Applied Industrial Technologies, Inc.

Welcome to the fiscal 2021 second quarter 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. If you wish to ask a question at that time, please press star 1 on your telephone keypad. Prior to asking a question, lift your handset to ensure the best audio quality. Please note that this conference is being recorded. I will now turn the call over to Ryan Cieslak, Director of Investor Relations and Treasury. Ryan, you may begin.

Thanks, Mariama, and good morning to everyone on the call. This morning we issued our earnings release and supplemental investor deck detailing our second quarter results. Both of these documents are available in the investor relations section of applied.com. Before we begin, just a reminder, we'll discuss our business outlook and make forward-looking statements. All forward-looking statements are based on current expectations subject to certain risks, including a potential impact from the COVID-19 pandemic, as well as trends in sectors and geographies, the success of our business strategy, and other risk factors. 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. In addition, the conference call will use non-GAAP financial measures, which are subject to the qualifications referenced in those documents. Our speakers today include Neil Scrimshaw, Applied's President and Chief Executive Officer, and Dave Wells, our Chief Financial Officer. With that, I'll turn it over to Neil.

Thanks, Ryan, and good morning, everyone. We appreciate you joining us and hope your new year is starting well. I'll begin today with some perspective on our second quarter results, current industry conditions, and our position going forward. Dave will follow with a summary of our financials and some specifics on our second quarter and outlook, and then I'll close with some final thoughts. We're pleased to report a solid and productive quarter for Applied, along with positive momentum building as we enter the second half of our fiscal year. Our team executed extremely well during the second quarter, and we saw sustained sequential improvement in customer demand following the initial recovery highlighted last quarter. We are leveraging our industry position and generating incremental traction from our strategic growth initiatives. These include addressing customers' early cycle technical MRO needs, as well as playing a vital role in supporting efficiency and performance initiatives across their critical industrial infrastructure. We believe these customer initiatives will be increasingly relevant, giving a greater focus on operational risk management and supply chain considerations. We are capturing these initial tailwinds while remaining disciplined with controlling costs as sales continue to recover. Cost accountability and execution have always been key to our culture and remain integral to our operational focus going forward. This is supplemented by operating efficiencies gained from optimizing processes, systems, and talent across the organization in recent years. While additional expense restoration will occur in the second half of our fiscal year, we expect these counter elements to provide further balance to our cost trajectory near-term and support our long-term EBITDA margin expansion potential as the demand recovery continues to unfold and we leverage our operational network. I'm also encouraged by the strong cash generation we continue to see across the business. Year-to-date free cash is up over 60% from prior year levels and over 200% of adjusted net income. While influenced by the counter-cyclical nature of our model, cash flow is ahead of our expectations and up meaningfully from prior year levels. This highlights the progress we continue to make with regard to expanding our market position while optimizing our margin profile and working capital management. Our first half cash generation and balance sheet flexibility leave us well positioned entering the second half of our fiscal year. As it relates to the broader demand environment, underlying trends remain below prior year levels during our fiscal second quarter, but continue to improve sequentially despite the recent rise in COVID rates. We saw greater break-fix and maintenance-related demand across our service center network on rising production activity, greater spending authorizations, and enhanced sales momentum across strategic accounts. Customers are remaining productive in the current environment as established safety protocols are proving effective and providing support. Demand across our fluid power and flow control segment was also encouraging. with order activity and backlog momentum building. This partially reflects firm demand from our leading service and engineered solutions capabilities as secular growth tailwinds continue across various industries. Combined, the year-over-year organic sales decline of 10.5% in the quarter improved from 13.5% decline last quarter. Year-over-year trends improved each month, while sequential trends in daily sales rates were seasonally strong. Areas such as food and beverage, aggregates, technology, lumber and wood, chemicals, and pulp and paper continue to show positive momentum. And while year-over-year weakness remains greatest across heavy industries, such as machinery, metals, and oil and gas, Demand within these verticals continues to gradually improve, and related indicators suggest further recovery could emerge in the coming quarters. The positive sales momentum has continued into the early part of fiscal third quarter, with organic sales through the first 17 days of January down a mid-single digit percent over the prior year. It's important to note that visibility remains limited and uncertainty persists as customers continue to manage through a challenging macro and pandemic outlook near term. Like many, we are hopeful the business environment continues to recover as vaccines are deployed further in coming months, but we remain cognizant of the potential impact from resurging COVID cases, timing of mass vaccine distribution, and possible fiscal policy changes from the new administration. As we've shown in recent quarters, we know how to manage and execute in this uncertain business environment. In addition, I firmly believe our value proposition and company-specific growth potential is the greatest in Applied's history. There is evidence of this emerging across the organization. For example, we're playing a key part in the recent vaccine rollout and related COVID-19 response. Our flow control offering and support team are providing critical products and solutions for vaccine production. This includes hygienic diaphragm valves, water for injection pumps, and clean and place flow systems used to clean and regulate material flow and temperature as the vaccine is manufactured. We're proud and grateful to be participating in this historic moment, which highlights our expanding position and capabilities across essential industries. We're also seeing positive momentum across our fluid power operations as more customers integrate new technologies into their equipment and critical assets in order to optimize productivity, safety and energy cost. while reducing broader business and supply chain risk. In addition, demand tailwinds tied to 5G infrastructure, cloud computing, and other growing technologies are driving demand for pneumatic and electronic automation systems. Our leading fluid power service and engineered solutions capabilities provide us a strong position to capture these growth opportunities as reflected in our growing backlog in recent months. Our technical position and long-term opportunity is further supplemented by the progress we are making in expanding our next generation automation solutions following three acquisitions in the past 16 months. This includes a recent acquisition of Gibson Engineering in late December. A growing automation footprint and offering focused on robotics, machine vision, motion control, and digital technologies is being recognized across our industries and presents a significant growth opportunity longer term as we address customers' operational technology needs in an improving industrial sector. We welcome Gibson to apply and look forward to leveraging their innovative technology and capabilities. Overall, from critical break-fix MRO applications to emerging technologies and specialized engineering services, our value proposition is evident, and we continue to see greater demand as industrial production ramps. These are positive developments, and we are benefiting, as customers themselves benefit, from the value we bring to these opportunities. At this time, I'll turn the call over to Dave for additional detail on our financial results and outlook.