Applied Industrial Technologies, Inc.

fourth quarter earnings call for Applied Industrial Technologies. My name is Natalia, and I will 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 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, Natalia, and good morning to everyone on the call. This morning we issued our earnings release and supplemental investor deck detailing our fourth quarter results. Both of these 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. Our 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-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 you're doing well. I'll start today with some perspective on our fourth quarter results, current industry conditions, and company specific opportunities. They will follow with more detail on the quarter's performance and our forward outlook, including fiscal 2022 guidance. And then I will close with some final thoughts. Overall, we ended our fiscal 2021 with strong fourth quarter performance that exceeded our expectations. and highlights our favorable competitive position as the industrial recovery and internal initiatives continue to gain traction. Before I get to some specifics, I want to thank our applied team for their commitment and strong execution throughout fiscal 2021, particularly considering the many challenges we faced as the result of the COVID-19 pandemic. Our associates' teamwork, dedication, and invaluable contributions turn these challenges into opportunities. This includes being a critical partner across essential industries and now supporting the growth requirements customers face as we enter what could be a prolonged period of favorable industrial demand. Combined with our strong cost discipline and the resilient nature of our model, we persevered and generated record earnings in fiscal 2021 while remaining fully invested in our long-term strategy. In a year unlike any other, we upheld and often exceeded our commitments to customers, suppliers, and all stakeholders. And we now look to build on this momentum going forward. As it relates to the quarter and our views going forward, I want to re-emphasize several key points that continue to drive strong performance across our business. First, we are seeing sustained demand recovery. Second, our industry position and strategic initiatives are driving growth opportunities beyond the cycle recovery. Third, we are benefiting from a leaner cost structure and effective channel execution. And our final key point, we enter fiscal 2022 in a strong financial position with ample liquidity. In terms of underlying demand, we saw continued improvement across both our segments as the quarter progressed, driving daily sales above normal seasonal patterns and our expectations. Combined with the lapping of prior year pandemic-related weakness, Sales increased nearly 20% on an organic basis over prior year levels and were positive on a two-year stack basis. Trends were stronger in the second half of the quarter versus the first half as break-fix and maintenance activity continued to ramp. In addition, we saw the release of larger capital spending during the quarter, including across our fluid power and flow control segment. where shipments accelerated following strong order activity in recent months, with backlog remaining at record levels. This positive sales momentum has continued into early fiscal 2022 with first quarter organic sales through mid-August, up by a high teens percent over the prior year across both our service center segment and fluid power and flow control segment. When looking across our customer-end markets on a two-year stacked basis, the strongest areas include lumber and wood, food and beverage, aggregates, technology, chemicals, transportation, mining, and construction. We're also seeing improved order momentum across other heavy industries, including machinery, as well as stronger demand within our longer cycle specialty flow control market verticals after lagging some in recent quarters. Importantly, we believe our sales improvement goes beyond the current in-market recovery and reflects building momentum across our internal growth initiatives. In our service center segment, we are supplementing our technical scale with more robust analytics digital solutions, and customer development initiatives. We're also benefiting from past and ongoing talent development initiatives centered on our best team wins culture. While our consistent strategy and local presence is strengthening relationships across our customer and supplier base as they look to execute their growth initiatives with more capable channel partners. In addition, we're leveraging a growing cross-selling opportunity. Legacy embedded service center customers are increasingly recognizing our full capabilities across fluid power, flow control, automation, and consumable solutions. We believe this drives greater customer penetration and new business wins as customers adhere to new facility protocols and mitigate supply chain risk. In our fluid power and flow control segment, we continue to see strong demand tailwinds across the technology sector, including areas tied to 5G infrastructure, cloud computing, and semiconductor manufacturing. Our exposure across this area has been supplemented in recent years through the ongoing build-out of our automation platform, focused on advanced facility automation through machine vision, robotics, motion, and industrial networking technologies. Related organic sales across this automation offering were up over 30% year over year in the fourth quarter, with order activity remaining strong in recent months. Our growing automation offering also aligns with the related trends and solutions we offer across our legacy operations. This includes areas within fluid power where our capabilities in electronic integration, software coding, pneumatic automation, and smart technology applications are driving new growth opportunities as customers increasingly focus on machine technology advancements, and data analytics. Combined with an accelerating demand recovery in longer and later cycle markets, such as industrial OE, process flow, and construction, segment sales were up 8% organically on a two-year stack basis during the fourth quarter, with positive trends continuing in recent months. Overall, the momentum we see building from our industry position and initiatives leaves us optimistic heading into fiscal 2022. We remain cognizant of ongoing supply chain constraints across the industrial sector which has been widely conveyed throughout the industry in recent months. Lead times remain extended across certain product categories, driven by component delays and an increase in fulfillment timing. However, the backdrop does not appear to be getting materially worse, and the direct impact to our operations and performance remains relatively modest to date. Our technical scale, local presence, and supplier relationships have been and will continue to be a competitive advantage in managing through current supply chain dynamics and driving share gain opportunities as the cycle continues to unfold. Our team is also doing a great job of managing broader inflation through price actions, strong channel execution, and benefits from productivity gains. Combined with a leaner cost structure, our EBITDA increased over 46% year-over-year in the quarter. SD&A expense as a percent of sales was the lowest in 10 years. And EBITDA margins are at record levels. While we expect ongoing inflationary headwinds going forward, our cost and margin execution provide strong evidence of the company-specific margin expansion opportunity we continue to see unfolding in coming years lastly our balance sheet is in a solid position following strong cash generation in fiscal 2021 we ended the year with net leverage of 1.8 times the lowest in four years and ample liquidity heading into fiscal 2022 Over the past two years, we've deployed nearly $340 million on debt reduction, dividends, share buybacks, and acquisitions during an uncertain and challenging operating environment, further highlighting the strength of our team and business model. We also enter fiscal 2022 with an active M&A pipeline across our focus areas of automation, flow control, and fluid power that could present additional value-creating growth opportunities going forward. Overall, I'm encouraged by our ongoing execution and position. These are exciting times that apply as our differentiated value proposition and growth strategy are engaging our internal team, and driving increased recognition across our legacy and emerging industry verticals. At this time, I'll turn the call over to Dave for additional detail on our financial results and outlook.