Applied Industrial (AIT) 30 Oct 222023 Q1 Earnings call transcript

Welcome to the Fiscal 2023 First Quarter Earnings Call for Applied Industrial Technologies. My name is Bridget, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Ryan Cieslak, Director of Investor Relations and Treasury. begin. may you Ryan,

documents and we to and issued first of detailing Bridget, Relations the call. of section investor on This our applied.com. these Both results. morning, our quarter available good Thanks, in everyone Investor morning the presentation are Okay. earnings release

Actual outlook uncertainties, our on begin, subject current revise just business to we'll may including statements, in forward-looking results certain discuss reminder, we make from forward-looking filings. any obligation which The and those materially expectations SEC detailed undertakes Before company statement. our or to risks these a and differ are based publicly update expectations. no

the subject measures, call conference certain use which addition, to non-GAAP in are referenced financial In qualifications will documents. those

Schrimsher, and Executive Neil Officer. and Our to it Financial Chief speakers Dave our that, Applied's Officer; I'll With turn Neil. over include Chief President Wells, today

detail and expectations Thanks, current as some our specific follow with everyone. us. raised outlook with you appreciate today well including Ryan, morning. guidance, update we've Dave the start results, quarter's our good additional I'll will our performance on with and morning, which quarter more and conditions some and an on joining perspective as We first industry on our then I'll final going close And this color financials thoughts. forward. provide on

growth the EBITDA had So quarter. respective to XX% all XX%, EPS and Sales, remained record XX% solid strong hit levels. overall, quarter over XXXX. Demand during a with of we fiscal prior and first levels, start year

and of inflation robust is comparisons. margin our profile effort operating leverage, meaningful for on an new consistent difficult This Applied earnings results. benefit to is and thank resulting and and growth across growth optimizing We want controlling these segments. achieve internal supporting further both their managing from positioning job costs. to our ongoing more team continue focus and growth despite driving position doing industry also excellent We're This to opportunities expand entire our performance initiatives. I in helping our

highlight more to several in detail. points So key

it healthy and underlying normalization our in saw Customer as trends and relates the quarter We initial activity some quarters. expectations. recent order levels robust remained following First, exceeded demand. in to spending sequential through

However, bookings productive a make and and work as and and record trends demand base maintenance supply equipment remain production firm backlogs, order investments. and highlight across growth customers steady reinforce chains and through their required environment

organic Our part the approximately month-to-date sales, market in sales fiscal providing organic into base diversified with end continued quarter, support. and of our October, XX% is of the prior in Positive XX% sales year. over early period. year demand straight further Center have underlying our growth second Service above for prior XX% on This quarter. is top Within segment, second the growth the was

quarter, see through booking at levels, trends. So the very and firm encouraging remained MRO Segment within positive into we our patterns rates of continue to end remained markets. October. steady healthy core most Break-fix order orders and activity

sector partially today. growth In of our supply chain manufacturing tailwinds the facing various addition, growth requirements across and reflects believe level sustaining service network center secular U.S. the we

and as markets and and and these capabilities products driving and Our motion both solutions scale, local knowledge emerging tailwinds consistent opportunities of growth service persist. technical end greater are legacy across control

core broader initiatives of We business also morning, Cleveland long gathered efforts. growth Fluid remained cross-selling segment, indicated press and our our as is Control actions Sales team teams this this leadership in further new Engineered surrounding Power which our growth term. service and our margin our are also progress number in making benefit our first as to deploying name actions and sales significant Earlier the X segment. & in release strategic solid The time a excitement from to process Solutions in U.S. and increased well from today meaningful, for continue our our former traction ongoing designed as energy center years. profile of pricing Flow is catalyze the month,

in continue verticals. scope we growth of businesses, believe Fluid note, Of the elements organic and XX% are OE, last growth we're value these industrial and Power, accelerated solutions. capabilities quarter. segment. leading continues These integral our to from benefit across the segment, Solutions specific and longer-cycle As to from name core sales we off-highway and firm products Flow better Control strategically including of this process technical the Growth segment solid engineered flow across the proposition capabilities Engineered the segment to XX% aligns demand our seeing expand mobile automation new and higher with across

Engineered Our Fluid Power power Systems. Power leading team across many systems electrification our to industrial and manifolds solutions customized IoT, the Solutions, tied of demand and continues to telematics Fluid of to units advanced pneumatic from and healthy automation see

markets, to activity tied business MRO support addition, flow decarbonization with In end process remains new and positive on our core from capital control infrastructure in efforts. incremental our spending customers'

continue automation to healthy growth order and also backlog our We across see platform.

the evolving Our going traction the the and manage and Solutions considering forward. ongoing is considerations gaining impacting an market production when across is automation across further system value we proposition through and that in our are customers automation our chain platform, scale including post-pandemic shipments. active economy. the delays, industrial pipeline the structural segment of competitive timing excited strategy remain growth labor as very Engineered potential component expect further We and of Overall, of particularly encouraging, momentum builds which about constraints, sustaining opportunities M&A position supply strategic optimize to constraints and

to relationships supplier our term, suppliers Our we going with near ongoing work ability to to availability the these component forward. optimize industry and continue and position manage constraints provide through

straight sales quarter. had eighth sustained quarter, the X.Xx twice and another strong we nearly of execution the Combined grew and momentum, EBITDA channel discipline quarter efficiency In we of additional addition rate while expanded cost nearly year-over-year top inflationary through our to with during managing pressures sales line margins the countermeasures. grew EPS rate and gains, EBITDA the for growth

solid additional financial our strong with flow-through from really results the to this and At contribution outlook. time, on once turn segments. I'll detail both again Dave call over So for

Neil. Thanks,

First, just presentation start site momentum. solid ongoing will investor another our for the by reiterating available team. I on It's is that quarter your our and investor our Neil's on to the the execution quarterly by additional comments supplemental reference. see great reminder

offset days increased the organic now XX quarter factors, details on XX.X% So currency XX.X% which year a on increased quarter. of more was the growth, few basis selling number foreign an basis consistent year-over-year. Acquisitions basis. quarter. translation. a for point prior in Consolidated sales headwind was the sales from XX of contributed these over by points Netting The

last we growth to of As was pricing, contribution XXX in quarter, on it basis pricing relates the product consistent estimate with year-over-year the approximately quarter. sales points

this reminder, measurable only a on top As contribution both price line increases from SKUs sold assumption reflects periods. year-over-year in

Turning performance now by segment. sales to

of on Service across sales of Growth in beverage By supported foreign CapEx markets, on has with solutions. over sales healthy basis, sales Segment our rates Engineered the Fluid our order and a & with wood. automation year-over-year sustained overall quarter, contributing our segment, component and basis the quarter, mining, sales and core Within for next-generation our infrastructure energy XX.X% increased customer the our to but Solutions impact segment segment organic within and paper, technology, sales metals, X organic remains and the basis impact lumber X-year segment an machinery. backlog prior growth lead Slides highlighted acquisitions Power growth. on delays during the year over supplier ongoing points stack food strong and metals, during XX.X% the XX aggregates in weigh was strongest process across increased limited X remains basis. and quarter agriculture, food demand of XX.X% date. times been presentation, strongest an demand increased and XX% end On to on and pulp Center year-over-year broad-based flow by segment division, end currency. As when and MRO excluding beverage, chemicals, spending and Extended continue but mining, inbound market, growth resumed

margin to our gross Moving performance.

margin increased highlighted basis XX.X% of deck, of year points XX Page compared As level XX.X%. X the to on gross prior of the

During headwind and The the during underlying year the year-over-year expansion during in compared XX year-to-date. basis margins point of quarter, trends to prior we ongoing $X.X inflation product Overall, LIFO unfavorable expectations gross gross reflects million quarter. supplier the quarter our were LIFO an expense on $X.X recognized had inventory net the impact margin million with quarter. in and line

and macro margin ongoing to team actions Our countermeasures. broad-based inflationary channel execution, respond dynamics, continues pricing well with to

current and inflationary technology controlling was operating the expenses, organic XX.X% XX.X% currency the a leverage levels. Overall, model as constant environment great cost management As compared Despite headwinds, we excellence costs, SG&A a quarter, on prior increase leverage our operational costs job XX% to teams year levels. prior during sales to our doing from administrative an XX.X% our and services EBITDA growth, are the it in selling, initiatives, employee-related sales drove year of shared year quarter. increased in ongoing of over including gross solid expenses and margin higher prior relates basis our during down expense distribution investments.

This points In prior addition, year to impact year-over-year increased unfavorable compared XX XXX of to includes basis due XX.X% point levels. basis EBITDA margin LIFO. an

year per share earnings share reported prior per XX% from $X.XX earnings up was levels. Lastly, of

million. operating million, quarter activities while cash cash our first generated totaled to $XX.X Moving free $XX.X Cash from flow flow performance. during was the

the working were and As typically mix a the quarter Ongoing quarter a sales from influencing momentum first is factors generation capital other during reminder, perspective. cash lowest quarter. our demand seasonal on

on sheet trends as well working is leverage process, million with working net the EBITDA. of our hand benefits Looking of easing the our from EBITDA, approximately which ahead, capital prior segment, year conversion below year we of cash from some Solutions working initiatives. continued expect September progresses, a From tied level as benefit including we capital balance to the $XXX and as Engineered ended X.Xx at X.Xx adjusted perspective,

$XXX approximately revolver of available additional has Our capacity $XXX million and million an option. accordion currently

private We also have on our shelf uncommitted incremental securitization AR facility. facility and capacity

outlook. our to now Turning

fiscal margins release our our organic reflect EBITDA well to $X.XX and on to first year. of $X.XX on of to quarter $X.XX full up the EBITDA Page XX X%, the indicated now X% based performance in share, X% $X.XX including assumption we strong a assumes X% growth XX.X% today's XX.X% guidance XX% As growth XX.X%. per of and and as first as assumptions the to range of detailed half presentation, raising to guidance sales for EPS growth increased are margins EPS of X% press up per the in Previously, XX.X%. of year project share to XXXX sales to to We

take pressures. uncertainty chain inflationary supply economic Our continues consideration into as broader sales and to outlook ongoing as well

growth and as mindful rates also year play driven some are the the of continues industrial of to We the order potential of normalization by activity out. and slower moderation

We our these particularly into within the assumptions our half have second updated guidance, incorporated year. of fiscal

by In quarter second in currently we year on especially near-term we fiscal month-to-date as that sales are quarter. last and growth low the December. comp to grow trends second sales comparisons the mid-teen against difficult organic the quarter October percentage prior we saw note sales to addition, a over strong Please based our more as outlook, project progresses, sales

the In into slower this as activity budget addition, spending manage calendar expect we months year of winter fall uncertain potentially an customers more in environment. late and scheduled year-end maintenance subdued seasonally

a that, to quarter quarter the to for on unchanged expect Lastly, we second back final levels relatively to organic mid-teen assumption, and some based our first down Neil With growth now be low sequential turn on comments. over call SG&A will to margins slightly I expense compared basis. gross sales

Dave. Thanks,

So by technical providing utilization year. portfolio relationships aged MRO infrastructure increasing of level, long and fundamental across September. and reconfigure North refreshing strategies local break-fix The the seeing expanding extended of persist our solutions, secular could the emerging backdrop evidence We XXXX their in back have to part is capabilities technologies This supported and will The reshoring time, structurally well and a further high we at is across at is ongoing the service investment an summarize, favorable momentum underlying specialized of as early production this capabilities, This industrial in support growth reinforce fiscal and as engineering require are present capacity is as and supplier chains period our U.S. higher support America. leading MRO structural significant a and of position strategic the in own increasing. we strong break-fix an backdrop activity solutions, North tailwinds infrastructure believe channel and support production evident From of we industrial sustained with critical customers term. sector. strategy supply XX-year about good same up America. when to next-generation to believe evidence U.S. expanding At manufacturing the customers' industry-leading strong of and wrap are in the performance feel our and partners, are as capacity talent. and was manufacturing technical requirements localizing we considering

Our aligned and strategy strongly with requirements. and are these initiatives growth trends

mentioned, Dave on the of cognizant impact investment remain near business rates economic potential globally. As we term, interest uncertain higher including the backdrop of

forward. While potentially drive industry-wide we believe market diversified notable slowing can opportunities above-market continue quarters, demand coming mix position, our growth in and to going industry end self-help

provide opportunities and support we've investments of past, cash to business flexibility current if generating strong And easily the adjust our playbook and pursuit our liquidity ongoing operating be, model significant environment. M&A flow. In in sheet in discipline the as strategic organic provides simultaneously addition, for shown lastly, while and need balance and the

how So up very of open in on you our your your Once and towards as lines $X started, focused to with billion XX% for support. continued remain that, we year we'll questions. what's and overall, we it's we for next thank see EBITDA And ahead the margins. again, progress revenue great the milestone

question our Chris from first line of [Operator Capital. Dankert Loop Instructions] the comes And of

off, first you guess, over team there. congratulations very and I whole just genuine a to the

this You of should very here. result be proud

back guess midpoint organic the I first correctly, on you of guide, I kind guide kudos. growth we thinking year? Am how are So reading And XQ about mean, the how gave the about you're from the question, kind half we the XQ assuming of incredible [indiscernible] of just -- reading the the baked of of into guidance the I drops think in shape correctly? guess, to that flat I do year, today?

the at uncertainty half on to guide flat based out organic midpoint there. growth The would that up imply modestly second

the backlog quarter. vision the clear obviously through So second position

the that be the uncertainty prudent of this out outlook of point. of still at year terms we as that's back in kind think that So the just for and of about kind there macro half

shape Got first it. EBITDA to in But the SG&A quarter quarter down of years a move XQ level the the we've of watermark that, fair first recent past again just typically, in margin, Understood. we're lowest an a year. kind the the high the say has kind Is been several bit here? kind And of taking guidance, EBITDA based then again, of in it to just on here, line the impressive execution to here. seen is -- kind growth of given and inverse margin of

factor second terms parts to We consistent The did quarter, of the is continue about, demand with suggest business as big the radar here, as random in of again, the hit this again, on in headwinds quarter. once some those remeasurement. think weigh LIFO first you the

those that, So so through. we're a tail going see on of come to some seeing economic longer increases

move and to as LIFO we the across guide So expect think obviously, out. here headwind just the that of be cognizant that continued plays would We that as ease about how we year.

the as little upside rates, you with bad of consistent it we then point from but a QX think So right QX, about current as now. good have bit

follow-up guess, forgive but is on it, a be current $XX to on LIFO million I've if just the year now? drag that. expected And right me I like missed

No, we're it calling the upwards $XX it. could way right be now million of is

David comes line And of question our from next Manthey of Baird. the

a all going regarding lot didn't comments Dave, I the being you Engineered year-over-year to save your margin Were forward. second on quarter catch a Solutions of renaming segment. will it. referring us for unchanged, It Thanks trouble or... gross

QX. from Potentially

Got it.

granular I hate to here. then too And Okay. get

raised we exactly read what shouldn't Or but beat $X.XX. outlook know October are looks Or just given are your anything that you troublesome midpoint $X.XX. leading what at if the ago? assume just that? XX by indicators I you any into could about what or guide saw than talk the by strength. that there you am days too much I the into was, the like You Street reading more today I XX don't

Yes. teams, the with customers of, things read mindful our currents anymore. trying hey, constructive. in But we potentially our I We're our David, various not our know with and cross December. we little would to stronger to solid that remain well. dialogue got as continues be We're that, read after just back to say, thus the the We then we last a the being far go relatively with think pleased it comparables that as and through quarter. And we've start especially, flat. get customers

I the feel the As market think we we case above on think little it position about bit? definitely a or take don't time build are our we market own very very is broader going that our to general that and but could, for working forever. if how business trends we we perform are slow strong initiatives, can some think market, I advantage experienced plus seen what of our growth has or unique, secular quite

Yes.

We do conservatism. that Okay. appreciate

couple a here. just Here, more slide in

the in of or then Is that and seeing demand on success just are forward of time hop been Automation, you've strength of pull programmatic first, there? off. your any the And spending business kind these So there automation in -- seeing you most I'll infrastructure And other about you're demand in industries off-highway having second, any pull what an segments? Neil, kind for applications? can mobile, some government now. you then of talk

Sure.

think I if Power unique about there's driving think anything Fluid So market conditions. and from the it mobile, don't in off-highway I general

through. the expand are that and the introducing in OEMs segment electronic good pull think we these we controls a those participating our are to capabilities as mid-sized features and I bring new offering equipment in, capabilities we we and expand solutions in marketplace their as growing on as of many

solutions paper, inside with for really that's with machinery, collectively, are with really the coming then doing how across about helped think market. cross-sell automation embedded quality the our equipment and with given we're well beverage, and solution the And in. industries. the then position very on it's exist and and the movement That's I and mobile segments like or robots whether vision they full other And bottlenecks customers. and and consumer broadening And increasing our can range. goods are We output of we're them. capital set be tending centers both and about more automation robotics side, labor that facilities. and those If in growing the feel and we helping So around machine potential, important service our think control material plants packaging food systems

of we here, penetrated with XX%, So to segments fully feel to It naive. doesn't XXX, solutions. like are many it XX% from go and plan we not these materially up steps industrial participate. We're about feel but like we automation

next of [Operator the KeyBanc Instructions] line Our of Newman question Ken comes from Markets. Capital

curious on you how expand much in quarter. outperform to the going on half? back industry? bit the you're Curious, a you're think assuming you're of you or could terms if industry you Congrats I'm just expecting what consolidation little in the

Yes.

for industrial mid-single be could we back could we in then if first half, we production conditions the potential So up would think the there's side. digit. that about a be there and look, digit probably of half, decline a think as And mid-single market that

we're forming our on that, But guide. that's conditions general the with feel So market like views the and some of positioned. well we

capabilities, expanding Engineered Our locations, our broadening, perform Solutions to very, very are well. service

Understood.

not for as positive initial and about curious if going you if of Regal to how this acquisition your between much take you've larger between a have but my I'm Rexnord this Altra color you on product we overlap follow-up, I'm a should morning think there impact suppliers. gotten sure that, any just whether look For X was net announced forward? at a there large is and

notes. view come the obviously, I suppliers of will across know we, bit extended for get but a goes I'll additive. and think approval, we we did I both take as see take it see exchange would congratulatory mean little businesses. it some solutions, and and assume time I position review positive. strong to as the out Again, that And both as it as it regulatory those they with through.

our So on opinion adverse no it from side.

but it in. the did if give up more update if just automation I you organically how rate sorry just where And quarter? could in curious are? business run And I if on us One quantify squeeze an I'm missed Okay. you sales much the annualized this, could was

Sure.

that, what So I'd rate digit backlog was that saw kind mid-single grow. and organically. the to rates order last did similar say of we growth up With quarter,

comments, mentioned or segment we backlog as experienced that have So in has delays out. components that the systems some up of held going the certain and

see to that. continue We

Our doing in September number very strong was it.

the as perhaps be are we expectations business for our think to blended conditions will overall going and that will the about forward. the it perform outperform continue So what segment

look So grow. appropriate will encourage to the is organic to one making we continue to inorganic investments work, at it and and that

at point, But of of terms even this with million that, still run $XXX up north Ken. in annualized rate

And maybe And macro Understood. color about within pipeline there? about I know is how it the talked then sorry, that positively amid uncertainty? Any you just think business. M&A capital being there deployment -- active. higher do you

Yes.

remain the we're position about the mean, We priorities job So busy our continuing in in our we've make or we that and that where we times, overall, these to past. a do opportunities we're M&A with [indiscernible] the And priorities to our business. investments I in acquisitions have. obviously, organic talked do nice can financial

ones. big share repurchase be view then to committed will the those always And opportunistically to more -- are look. be remain we're still obviously, and So then a would dividend,

do we from follow-up Manthey Baird. have of And a of the David line question

of the accompanied hard you then. back rolling the versus terms in by key today Yes, in differences make of of about in that and to saw was course, amount business up in mix follow-up IP oil XXXX? remind remind the But over XXXX the 'XX. We of quick a 'XX of back? here. and company relative Could us just and retrench you differences general us could mid-single-digit business And a

Yes.

against compared Control it have Fluid Flow David, Power, all the don't side. clearly time, we've grown to I that But that. and now So on automation

on of be the mix further the XX XX perhaps could trends to of expect road, would with out performance and with media XX% those time we the service business, secular a strong center time XX%, approaches even in XX-XX, -- look benefiting. I've Solutions Engineered focus down as we growing and be So very both. been impressed company in the

So have that our that decrementals manage continuing that pullback to demonstrate then, if think had tight well like we just going period, we capability that expanded incrementals forward. in can we've time decrementals and managed we're we we

And certainly of double and gas David, much this kind less at than oil at digits exposure, that X% now less time, point.

beverage, or just to that there exposure would the add I cycles industry, that think, a know, food in business and like prior you exposure X% around as aggregates, of as the business captured areas a that and have I category well. we larger I greater percentage that's today around we today think of than less general as well as about the talk much the

is prior end say, cycles. of diversification a the certainly notable the of element relative So to apply markets

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

forward quarter. for look the joining seeing and everyone today, to you. we to thank want you many us Thank simply I of throughout

ladies and for That gentlemen. you, Thank conference. you participating. Thank concludes today's

You disconnect. may now