Applied Industrial Technologies, Inc.

Welcome to the fiscal 2022 fourth quarter earnings call for Applied Industrial Technologies. My name is Ingrid and I'll be your operator for today's call. At this time, all participants are in a listening mode. Later, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star zero. 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, Ingrid, 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 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 and uncertainties, including those detailed in our SEC filings. 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 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. I'll start today with some perspective on our fourth quarter results, current industry conditions, and our expectations going forward. Dave will follow with more specific detail on the quarter's performance and our forward outlook. including fiscal 2023 guidance, and I'll then close with some final thoughts. So overall, very encouraged how we ended the year. We achieved another quarter of record performance across sales and earnings. EBITDA grew 27%, and EPS was up 34% on 19% sales growth. We also continued to expand EBITDA margins, achieving new highs above 11%, for the second straight quarter despite ongoing inflationary headwinds. All these numbers include meaningful LIFO headwinds as well. In total, these are strong results to end a year that included significant progress on many fronts, including continuing to position the company for long-term success through continuous improvement actions, growth investments, and reinforcing our balance sheet through debt reduction. We also drove significant improvement in our return on capital metrics throughout the year. I want to thank our applied team for their ongoing commitment and strong execution. Our outperformance throughout the year validates our industry-leading position and strategy, and we're very excited to build on this momentum going forward. So several key points to highlight in more detail. First, underlying demand remains strong across both segments through the quarter with trends accelerating during June. Trends were positive in all our key industry verticals with particular strength in metals, aggregates, mining, pulp and paper, chemicals, lumber and wood, and other various heavy industries. In addition, we believe we're capturing incremental growth opportunities from our industry position and service capabilities. Combined with ongoing price contribution, year-over-year organic sales growth of approximately 19% represented the strongest quarterly performance for all of our fiscal 2022, even though we're facing more difficult prior year comparisons. Growth was also strongest in June, and we're seeing mid-teens year-over-year sales growth sustain into early fiscal 2023. We know there's been a lot of discussion and questions around broader macro uncertainty and if that's impacting our business. Needless to say, we're keeping a close eye on various cross-currents, but we have not seen any meaningful signs of slowing in our business to date. And one of the messages I want to reinforce here today, we believe the results you're seeing from Applied partially reflect our differentiated industry position and benefits from various initiatives we've executed on in recent years, which have strengthened our internal capabilities and growth profile. We have great confidence our strategy and company-specific opportunities provide sustainable growth, and margin catalyst going forward. So to provide some more detail across the various areas of our business, we're seeing very encouraging trends within our service center network. Sales in our service center segment were up 21% organically over prior year levels. This is one of the strongest quarterly growth rates we've seen in this segment in some time. Volumes continue to build as the quarter progressed And we're now up a healthy double-digit percentage over pre-pandemic levels of fiscal 2019. In the early fiscal 2023, positive momentum is sustaining in this shorter cycle area of our business with segment orders and booking rates remaining supported. We believe this performance highlights structural growth and earnings improvement that is materializing within our service center network as we play an increasingly critical role across the industrial sector today. Part of this reflects greater required maintenance activity and technical support needs from our customers. With U.S. manufacturing capacity utilization near a 20-year high, our service center customers are increasing the frequency of maintenance and repair activity and releasing new capital spending and maintenance projects on production infrastructure. Our scale, local and consistent service capabilities, and technical knowledge of higher engineered motion control products and solutions are driving greater growth opportunities across both legacy and emerging end markets. We're also seeing solid traction across our strategic initiatives focused on talent, sales process optimization, and analytics. This is driving greater and more efficient capture of new business, which is contributing to solid cost leverage and operating margin expansion across the segment. Overall, our service centers are in a solid position to sustain this favorable performance moving forward. Positive underlying demand is also persisting across our fluid power and flow control segment. Within fluid power, our backlog remains at historical highs with firm order trends sustaining within all three of our core application verticals, including industrial, off-highway mobile, and technology. Our design, engineering, and software coding expertise 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. In addition, we're seeing smart machine technology accelerate at a rapid pace. Our fluid power team is deploying some of the most advanced solutions tied to IoT, telematics, and electrification for fluid power systems. Component delays and supply bottlenecks remain hurdles within the system build and assembly focused area of our business, but our team is doing a great job managing these dynamics and our backlog provides growth visibility into fiscal 2023. In addition, demand continues to expand for our higher margin process flow control products and solutions. MRO activity and capital spending on process infrastructure remains positive in core end markets such as chemicals, refining, petrochemical, utilities, and metals. Our flow control solutions are increasingly used in applications tied to our customers' decarbonization efforts and other required infrastructure investments as end markets transition around new energy requirements. Additionally, we're seeing notable progress in cross-selling our flow control solutions through our service center network as we connect strategic and local accounts to these leading process capabilities. We see further momentum building into fiscal 2023 as we execute on this meaningful opportunity. As it relates to our expanding automation platform focused on next generation robotics, machine vision, and digital solutions, we continue to see strong growth in orders and backlog. Customer interest in new business opportunities are being reinforced by labor constraints and evolving production considerations post the pandemic. These trends are expanding the need for automation and are leading engineering capabilities across functions such as material handling, production inspection, machine tending, palletizing, and quality control. We're making traction with our greenfield expansion initiatives and developing new approaches to best serve our embedded customer base and further enhance our market position, including through proprietary turnkey solutions and leading application expertise. We see significant potential to further scale this platform into fiscal 2023 and beyond, both M&A and organic initiatives. Overall, the growth momentum sustaining across our core operations and emerging solutions is encouraging. At the same time, our teams remain focused on driving strong returns as this growth continues to manifest through both consistent execution and continuous improvement actions. We saw this once again during the fourth quarter where we responded well to inflationary pressures industry-wide by implementing further price actions and other countermeasures. Cost leverage also remained solid. Combined, these dynamics continue to drive strong EBITDA margin expansion despite ongoing LIFO expense headwinds. When looking at fiscal 2022 in total, we recorded 26.5 million of LIFO expense, which represented an over 70 basis point headwind on our margin trends during the year. Despite this meaningful hurdle, we held gross margins relatively unchanged and expanded EBITDA margins by over 90 basis points to new record levels. This is a tremendous accomplishment by our team and provide strong evidence of the underlying margin and return improvement potential across supply as we continue to execute our strategy. Lastly, we ended fiscal 2022 with a healthy balance sheet with net leverage at 1.2 times and over $1 billion in balance sheet capacity. We remain disciplined and focused on deploying capital that enhances our scale, growth profile, and competitive position going forward. This includes organic investment opportunities as well as through additional M&A with an active pipeline that we look to execute on during fiscal 2023. While our capital deployment priorities have not changed, we remain flexible to return capital to other avenues if necessary, including opportunistic share buybacks. Given our long-term earnings potential and the intrinsic value we see across our company, as you saw in our release today, our board approved a new 1.5 million share repurchase program that refreshes our buyback capacity for future share repurchase activity. Now, at this time, I'll turn the call over to Dave for additional detail on our financial results and outlook. Thanks, Neal. And just another reminder before I begin,