Applied Industrial Technologies, Inc.

Welcome to the fiscal 2021 third quarter earnings call for Applied Industrial Technologies. My name is Cheryl 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 hands set to ensure the best audio quality. Please note that this conference is being recorded. I will now turn the call over to Ryan Seaslock, Director of Investor Relations and Treasury. Ryan, you may begin.

Okay. Thanks, Cheryl, and good morning to everyone on the call. Hope you're all doing well. This morning we issued our earnings release and supplemental investor deck detailing our third quarter results. Both of the documents are available in the investor relations section of apply.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 the 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-GAP FINANCIAL MEASURES, WHICH ARE SUBJECT TO THE QUALIFICATIONS REFERENCED IN THOSE DOCUMENTS. OUR SPEAKERS TODAY INCLUDE NEIL SCRIMCHER, APPLY'S PRESIDENT AND CHIEF EXECUTIVE OFFICER, AS WELL AS 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 YOU'RE DOING WELL. I'll start today with some perspective on our third quarter results, current industry conditions, and our position going forward. Dave will follow with a summary of our most recent quarter performance, as well as some specifics on our forward outlook, and then I'll close with some final thoughts. Overall, we had a strong third quarter that highlights solid execution and a number of positive trends developing across the business. I want to recognize the entire applied team. They're the foundation of the strong results you see materializing across our company today. Their perseverance and operational focus over the past year reflects our one applied culture and puts us in a great spot entering a period of significant potential for the company. As it relates to the quarter's performance, I want to emphasize four key points that stand out. First, we saw a sustained recovery in demand that accelerated into March. Secondly, our technical and solutions-focused value proposition is driving incremental growth opportunities. Third, we are managing supply chain and channel dynamics very well. And our final key point, we are benefiting from a leaner cost structure. With regard to the broader demand recovery, underlying trends improved business as the quarter progressed, driving daily sales above normal seasonal patterns and our expectations. Combined with the initial lapping of prior year pandemic-related weakness, sales returned a modest year-over-year growth following double-digit declines over the past three quarters. Trends were strongest in March and have sustained positive momentum into the early part of our fiscal fourth quarter, with organic sales through the first 19 days of April up approximately 10% over the prior year. With the last quarter, we're seeing greater break-fix and recurring maintenance activity across our service center customer base as production continues to ramp and capacity comes back online. The rebound in activity is currently greatest among larger strategic accounts, though we're seeing encouraging signs across local accounts as well. Demand across our fluid power and flow control segment is also building, with orders and backlog up sequentially and year over year during the quarter. When looking across our customer end markets, areas such as food and beverage, aggregates, technology, lumber and wood, chemicals, and pulp and paper remain the strongest. And we are seeing improved order momentum across heavy industries, including metals, mining, and machinery, where sequential sales trends improved from last quarter. Given the break-fix intensity and related service requirements of these heavier industries, the improvement is a favorable development. We're also seeing greater growth opportunities tied to various secular trends and our technical position. In our service center segment, we believe our local presence, scale, and service capabilities are increasingly valuable post the pandemic as customers address their increasing production and labor requirements while adhering to new facility protocols and mitigating supply chain risk. In our fluid power and flow control segment, we continue to see strong demand tailwinds tied to 5G infrastructure, cloud computing, and other growing technologies, including providing solutions across the semiconductor manufacturing channel. Customers are proactively investing in solutions that optimize the productivity, safety, and efficiency of their production infrastructure and equipment. This is driving demand for our leading fluid power service and engineered solutions capabilities, as well as encouraging organic growth and backlog across our expanding automation business focused on machine vision, robotics, and digital solutions. Our automation team is making solid early progress, connecting their premier engineering and application expertise across our growing footprint and legacy customer base. Overall, the current demand backdrop and forward indicators, including commentary from our sales teams, is encouraging and leaves us optimistic on the near-term outlook. That said, inherent risk and uncertainty still exist as the recovery remains early, following an unprecedented downturn. We're keeping a close eye on emerging supply chain constraints across the industrial sector. While consistent with typical early cycle dynamics, lead times are extending across certain product categories. A greater number of suppliers are highlighting component delays as broader production capacity and logistics catch up to the demand recovery. The direct impact to our operations and performance has been modest to date. However, we expect a tighter industrial supply chain to persist as industry capacity and labor adjust following the pandemic. We believe our strong industry position, local presence, sourcing capabilities, and strategic supplier relationships put us in a solid spot to manage these dynamics well and meet our customers' critical supply chain needs. In addition to encouraging top line performance, the improving demand environment, combined with our strong channel execution, drove gross margin expansion during the third quarter. We are seeing greater number of suppliers announce price increases in recent months. To date, supplier price increases align with our broader early cycle expectations, though the backdrop remains fluid as suppliers deal with higher raw material and supply chain costs. We have an established track record of effectively managing supplier inflation through the cycle. This reflects our industry position, exposure to break-fix activity, and engineered solutions and systems mix, as well as ongoing self-help gross margin opportunities. We've remained highly focused on our requirements, as well as leveraging our channel position as we look to optimize with our suppliers and serve customers' growth and supply chain initiatives. Our third quarter results also reflect emerging benefits from a leaner cost structure, following business rationalization in recent years and operational efficiencies gained from processes, systems, and talent across the organization. Combined with our cost discipline, we grew adjusted EBITDA firmly above the rate of sales growth and expanded margins in the quarter. While growth requirements will influence our operating cost trajectory going forward, third quarter results are encouraging and provide insight into our operational leverage and EBITDA margin expansion potential as the demand recovery continues to unfold. And then lastly, our balance sheet is in a very solid position. following record cash generation year to date. We believe our margin expansion potential and ongoing working capital initiatives will allow us to drive stronger cash conversion through the cycle relative to history, enhancing our ability to accelerate growth and enhance stakeholder returns. Our M&A pipeline remains active and a primary focus for capital deployment as we look to further expand our automation, fluid power, and flow control offerings. At this time, I'll turn the call over to Dave for additional detail on our financial results and outlook.