovative solutions for the industrial Internet of Things. Given our technical industry position, engineered solutions and supplier relationships, delivering expertise that improves efficiency and boost productivity is key and we look forward to enhancing these comprehensive solutions for increased customer and shareholder value.

Now, at this time, I'll turn the call over to Dave for additional detail on our financial results.

David K. Wells -- Vice President, Chief Financial Officer and Treasurer

Thanks Neil, and good morning, everyone. Another reminder, there is supplemental investor deck recapping key financial and performance talking points is available on our investors site.

To summarize fiscal fourth quarter performance, sales trend slowed, reflecting a broad weakening across our end markets. However, we executed well in this softer environment, reinforced our cost discipline and improved margins, EBITDA and free cash generation.

To provide more detail, consolidated sales decreased 1.7% over the prior year. Acquisitions contributed 2.2% growth, while foreign currency lowered sales by 0.4% and the difference in selling days was a negative 0.8% impact. Netting these factors, sales decreased 2.7% on an organic daily basis. As Neil mentioned, we saw a slowdown across a number of key end markets during the quarter, which we believe is indicative of more disciplined customer spending and lower project activity following a strong prior 18-month period, as well as increased macro uncertainty.

In addition, as discussed the last several quarters, weaker technology end-market demand in our fluid power operations remains an overhang, albeit in line with our expectations and stable sequentially. We would also note comparisons remained difficult during the quarter with organic daily sales growth of 8.2% in the prior-year fourth quarter versus 6.7% during the prior-year third quarter.

Looking at our results by segment, as highlighted on slides 6 and 7, sales in our service center segment increased 1.4% year-over-year. Our early March acquisition of MilRoc Distribution and Woodward Steel contributed 2.2% growth, while segment sales on an organic daily basis were up a modest 0.5%. Our core US service center operations sustained positive growth with sales up low-single digits, though this was below our expectations, reflecting the lower -- slowing end markets backdrop during the quarter. Demand was also weaker in our oil, gas and Canadian operations. We note the fourth quarter represent our most difficult prior-year comparison for the year in this segment with the prior-year fourth quarter up 8.5% on an organic daily basis. On a two-year stack basis, segment sales were up 9%, down slightly from 10.4% in the third quarter.

Moving now to our fluid power and flow control segment, sales decreased 8.5% over the prior year. Excluding the impact of acquisitions and selling days, segment sales declined 9.8% on an organic daily basis, primarily reflecting ongoing fluid power technology market headwinds as well as slower demand in our flow control operations.

In addition, as mentioned last quarter, year-over-year trends are being impacted by the wind down of a large prior-year FCX flow control project. This overhang will continue into our first half fiscal 2020. I will note, legacy fluid power sales were largely in line with our expectations, and we're seeing technology market headwinds stabilize with related backlog improving sequentially the past several months.

Moving on to margin performance, as highlighted on Page 8 of the deck, reported gross margins of 29.2% were down 22 basis points year-over-year, but improved 20 basis points sequentially. This is despite a non-cash LIFO charge during the quarter of $3.4 million and approximately 37 basis points year-over-year headwind. Excluding LIFO, our gross margins increased 50 basis points year-over-year, reflecting ongoing execution of our pricing and other margin expansion initiatives, coupled with a continued mixed benefit from expansionary products and value-added services.

Turning to our operating cost. On a reported basis, selling, distribution and administrative expenses were down 3.9% or over 5% year-over-year when adjusting out the impact of acquisitions and foreign currency. Lower year-over-year spend, partially reflects the benefit of productivity[Phonetic] initiatives, leverage of systems investments and our ongoing diligence in controlling spend.

EBITDA for the quarter was $88 million or up almost 1% over the prior year, despite a roughly 400 basis point headwind from incremental LIFO expense. EBITDA margin was 9.9% or roughly 23 basis points higher year-over-year, including a nearly 40 basis point headwind from LIFO. Reported EPS for the quarter was $1.02 per share, inclusive of approximately $0.18 cents of discrete tax expense, primarily resulting from the reversal of the discrete tax benefit recognized in our first quarter results, as well as the effective tax regulations that were issued during the quarter. Excluding the incremental tax expense, EPS for the quarter would have been at the high end of our guidance.

Cash generated from operating activities was $103.4 million and free cash was $96.2 million, which was above the prior-year period and our expectations. We are encouraged by the rebound in our fourth quarter cash performance, highlighting ongoing traction from our shared services and other collection and inventory initiatives.

Our capital allocation strategy continues to focus on reducing outstanding debt and funding accretive tuck in M&A opportunities. We paid down $24 million of outstanding debt during the quarter and nearly $104 million since financing the acquisition of FCX. Net leverage improved to 2.6 times EBITDA at quarter end, below the prior-year period of 3.3 times and close to our targeted ongoing level of approximately 2.5 times EBITDA.

Transitioning now to our outlook for fiscal 2020, as noted in our press release, we are forecasting a sales range of down 2% to up 2% and earnings per share in the range of $4.20 to $4.50 per share. Excluding acquisition-related sales and adjusting for two extra selling days this year versus fiscal 2019, our guidance assumes organic daily sales of down 5% to down 1% year-over-year. Other assumptions in our outlook include $37 million to $38 million of interest expense, an effective tax rate of 25% to 26% and approximate 39 million diluted shares outstanding.

The guidance takes into account increased uncertainty around the industrial cycle entering our fiscal 2020, hitting weaker sales trajectory in our business over the past several months, including mid-single-digit sales declines during the month of July. We believe this outlook is prudent against the current backdrop. With that said, we remain highly focused on internal growth and margin initiatives, which combined with stabilizing technology end-market demand in our legacy fluid power operations, easing comparisons and potential lower life of headwinds provide several levers to support our earnings momentum even in a slower demand environment.

Furthermore, we expect a solid year from a cash generation standpoint, reflecting further traction from our working capital initiatives before cash generated from operations in the range of $220 million to $245 million. Capital expenditures are expected to range from $20 million to $25 million, resulting in free cash outlook of $200 million to $220 million. This represents an increase in free cash of approximately 30% over fiscal 2019 at the midpoint. Our cash generation potential during fiscal 2020 will provide flexibility for further debt pay down, accretive acquisitions, funding our dividend strategy and opportunistic share buybacks.

With that, I will now turn the call back over to Niel for some final comments.

Neil A. Schrimsher -- President and Chief Executive Officer

Thanks Dave. So to recap, while the current industrial backdrop leaves us cautious with our near-term outlook, we remain focused building upon our strong foundation and position as a well diversified industrial distributor with high-quality product offerings and value-added technical capabilities. We've made meaningful progress in executing our strategy, creating success for our customers and delivering value to our shareholders.

Going forward, our multifaceted and technical oriented growth strategy, together with our ongoing continuous improvement initiatives, present many new and relevant opportunities to win in the marketplace. I'm confident in our ability to excel and to be bigger, better and stronger and to realize our full potential.

With that, we'll open up the lines for your questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]

Your first question comes from Chris Dankert with Longbow. Your line is open.

Chris Dankert -- Longbow Research -- Analyst

Hey, good morning, guys. Thanks for taking my question.

Neil A. Schrimsher -- President and Chief Executive Officer

Good morning.

Chris Dankert -- Longbow Research -- Analyst

I guess, first off, kind of, looking at the midpoint of the guidance figures you provided here, seems to imply you can hold EBIT margin flat or actually improve it by 10 basis points, 20 basis points into fiscal 20. I mean, that will be really impressive given the slowing demand and pricing. Just can you walk us through the moving pieces there or the plan to, kind of, to support margin in this environment?

Neil A. Schrimsher -- President and Chief Executive Officer

You bet. We think, we still see good traction for our price initiatives. But more importantly, Chris, some of the other margin levers that we have at our disposal in terms of the expansionary product sales, etc to -- continue to drive in a tougher environment. So modest margin improvement something in the range of flat to 20 basis points in operating for gross margins. Beyond that, the SG&A leverage you saw in the quarter was positive. And we've got additional work around that in terms of continuing to manage through and recognize the benefit of some of our technology investments and productivity initiatives.

So I think, here again, you saw it in Q4, we know the levers. We've got the discipline around being able to size and react in any environment, and we'll manage through some tougher macroeconomic conditions just fine.

Chris Dankert -- Longbow Research -- Analyst

Got you. So it really is more just, kind of, flexing the Applied DNA and really, doing which typically we do to get cost out, rather some kind of explicit expense reduction program?

Neil A. Schrimsher -- President and Chief Executive Officer

Chris, exactly. On the margin side, we continue to use the technology, the systems and the investments that's reducing variation around customer groups and product groups. We benefit from mix and products and services as we expand those with our customers in the side. And then on the customer mix, we're representing our selling not only to larger accounts, but representing the local economy. And then from a SG&A standpoint, we will maintain or be cost accountable. But some of the technology investments that we've had are really allowing us to leverage more central services, shared services and let our local teams to be more forward facing in doing work that's touching customers and adding value to customers.

David K. Wells -- Vice President, Chief Financial Officer and Treasurer

I'd add to Chris that, certainly, we still reflect a fairly significant level of LIFO headwinds in the guidance. We would see that an opportunity is potentially some of that would ease both with our continued reduction of our inventory position as well as some easing of inflationary pressures, which could be an additional tailwind for us there.

Neil A. Schrimsher -- President and Chief Executive Officer

Perhaps, timing wise on that, maybe a little more back half. So then it is the first half with what we would see right now.

David K. Wells -- Vice President, Chief Financial Officer and Treasurer

Good clarification.

Chris Dankert -- Longbow Research -- Analyst

Got it. Yes, again that's really, really helpful, guys. Thank you. And I guess, since we kind of brought it up, can you just highlight what the LIFO headwind is that you've got built into the guide here?

David K. Wells -- Vice President, Chief Financial Officer and Treasurer

It would range $7 million to $8 million in terms of the assumed headwind, a modest reduction from what we saw this year.

Chris Dankert -- Longbow Research -- Analyst

Got you. Thanks. And I guess just one last one for me, and I'll hand it off. Could you guys kind of break out what the expectation is as far as by segment here? I mean, I think looking at the growth you guys have baked in organically, maybe distributions down mid singles and fluid power is down -- excuse me, fluid power is down mid singles and distributions down low singles, just any comment on, kind of, how you're thinking about it by segment would be helpful?

David K. Wells -- Vice President, Chief Financial Officer and Treasurer

Hey, you bet. The high end of the guidance we'd assume service centers up low-single digits, at low end we'd assume them down-low single digits. On the high end of these fluid power flow control, that would show a down-low-single digits and on the low end of the guidance actually down-mid-single digits. I think, we've got some swing items in terms of, certainly, technology, rebound, etc that come into play there in that range.

Chris Dankert -- Longbow Research -- Analyst

Got it. Thanks so much, guys.

David K. Wells -- Vice President, Chief Financial Officer and Treasurer

You bet.

Operator

Your next question comes from Jason Rodgers with Great Lakes Review. Your line is open.

Jason Rodgers -- Great Lakes Review -- Analyst

Yes. I wonder, if you would give the typical industry breakdown for the quarter?

Neil A. Schrimsher -- President and Chief Executive Officer

So sure. So for the 30 industries, this time we would had 18 that would have shown increases. So that's down sequentially from the prior quarter. I think, weaker comparables and some that we've called out earlier in the heavy industrial commercial machinery, oil and gas, lumber wood products, some durable goods and some continued softness, weakness in that computer, electronic manufacturing segment, metals and food, and I think pockets of aggregates still contributing positively.

Jason Rodgers -- Great Lakes Review -- Analyst

And then, just looking at the guidance, I wonder if you could talk a little bit about the assumptions around the project delays and fluid power when you might start seeing those and when do you lap that large FCX project?

David K. Wells -- Vice President, Chief Financial Officer and Treasurer

There is tough comp on the FCX large project. It will continue to the first half of 2020 with Q1 actually being our toughest comp within that project horizon. So, right now, the guidance assumes really no rebound in the technology markets until well into the back half of the year, potentially even pushing out past our fiscal Q3. But certainly, here again, that could be a swing item as we think about the range and, once again, as we highlighted in the script, continue to see actually a slight backlog build in that piece of the business, really just comes down to the release of those projects and the timing around when we see some of that recovery.

Jason Rodgers -- Great Lakes Review -- Analyst

And then, if I can ask about the Olympus acquisition, the whole automation area, is that an area that you're looking to target more heavily or is this just kind of maybe a one-off opportunity that you saw?

Neil A. Schrimsher -- President and Chief Executive Officer

We think it's additive and complementary to our offering, and customers are going to have greater expectation as technology presents an opportunity to increase their productivity. And so in our current offerings today, we're working with our suppliers on sensors and smart products. We will be teaming with customers in a collaborative way to identify needs, how we extract and use data together those insights to have improvements. And so this extension allows us to further do that with motion control products, vision products, robotics' cobots into that offering. So that work has been going on with customers. And I think, it's a growing expectation. So we very much like the addition. We think it gives us some synergies up and down that I-5 corridor, but also a presence, kind of, in the Gulf and Texas to do the same.

Jason Rodgers -- Great Lakes Review -- Analyst

Thank you.

Operator

[Operator Instructions] Your next question comes from Adam Uhlman with Cleveland Research. Your line is open.

Adam Uhlman -- Cleveland Research -- Analyst

Hi, guys. Good morning.

Neil A. Schrimsher -- President and Chief Executive Officer

Good morning, Adam.

Adam Uhlman -- Cleveland Research -- Analyst

I was wondering -- yes -- I was wondering, if we could go back to FCX you reiterated the synergy expectations. I was wondering, if you could help us understand where do we stand today relative to that target? Kind of, what do we have baked into the guidance for this year? And then when is the full synergies expected to be realized?

Neil A. Schrimsher -- President and Chief Executive Officer

You bet -- go ahead.

David K. Wells -- Vice President, Chief Financial Officer and Treasurer

That is right on track. If you recall, we had socialized a $30 million synergy benefit over the five-year horizon. We talked about 40% that beat in the first half of that five-year period, back half in the -- remainder of the year period there. We're pleased to report that we're right on track in terms of the synergy realization and that has helped us as you think about continuing to protect profitability and year-over-year margin improvement, despite the softer top line conditions with FCX, with some of the slowdown we've seen in the process market, as well as those project comp issues that caused us to accelerate and exceed the overall projections for the business out of the gate. So pleased wit, how that's trending, and we would see that continuing to trend toward our expectations as we work through fiscal 2020.

Neil A. Schrimsher -- President and Chief Executive Officer

So as I think about it, 18 months in, and teams are really integrating and working well together. I like the progress around margins. The work we've had in productivity probably ahead in that area. We know we have the tougher comps and the headwinds around large projects, but I'm very encouraged by the broader MRO work that's going on and those opportunities that we have with common customers and really seeking together new customers with that expanded offering.

Adam Uhlman -- Cleveland Research -- Analyst

Okay, that's great to hear with the project headwinds in oil and gas. I guess, switching back to pricing, I might have missed it. Could you tell us what the estimated price realization was for and what you're expecting for this year? I think you mentioned that you expected to moderate a bit from this -- from the recent trend.

Neil A. Schrimsher -- President and Chief Executive Officer

Yes, I would say price in the prior quarter is 100 basis points contribution. And we think in the outlook and going forward we would have a 10 basis point to 20 basis point type improvement.

David K. Wells -- Vice President, Chief Financial Officer and Treasurer

[Indecipherable] relatively significant inflationary headwinds in Q4. So but a nice offset in terms of our price and inflationary impact realization.

Adam Uhlman -- Cleveland Research -- Analyst

Got you. Okay. And then, I was wondering, if you could fill it here on a detail. What were the segment profit dollars this quarter between fluid power and service center?

David K. Wells -- Vice President, Chief Financial Officer and Treasurer

Yes. you'll see that obviously as we release the K on Friday. That's not something we'd be ready to disclose and discuss on this call.

Adam Uhlman -- Cleveland Research -- Analyst

Okay. Got you. Then another clarification, the tax rate moving up next year, I guess. what's happening there?

David K. Wells -- Vice President, Chief Financial Officer and Treasurer

You bet. I mean, basically, it's the non-repeat benefit, Adam, some of the intangible impairments benefit, the impact that drove on the tax rate in fiscal 2019. So kind of a lot of moving pieces, obviously, as we took some discrete tax benefit in Q1, saw that flip back in Q4. But end of the day [Indecipherable] it is just the kind of the non-repeat impact of what you're seeing is normalized tax rate going forward for us.

Adam Uhlman -- Cleveland Research -- Analyst

Okay. Thank you.

David K. Wells -- Vice President, Chief Financial Officer and Treasurer

You bet.

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.

Neil A. Schrimsher -- President and Chief Executive Officer

Good morning.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Looking at the industrial demand on Slide 5, you talked about slower activity in April and May and then stabilization in June. Can you tell us what you've seen in July and into August so far, after that stabilization?

Neil A. Schrimsher -- President and Chief Executive Officer

Yes. So from a July standpoint, we -- mid-single-digits down and really from an August -- It's still early. There's variability day-to-day, but it is in the range -- in the guidance range that we're talking about, obviously a little firmer, more as we get later in the month. But those were the developments, and so we look back, we'd say kind of that April timeframe and post holiday softness, maybe we didn't fully anticipate continued May, and then some improvement in June, but then a pressure as we moved into July, which is coming into our thinking around guidance that it feels appropriate and prudent.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Got it. So basically you're thinking about FY 2020, it's kind of a mirror image of what we saw in 2019, where organic growth started the year strong and then decelerated. Now you're looking at it going the other way as we come out into the back half.

Neil A. Schrimsher -- President and Chief Executive Officer

That -- against those comps that we will have mid-to-low single-digit pressure as we go through the first half and perhaps the opportunity to improve. And -- while, there's positive elements in this cycle, there's still uncertainty right though it's the trade or tariffs. I think we are seeing that some delays in project activity and I think customers can be tightening their spend of what they are going to invest in this portion right now -- this time right now.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Yes, I understand. So just in term -- yes, sorry, go ahead guys.

Ryan D. Cieslak -- Assistant Treasurer

Yes, this is Ryan. Just to chime in, in terms of what we're thinking about the industrial environment and what's implied in the guidance. In a low end, I would say sort of assumes ongoing softening in the industrial environment through at least the -- our first half of our fiscal year. And then the high end really does not assume any improvement in the industrial environment more just of a stabilization as we move here into the coming months and quarters. So no real assumption of improvement in the industrial environment, even in the back half of our fiscal year as it relates to what we're assuming in our guidance at this point.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Understood. That's good. Thanks. So you talked about customers maybe being a little tighter on their spend, how -- can you talked about how you're approaching purchasing and stock levels for faster turning items and what you're seeing in terms of de-stocking, whether it's through you or the customer base?

Neil A. Schrimsher -- President and Chief Executive Officer

Yes, I don't know that it's -- we talk about in some break fixed MRO, there's still going to be demand and we just need activity going on. And so there's less activity, there will be a little less for us there. But if there's activity that will -- I think for our customer side of it, as they contemplate either a project or investment, perhaps there's a little bit of pause or a delay as they go through that review. Ourself, we continue to work with our best suppliers of how we link up and have the right investments in inventory, one for the environment and our customer base and I think there's a general improvement on flow products, higher velocity types that result in up the lower need for us to have safety stock around those items. And we really want our investments to be around things that are more impactful to keep uptime and productivity for our customers. So that's our real approach.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Understood. Nice to see the Olympus deal. Can you tell us what the growth rate was for that business over the past few years, maybe organically? And have they done any acquisitions themselves?

Neil A. Schrimsher -- President and Chief Executive Officer

Probably a small acquisition back, and really, that was their entry point of moving from North West into the Gulf or Texas. But that got a little bit of date on it. I think, we've seen good growth rates as they have in it. And our view going forward off this base that we have today, we can continue to build on that. And we'll see some opportunities that will come across with current customers and then as we look at executing some projects with them as well.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Can you talked about margin profile there or where you think it can get and also capital intensity, just thinking about free cash flow for it?

Neil A. Schrimsher -- President and Chief Executive Officer

Yes, we don't expect heavy capital intensity. There's probably a little bit of investment that we'll make in time, either around IT and perhaps around some investments around engineered solutions, but not high capital intensity in that side. And I'd say from an overall margin profile kind of slightly below company average.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Okay. [Speech Overlap] Sure. Was that the only motion on automation property you've been looking at or are there more on the drawing board?

Ryan D. Cieslak -- Assistant Treasurer

We feel this is in our M&A pipeline. So there would be opportunities as we look going forward, and either from a geography standpoint. But probably, more importantly, just the technical capability that they can provide and add to do that. And so, our M&A priorities broadly will continue to be as there is select bearing and power transmission opportunities, fluid power extending in process flow control. And we think automation is a good business platform for us to further develop as well. And as alluded earlier and talking about some of this is also going on with our current suppliers and current customer segments today also.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Great color. Thanks. And just one last one. A really nice job on SG&A control in the quarter and I heard what you said earlier, Dave. But with the acquisition coming in with a little weaker top line, how should we be thinking about SG&A margin for the first half? Is that -- can you stay at 19.3% or should we be thinking more mid-19%?

David K. Wells -- Vice President, Chief Financial Officer and Treasurer

Yes, there may be some pressure. It was around mid-19% as we continue to react. We don't want to overreact to the softness that we're seeing here. But here again, we know the levers, certainly there is a variable element, obviously the SG&A that will naturally come. So you may see some pressure on that first half, but obviously over the course of the year, that will normalize.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Got it. Thanks.

Operator

Your next question comes from Barry Haimes with Sage Asset Management. Your line is open.

Barry Haimes -- Sage Asset Management -- Analyst

Thanks. A bunch of mine were answered, but one other just follow-up on Olympus. Are there things that they can do either in terms of expertise or product set that can be in effect, rolled out or used within the existing branch network? Thanks. -- was it more just -- just acquiring more Olympuses to build up that business.

Neil A. Schrimsher -- President and Chief Executive Officer

I think their offering and then the opportunity to bring those capabilities to customers, I think around product categories, around vision, I think about robotics into that opportunity to reach more customers through our existing channels and their presence will grow. And so there's a growth opportunity for companies like Olympus and Geographies[Phonetic]. But there's also opportunities to grow that with customers that we serve in that geography and new ones as well.

Barry Haimes -- Sage Asset Management -- Analyst

Thank you. Appreciate it.

Operator

Your next question comes from Michael McGinn with Wells Fargo. Your line is open.

Michael McGinn -- Wells Fargo -- Analyst

Thanks for the time, gentlemen. I had a quick question on the guidance. It sounds like you guys are being a little more cautious with the core outlook. I was just seeing what's left for you guys, if things weaken from here in terms of FCX integration, branch consolidation, corporate expenses come down last couple of quarters. Just give us a little color there.

David K. Wells -- Vice President, Chief Financial Officer and Treasurer

Here again -- as we said with FCX, we're progressing nicely in terms of meeting the expectations that we had set on this synergies. So the reason I would see us coming of course there, that's going to contribute to the fiscal 2020 [Indecipherable] then protecting those operating margins. The SG&A levers obviously, we know -- we still have opportunity. When we think about leveraging the technologies something you've seen that's dealer shared services. We're still -- I talked early to-mid innings in terms of the work around the opportunity there. So we'll continue to see that play out in our 2020 results. And obviously, we're very cautious in terms of project spend, some of that discretionary spending still we see how this environment really shapes out over the course of the year.

Michael McGinn -- Wells Fargo -- Analyst

Okay. Great. Thanks. And then moving on to kind of the gross margins, looking -- we've heard a lot of noise from competitors about the rebate situation, about supplier consolidation or pushing back on supplier increases. It's hard -- it's tough to get rebates in this environment. But with your expanded offerings being in a choir, how are you looking at supplier negotiations this year? Thanks.

Neil A. Schrimsher -- President and Chief Executive Officer

I don't know, if we've got any different approach or discussion with suppliers on that. I mean, for us, our margin expansion has really been about our own self-help around point-of-sale and using those kind of technology and investments that we've made. We get benefit from mix, both customer mix representing the local economy and also product mix and services. As those expand and we add more value to those customers, that helps on our mix up. As we develop those and partner with best suppliers that can be part of the margin side of that. But, we haven't had a different approach to that in the past and we'll have continuity with that going forward.

David K. Wells -- Vice President, Chief Financial Officer and Treasurer

I'd add just generically that, some -- not some not all of our supply rebate programs for the coming year are cognizant of the fact that we did put some excess inventory on the shelf in our fiscal 2019, both in advance of tariffs and to protect customers from some supply constraints. So that's -- we're partnered with some of those key suppliers too as we work through that 2019 and yes, we're not overly penalized for that in 2020.

Michael McGinn -- Wells Fargo -- Analyst

Okay. And are you guys -- is there a base case assumption for your -- what you have in terms of oil and gas, E&P spending for 2020 with the MilRoc and Woodward acquisitions? Just curious if that's now more of an emphasis for you guys?

Neil A. Schrimsher -- President and Chief Executive Officer

For -- overall for us, oil and gas will be less than 8% of the total business. And so with the acquisition in Anadarko, sales were up, but there was pressure headwind on the organic side of oil and gas. And I think that relates back to project side activity maybe a little less going on. And also with a customer too tied up around acquisitions in that space, which created a little bit of slowing. But, it is a segment in the business. But at less than 8%, we'll continue to work and grow just like we do the other segments across the business platform.

Michael McGinn -- Wells Fargo -- Analyst

Okay. And then last one for me. I think your 2023 strategic plan has $100 million of M&A embedded per year.

You didn't do any repurchases? It doesn't look like you did any repurchases this quarter or last quarter. Are things starting to come to market now at the macro-slowing? Or are you going to -- do you see starting to be able to pick up some incremental business here from a bolt-on standpoint, people now looking to sell? How is that playing out in terms of the repo versus M&A in terms of capital allocation? Thanks.

Neil A. Schrimsher -- President and Chief Executive Officer

Yes, I don't think the economics necessarily impact the M&A pipeline in the activity. We've been busy. We'll expect to continue to be busy in that. And then from a capital allocation standpoint, we will continue dividend. We will continue to service debt. Leverage reached 2.6 times in that and we'll continue to look opportunistically, what's the right view on perhaps a share repurchase, but we do want to stay active around our priorities in M&A. And from a 2023 standpoint, we're not shifting or changing those objectives.

Michael McGinn -- Wells Fargo -- Analyst

Thank you.

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 A. Schrimsher -- President and Chief Executive Officer

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.

Operator

[Operator Closing Remarks]

Duration: 43 minutes

Call participants:

Ryan D. Cieslak -- Assistant Treasurer

Neil A. Schrimsher -- President and Chief Executive Officer

David K. Wells -- Vice President, Chief Financial Officer and Treasurer

Chris Dankert -- Longbow Research -- Analyst

Jason Rodgers -- Great Lakes Review -- Analyst

Adam Uhlman -- Cleveland Research -- Analyst

Steve Barger -- KeyBanc Capital Markets -- Analyst

Barry Haimes -- Sage Asset Management -- Analyst

Michael McGinn -- Wells Fargo -- Analyst

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