Applied Industrial Technologies, Inc.

School 2022 Second Quarter Earnings Call for Applied Industrial Technologies. My name is Shelby 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.

Okay, thanks, Shelby, 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 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, a conference call will use non-GAAP financial measures which are subject to the qualifications referenced in those documents. Our speakers today include Neal Scrimshaw, Applied's President and Chief Executive Officer, and Dave Wells, our Chief Financial Officer. With that, I'll turn it over to Neal.

Thanks, Ryan, and good morning, everyone. We appreciate you joining us and hope everyone is doing well. I'll begin today with some perspective on our second quarter results, current industry conditions, and our expectations going forward. Dave will follow with more specific detail on the quarter's performance and provide some additional color on our outlook and guidance, which we raised this morning. And I will then close with some final thoughts. Overall, we reported a strong second quarter that highlights the enhanced earnings potential across applied. We achieved record second quarter sales, EBITDA, and EPS, with respected growth of 17%, 36% and 49% over prior year adjusted levels. We're benefiting from a solid fundamental backdrop as well as our team's consistent execution across strategic initiatives. These dynamics are increasing our growth momentum and returns on capital across Applied. I want to thank our entire team for their ongoing effort and focus on optimizing and positioning the company to achieve these results. It's rewarding to see as we continue to leverage our leading technical industry position. As it relates to the quarter and our views going forward, I want to emphasize a few key points driving our performance. First, underlying demand and sales growth accelerated as the quarter progressed. Second, our team is responding and executing well. in the face of ongoing supply chain and inflationary pressures. And third, our enhanced operational capabilities and organic growth potential leave us increasingly favorable with our outlook. In terms of underlying demand, trends were broadly positive across both segments during the quarter. Sales growth exceeded our expectation, with strength persisting each month, including strong sales activity during December. We saw strong year-end budget and capital spending across our customer base. Strength was broad-based across our served-in markets, including demand improvement with heavier and later cycle verticals. Trends were strongest across technology, metals, lumber and wood, machinery, aggregates, and chemical markets. In addition, our technical solutions capability, inventory availability, and expanded addressable market are positively influencing our growth. Combined with greater price contribution, sales increased a healthy 16% organically versus prior year levels. On a two-year stack basis, organic sales were up 6%, strengthening from the 3% reported last quarter, while sequential trends in daily sales were seasonally strong. In our service center network, customers are increasing production output and running facility equipment harder and longer to address pent-up orders and higher demand for durable goods. This is driving greater break-fix and required maintenance activity, as well as ongoing release of capital spending as customers look to optimize their equipment and production capabilities following pandemic and supply chain related challenges over the past several years. Our technical support and local inventory availability are vital to our customers in the current supply and labor constrained marketplace. In addition, we're seeing stronger sales execution across our service center team. We believe our investments and initiatives around analytics, sales process, and talent in recent years have been key to our performance, as well as the ability to cross-sell more technical fluid power, flow control, and automation solutions. Overall, our service centers are in a great spot to capture incremental organic growth as the industrial upcycle continues to play out. In fluid power and flow control segment, various secular tailwinds and company-specific growth initiatives are supplementing an ongoing cyclical recovery across this more technical and solution-based area of our business. Year-to-date, the segment represents approximately 33% of total sales, up from 31% a year ago, and 16% during fiscal 2017. From an in-market perspective, the segment continues to benefit from strong demand with the technology sector, where we are designing and producing various solutions that are integral to areas such as semiconductor manufacturing, 5G infrastructure, and cloud computing. We estimate these technology-related industry verticals represent over 15% of segment sales to date on a direct and indirect basis. In addition, Fluid Power customers are proactively investing in solutions that optimize the productivity safety and efficiency of their production infrastructure and off-highway mobile equipment as they focus on reducing power consumption and CO2 emissions and manage through a tight labor market. This is driving demand for our leading fluid power service and engineered solutions. This includes electro-hydraulic control and automation integration, customized software programming and digital IoT solutions. From tailored approaches to turnkey applications, our team is deploying and developing cutting edge technology solutions across both mobile and industrial fluid power equipment. We see sustainable growth potential across these customer solutions as reflected in our ongoing increases in our fluid power backlog. Combined with the sustained recovery in longer and later cycle markets, such as industrial OE and process flow, as well as a growing position across areas such as life sciences and metrology, we believe the underlying demand backdrop across our fluid power and flow control operations remains favorable. As it relates to our expanding automation platform, we continue to see strong growth with related sales of over 25% organically compared to the prior year. Our teams are uniquely positioned to capitalize on a growing secular automation trend, giving application expertise and engineered solutions, as well as an accelerated adoption of more advanced technologies that are aligned with our product focus, including collaborative robots, machine vision, and digital solutions. Overall, we're encouraged by the demand potential we see across this new and emerging growth area for Applied and remain focused on expanding our automation reach and capabilities in coming quarters. This includes the potential for additional M&A as well as organic footprint expansion as we identify new markets, leverage our internal resources, and collaborate with suppliers. Our progress, while notable, is just beginning in this area and we look forward to developing ongoing business opportunities aimed at connecting our automation and smart technology capabilities across varied markets such as semiconductors and electronics, medical and life science, food processing, logistics, and data centers. Overall, the demand environment remains positive and we're seeing ongoing contribution from our internal growth initiatives moving forward. At the same time, we continue to manage through supply chain constraints and inflationary pressures across the industrial space. These dynamics remain challenges, though our teams are responding well and leveraging our industry position to mitigate related pressures on underlying operations while supporting our customers' growth requirements. This is reflected in our second quarter results, including ongoing strategic expansion of our inventory levels. In addition, our price actions and strong channel execution drove year-over-year and sequential improvement in gross margins during the quarter. Combined with our cost discipline, enhanced internal processes, and greater operational efficiencies, we reported strong high teen incremental margins in turn driving record second quarter EBITDA and EBITDA margins. Overall, these are great results and an indication of our capabilities and earnings potential as cyclical, secular, and company-specific tailwinds gain momentum. At this time, I'll turn the call over to Dave for additional detail on our financial results and our outlook. Thanks, Neal.