Applied Industrial Technologies, Inc.

Greetings and welcome to the Fiscal 2024 First Quarter Earnings Call for Applied Industrial Technologies. During the presentation, all participants will be in a listen-only mode. Afterwards, 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 0. As a reminder, this conference is being recorded Thursday, October 26, 2023. I would now like to turn the call over to Ryan Cieslak, Director of Investor Relations and Treasury. Please go ahead.

Okay, thanks, and good morning to everyone on the call. This morning we issued our earnings release and supplemental investor deck detailing our first 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 the 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 first quarter results, current industry conditions, and our expectations going forward. Dave will follow with more specific detail on the quarter's performance, as well as our updated outlook and guidance. I'll then close with some final thoughts. So overall, we had a nice start to fiscal 2024. We delivered strong earnings performance with EBITDA and EPS growing a respective 12% and 21% over the prior year and hitting new record first quarter levels. This was against a more modest sales growth backdrop that was largely in line with our expectations. The applied team did an outstanding job driving gross margin expansion during the quarter, reflecting ongoing internal initiatives, strong channel execution, and freight cost management. We're also beginning to see LIFO expense normalize as inflation starts to moderate and inventory levels stabilize. As highlighted in past calls, LIFO expense was a notable headwind to margins and earnings over the past several years. While we anticipate inflation to persist going forward, and there's a degree of uncertainty on the cadence of LIFO expense moving forward, we expect more normalized LIFO expense levels to provide a clearer view of the progress we continue to make along our initiatives, as well as the ongoing evolution of our business mix and industry position. We also had another solid quarter of demonstrating cost control. In addition to lower variable expenses as sales growth normalizes, we continue to benefit from greater efficiencies and cost leverage following investments in talent and technology, as well as an ongoing focus across our shared services model. Our operational discipline and execution commitment remain key guiding posts as we navigate an evolving demand environment and continue to invest across our business for future growth. As it relates to the broader demand backdrop, trends were largely in line with our expectations during the quarter. As we highlighted in recent quarters and consistent with macro industrial indicators, we continue to see normalization in customer activity across areas of our business. Customer production facilities have settled into a steady cadence following a heavy utilization ramp in recent years. In addition, we continue to face a headwind from slower activity across the technology sector, which we estimate negatively impacted our year-over-year organic growth by over 100 basis points in the quarter. A slower technology vertical has impacted our year-over-year sales growth for almost a year at this point. Our exposure to technology vertical has increased in recent years, both with strong organic growth and acquisition. This includes essential solutions integral to the production supply chains and infrastructure across semiconductor and electronics manufacturing, as well as data center operations. On a side note, orders within this vertical have stabilized and we believe the year-over-year sales trends will begin to improve in coming quarters as comparisons ease and demand starts to rebound, considering the many secular and structural tailwinds within this growth vertical. Outside of technology vertical, underlying sales growth held in well during the first quarter against difficult comparisons. 22 of our top 30 in markets were positive year over year, which is relatively stable with last quarter. Growth was strongest in many of our top industry verticals and across our larger national account base. Trends were most favorable across food and beverage, lumber and wood, mining, pulp and paper, energy, utilities, and refining verticals during the quarter. In addition, we continue to capture incremental growth opportunities from our industry position, local service capabilities, and cross-selling initiatives. We're also seeing more benefits both directly and indirectly from reshoring activity and investments in US industrial infrastructure as well as projects tied to the ongoing energy transition. This includes demand for our technical products and solutions as the broader industrial economy supports incremental production activity from these investments. We're seeing these benefits across many of our businesses in the U.S., including our service center and flow control operations, as well as our core industrial and mobile fluid power business. Related sales across these areas on a combined basis were up a high single-digit percent over the prior year during the quarter. This generally aligns with readings on U.S. industrial capacity utilization, which have been relatively firm at prior cycle highs in recent months. These trends suggest that the current market easing is more reflective of a cooling in customer activity rather than a retrenchment or contraction, while growing secular spending backdrop is providing incremental support. Within our service center segment, sales increased nearly 5% organically over prior year levels, on top of 20% growth during the first quarter of last year. Our core US service center network led the way with relatively firm trends through the quarter, which is an encouraging sign considering the shorter cycle nature of our service center sales and related correlation with the underlying U.S. industrial production activity. We continue to see strong growth across larger national accounts and fluid power aftermarket sales, as well as benefits from our Salesforce effectiveness initiatives. As a reminder, these include greater use of prescriptive analytics, system investments, and ongoing talent initiatives. We continue to benefit from our ability to consistently serve our customers technical break-fix needs at a scaled but localized level while providing them direct access to solutions for their fluid power, flow control, consumables, and advanced automation needs. The progress we've made on our strategy and market position has enriched and deepened our customer relationships within our service center network. This is presenting a greater scope of business opportunities at all points of the business cycle, as we are increasingly viewed as a strategic solutions provider for critical industrial infrastructure. We're also continuing to identify opportunities to further enhance our local service reach and accelerate our growth potential moving forward. This is reflected in the two bolt-on service center acquisitions we announced in early September, Bearing Distributors and CanGrow Industries. Each company brings deep customer and supplier relationships as well as strong technical talent that will strengthen our footprint and strategic growth potential across the U.S. Southeast and Upper Northeast. We welcome both Bering Distributors and CanGrow to the applied team and look forward to seeing their capabilities bolster our value proposition moving forward. Within our engineered solution segment sales, we're up close to 1% organically over the prior year. Segment growth has moderated from prior quarters as expected, primarily reflecting more difficult comparisons and reduced activity across the technology in market, as highlighted earlier. Automation sales were also slightly lower year-over-year on an organic basis during the quarter, though partially reflecting the timing of more complex engineered solution shipments, as well as ongoing component delays and supply chain constraints. This was more than offset by positive sales growth across our off-highway mobile and industrial fluid power verticals, as well as our higher margin process flow control products and solutions. Our mobile and industrial fluid power OEM and the engineered solution sales are benefiting from a healthy backlog that expanded over the past couple of years. Part of the backlog growth reflects market penetration as we continue to leverage our leading capabilities in electronic controls, IoT, electrification, and autonomous systems. This includes design, engineering, and software coding, and the integration of these advanced features into hydraulic and pneumatic systems. Our expertise in these areas is strengthening our value proposition as the fluid power space evolves and is providing a robust pipeline of long-term growth opportunities as we lead the fluid power distribution space towards these next generation platforms. MRO activity and capital spending on process infrastructure also remains positive in our core flow control in markets. with incremental support from backlog conversion and new business tied to our customers' decarbonization efforts. In addition, despite more muted sales growth in the quarter, overall customer interest and new business opportunities remained elevated across our automation operations, with our sales funnel and pre-sales engineering activity remaining at record highs. We're 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 industry position going forward. From a capital allocation standpoint, we remain very well positioned to drive ongoing organic investment as well as accelerate M&A going forward. We have flexibility to return capital through other avenues if necessary. This includes a potentially more active approach to share buybacks considering our positive long-term outlook and the underlying intrinsic value we see across our company as we progress along our strategy and toward our financial objectives. Lastly, I want to highlight our recent published ESG report. which I encourage you to spend time reviewing. We've expanded the report this year to include energy consumption detail, broader information on our sustainability solutions and initiatives, and more insight into our ESG actions moving forward. We remain focused on advancing our commitment and opportunity around this important stakeholder area, both now and into the future. This includes building on our legacy of being a responsible corporate citizen by implementing greener practices in our operations, promoting diversity, fostering continuous learning across our organization, and supporting our communities. At this time, I'll turn the call over to Dave for additional detail on our financial results and outlook. Thanks, Neal.