Applied Industrial Technologies, Inc.

Welcome to the Fiscal 2022 Third Quarter Earnings Call for the Applied Industrial Technologies. My name is Anne 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 Sisnek, Director of Investor Relations and Treasury. Ryan, you may begin.

Thanks, Anne, and good morning to everyone on the call. This morning, we issued our earnings release and supplemental investor deck detailing our third quarter results. Both of these documents are available in the Investor Relations section of apply.com. Just before we begin, 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 and 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 Neal Scrimcher, 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 third 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. I'll then close with some final thoughts. Overall, we had a very good quarter, further demonstrating the positive momentum sustaining across our business. We grew EBITDA and EPS 25% and 27% respectively on approximately 17% sales growth. Expanded EBITDA margins above 11% and generated solid cash flow while continuing to invest across our business for future growth. We did this against the backdrop of persistent and notable inflationary and supply chain headwinds that continue across our industry. My thanks to our applied team for delivering another solid quarter and demonstrating ongoing commitment to our strategic goals. So a couple of key points to highlight. First, underlying demand remains broadly positive and strengthened further from first half levels during the third quarter. Trends were strongest across metals, technology, mining, utilities, chemicals, building materials, machinery, and freight transportation markets. We're also seeing incremental demand across natural resource and refinery in markets. In addition to solid underlying market demand, we're capturing incremental growth opportunities from the strength of our industry position and internal initiatives. Combined with greater price contribution, reflective of the broader inflationary environment, Organic daily sales increased 15% compared to prior year levels and on a two-year stack basis. Last quarter, our growth on a two-year stack basis was 6%, so nice acceleration once again in the underlying trend. Similar to the last couple of quarters, our service center network is benefiting from greater break-fix demand and required maintenance activity across our customer base. Recent industry data indicates U.S. manufacturing capacity utilization is at its highest level in 15 years. We believe this is increasing the frequency of maintenance and repair activity and spurring new capital spending and maintenance projects on production infrastructure. These are meaningful trends for our service center network given our core focus on more highly engineered motion control products and solutions across the North American industrial supply chain. In addition, service center customer orders and new business opportunities remain encouraging as we enter the final quarter of our fiscal year. Favorable underlying demand is persisting across fluid power and flow control segment as well. In particular, we're seeing strong order trends sustaining within all three of our core application verticals. including industrial, off-highway mobile, and technology. OE fluid power demand is picking up within later cycle segments, such as heavy equipment, metals, mining, and construction. Our expertise and solutions tied to semiconductor manufacturing, data center cooling, and 5G build-out also remain key contributors. where secular tailwinds continue to increase related backlogs. In addition, orders remain strong for engineered solutions that optimize the productivity, safety, and efficiency of our customers' production infrastructure and off-highway mobile equipment. These solutions, including our design, engineering, and software coding capabilities, are in greater demand as customers focus on reducing power consumption, and CO2 emissions, navigate a tight labor market, and integrate more predictive maintenance into their equipment. We're also positioning our fluid power business for greater growth opportunities around IoT, telematics, and electrification for fluid power systems. Demand for these technology advancements is picking up across our fluid power operations, and over the long term, present a significant additive growth opportunity for Applied, giving our leading engineered solutions capabilities. We're also seeing accelerating demand for later cycle flow control products and solutions. Of note, MRO activity and capital spending on process infrastructure is ramping up in core end markets, such as chemicals, refining, petrochemical, utilities, and metals. In addition, we continue to see strong growth within hygienic and high purity applications where we have strategic growth initiatives. During March, we saw our highest quoting and order activity for flow control products in over three years, with positive momentum continuing into April. Relaxed COVID restrictions, greater customer facility access, and cross-selling opportunities are increasing sales momentum across our higher margin, low control business. This is great to see and we expect additional positive trends going forward. As it relates to our expanding automation platform, we continue to have strong growth in orders and backlog. Related sales during the quarter were up by a double-digit percent over the prior year and over 20% on a two-year stack basis. This business, which includes our four automation acquisitions over the past three years, is now annualizing around $150 million in sales and is positioned to grow significantly in coming years through both M&A and organic expansion initiatives. As highlighted last quarter, we are organically entering new markets across the U.S. As we look further to penetrate this expanding market opportunity. Our engineered solutions focus on next generation robotics, machine vision, and industrial networking combined with our historical competencies around motion control technologies is becoming increasingly recognized across the industry. Going forward, we believe we can leverage our existing service center and operational network to support this growth in coming years. Overall, we believe our differentiated industry position, addressable market, and secular tailwinds are driving stronger and sustainable organic growth across our business. At the same time, we continue to manage through supply chain constraints and inflationary pressures. Indications suggest these pressures will likely persist in coming quarters as supplier price increases and labor bottlenecks have shown little sign of easing. Given our LIFO inventory accounting method, we are recognizing these inflationary pressures in relatively real time, as evident by the nearly $16 million of LIFO expense reported year to date. This compares to roughly $3 million of LIFO expense recognized over the same period last year. Despite this headwind, we have held gross margins year-to-date relatively flat with prior year levels, and as our price actions and strong channel execution are providing support. In addition, we're seeing solid cost leverage as our growth potential plays out, reflecting enhanced internal processes and operational efficiencies from system investments and our shared services model. This is positively influencing our incremental margins year to date, which are trending toward the high end of our interim target range despite greater LIFO expense and other inflationary headwinds. And so with that, our EBITDA margins continue to expand and we're making solid progress towards achieving our interim annual EBITDA margin target of 11%, which also driving strong support in our returns on capital. We think we're in a great spot to build on this momentum into fiscal 2023 as our growth and margin initiatives gain additional traction. And lastly, our balance sheet is in a very solid position, following strong cash generation over the past several years, as well as EBITDA growth year to date. Stronger EBITDA margins and ongoing working capital initiatives are supporting solid cash conversion, even with ongoing working capital investment to support growth. Our M&A pipeline remains active and a primary focus area of capital deployment as we look to further expand our automation, fluid power, and flow control offerings. As indicated in recent quarters, we're maintaining a disciplined approach as we focus on assets that drive strong double-digit returns on capital and enhance our competitive position while increasing our differentiation and growth potential long term. While the cadence of M&A activity can vary period to period, we believe we're in a strong position to accelerate this growth component of our strategy moving forward and into fiscal 2023. At this time, I'll turn the call over to Dave for additional detail on our financial results and outlook.