Applied Industrial Technologies, Inc.

Welcome to the fiscal 2023 third quarter earnings call for Applied Industrial Technologies. My name is Frank and I'll be your operator for today's call. At this time, all participants are in the listen-only mode. Later, we will conduct a question and answer session. If you wish to ask a question at that time, please press the 1 followed by the 4 on your telephone keypad. Prior to asking a question, please lift your handset to ensure the best audio quality. If at any time during the conference you need to reach an operator, please press star zero. 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, Frank, 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. 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 statements. 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. As usual, I'll begin with some perspective and highlights on the key drivers of our results, including an update on industry conditions, as well as expectations going forward. Dave will follow with more detail on the quarter's financials and provide additional color on our outlook and guidance. And then I'll close with some final thoughts. So overall, we had another solid quarter demonstrating our industry position and operational focus. We grew EBITDA by 29% and adjusted EPS by 36% on approximately 15% sales growth. This is on top of similar levels of growth in the prior year period. So very strong compounding growth and earnings power that we believe is top tier within our core marketplace. Digging further into the results, we expanded both gross margins and EBITDA margins, further enhanced our return on capital metrics, and generated stronger cash flow, both year over year and sequentially. We did this against the backdrop of ongoing inflationary pressures and supply chain constraints, as well as some moderation in broader market activity. I want to thank our entire team for their ongoing effort and focus on optimizing and positioning the company to achieve these results. So a few key points to emphasize and provide more detail on in terms of underlying demand. customer activity remained generally positive during the quarter. Feedback from our teams on the ground continues to highlight a relatively productive marketplace. Growth was strongest in many of our top industry verticals and across our larger national account base. We're also capturing new business opportunities from our industry position and technical capabilities as customers address increased maintenance requirements, continue to work through backlogs, consolidate their spend across our comprehensive product and solution set. We're seeing more and more examples of cross-selling success, expanding wallet share with strategic accounts, and engaging new local account relationships. These are strong and sustainable self-help growth tailwinds that we look to build on into the future. As expected, we did see broader market activity normalized some as the quarter progressed, following a relatively busy production backdrop over the past several years. Shipment activity tied to system assemblies and engineered solutions also moderated slightly, following strong backlog conversion during December and January. Again, largely what we had anticipated. Sales month to date in April are trending up a high single-digit percent on an organic basis versus the prior year. As reflected in our updated guidance, we remain mindful of ongoing macro headwinds that could weigh on near-term market activity. That said, as we highlighted before, we are favorably positioned to continue to outperform the broader market, reflecting our industry position and internal growth initiatives. Part of this reflects our ability to capitalize on key secular growth trends, gaining momentum across the North American industrial sector. This includes greater infrastructure spending, reshoring, an aging and scarce technical labor force, and incremental growth from government stimulus spending. We believe all of these dynamics are positively influencing our underlying growth today, and could have an even greater impact into the future. This is particularly true across our service center segment, which had another solid quarter with organic sales growth of 16% and strong incremental margins. On a two-year stack basis, segment organic growth was up nearly 30% during the quarter, while year-to-date segment operating margins are up nearly 240 basis points from an adjusted operating margin levels two years ago. Reflecting on these results, it's clear our service center network is much stronger and more productive business today, following a number of initiatives, investments, talent additions, and process improvements made in recent years. Similar to last quarter, we did see some slowing in select end markets during the quarter, such as metals and lumber and wood. However, overall booking levels remain relatively stable, and in markets that are slowing across our service center network, the underlying trend is manageable to date and not indicative of a material correction. In addition, many of our top industry verticals in the U.S. remain strong in the quarter, with greater than 20% growth within food and beverage, pulp and paper, chemicals, and mining. We believe our service center customers remain focused on sustaining appropriate MRO activity on core production equipment in the current backdrop as they mitigate supply chain risk and position production capacity for growth in the years to come, especially when considering potential reshoring, infrastructure spending, and increased CapEx requirements. Within our engineered solution segment, which includes our fluid power, flow control, and automation offerings, we had another solid quarter of double-digit growth with organic sales up 13% from the prior year. While moderating from the plus 20% growth we saw last quarter, this partially reflects more normalized shipment activity and backlog conversion following the strong trends we saw late last quarter. We continue to see solid growth in our industrial and off-highway mobile fluid power verticals, where our technical solutions and engineering capabilities remain in high demand as OEMs face required technology, energy efficiency, and safety enhancements for their systems and equipment. Growth across our specialty flow control operations was also favorable in the quarter. reflecting steady MRO activity and maintenance project spending on process infrastructure and continued growth opportunities emerging from our customers' decarbonization efforts. Underlying demand within our automation platform remains positive, driven by strong secular tailwinds and our expansion initiatives. This level of sales growth in the third quarter moderated from the over 20% growth we saw last quarter, though primarily reflecting shipment timing and ongoing supply chain constraints. Year-to-date organic sales across our automation platform are up a healthy double-digit level despite ongoing supply chain headwinds, and we continue to see favorable growth in many of our core industry verticals and applications. We remain very excited about the potential of our automation platform, including an active pipeline of strategic M&A opportunities that we expect to further scale and optimize our competitive position going forward. In early April, we announced the acquisition of Advanced Motion Systems, which represents the sixth automation acquisition over the past four years. With annual sales of around 10 million, the transaction is on the smaller end, but is a great accretive bolt-on automation business that optimizes our footprint in the Upper Northeast region with strong capabilities in machine vision, motion control, and related services. We welcome AMS and look forward to leveraging their capabilities going forward. In addition to our sales performance, we had another strong quarter of margin improvement, both at the gross margin and EBITDA margin level. We're managing ongoing inflationary pressures through channel execution and countermeasures. Combined with our cost, discipline, and efficiency gains, we grew EBITDA nearly twice the rate of sales growth and expanded EBITDA margins sequentially and year over year. Year to date, EBITDA is nearly 60% higher on an adjusted basis than it was four years ago prior to the pandemic. While some of that growth is tied to the bolt-on automation acquisitions we've completed, the core driver is organic execution from our team in enhancing our growth profile, productivity, business mix, and cost structure in recent years. The expansion of our underlying earnings power is a strong testament to our strategy, commitment to operational excellence, and industry position. Lastly, we're in a strong position to take full advantage of our future organic growth and M&A opportunities moving forward. Our balance sheet has modest leverage currently, and we expect stronger cash generation going forward as our working capital requirements moderate following heavy investment in recent years. As it relates to M&A and capital deployment opportunities, we're holding firm to our return requirements and balancing broader macro dynamics. Our top M&A priorities remain focused on automation, fluid power, and flow control where we have an active pipeline. We'll also continue to evaluate options to strengthen our service center network where appropriate. through ongoing IT investments as well as select acquisition opportunities aimed at optimizing our market coverage, talent, and service capabilities. In addition, we'll continue to evaluate share buybacks and ongoing dividend growth as secondary options to deploy capital and drive returns. At this time, I'll turn the call over to Dave for additional detail on our financial results and outlook.