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spk01: Welcome to the fiscal 2024 third quarter earnings call for Applied Industrial Technologies. My name is Rochelle 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 the time, please press star followed by the number one on your telephone keypad. Prior to asking a question, lift your handset to ensure the best audio quality. If at any time during the conference call 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.
spk04: Okay, thanks, Rochelle, 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 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.
spk03: Thanks, Ryan, and good morning, everyone. We appreciate you joining us. 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. Overall, our third quarter results reflect our strong industry position and ongoing progress with our internal growth initiatives against a mixed and evolving in-market backdrop. There are a couple of puts and takes I want to walk through. First, sales exceeded our expectations during the quarter and returned a modest year-over-year organic growth. The year-over-year trend improved each month through the quarter. While partially reflecting easy comparisons, reported sales also benefited from solid performance across our core service center segment, where steady break-fix activity sales process initiatives, and secular growth tailwinds continue to drive positive momentum. This was partially offset by ongoing modest sales declines within our engineered solution segment. While the decline was slightly greater than expected, we're seeing several encouraging developments, including stabilizing technology vertical headwinds, strengthening process flow orders. In addition, our automation platform is also developing significant growth opportunities that we expect to start building in the quarters ahead. All of this indicates that fiscal third quarter 24 will represent the trough in the segment's year-over-year sales performance. Combined with improving short cycle macro demand indicators in recent months and potential incremental tailwinds, tied to infrastructure spending, reshoring, and our cross-selling efforts. We are positioning the business to accelerate organic growth in coming quarters and progress towards our long-term growth objectives. This growth positioning and the modest sales growth backdrop near-term resulted in some expense deleveraging during the quarter. Our applied team continues to execute and control costs effectively as reflected in operating expense up less than 2% year-to-date. This is inclusive of slightly higher support costs and our annual merit increase that went into effect January 1, and despite some prior year expense favorability. In addition, we remain on track to achieve record cash generation this year, which will provide additional capacity for capital deployment opportunities. Our priorities remain unchanged with a primary focus on optimizing growth and operating capabilities through both organic investments and inorganic acquisitions. Secondarily, we look to return cash to our shareholders through opportunistic share buybacks while continuing to support consistent annual increases in our ordinary dividend and managing our balance sheet commitments. Over the past five years, we've deployed over $900 million in capital towards these areas. As it relates to acquisitions, we have significant potential based on an active pipeline and our industry position. We remain focused on our return framework and opportunities that stand to enhance our organic growth, margin profile, and competitive position long term. Considering the fragmented markets we compete in, as well as increasing technical and operating requirements across our industry, we believe M&A activity could increase over the next several years. On that note, as indicated in our press release this morning, I'm pleased to announce a definitive agreement to acquire Grupo Copar, a provider of emerging automation technologies and engineered solutions primarily across Mexico. This acquisition will extend our automation footprint with the addition of 16 locations across Mexico, as well as Costa Rica and Texas. Copar has strong alignment with our strategy, focused on high-value robotics, machine vision, and IoT applications, and they will provide a diverse portfolio of established customers across food and beverage, automotive, light manufacturing, electronics, and pharmaceutical end markets. The acquisition will add approximately 200 new associates and is expected to generate annual sales over $60 million in the first year, with accretive contributions to both gross margins and EBITDA margins. We expect the acquisition to close in the coming weeks, and we look forward to welcoming COPAR to apply and leveraging their capabilities going forward. As it relates to the underlying demand environment, overall dynamics remain mixed but generally stable. Demand within our core technical MRO operations has been resilient, including solid demand across our U.S. service center and flow control operations, where sales increased organically by a mid to high single-digit percent during the quarter, including strong activity during the month of March. We believe steady capacity utilization and heightened technical MRO requirements on critical production infrastructure remain key tailwinds. This has been further supported by an increased focus on energy efficiency and service coverage. That said, in-market dynamics within these MRO areas of our business are bifurcated to some degree. In addition, demand remains more muted across the OEM channel including reduced shipment activity for off-highway mobile fluid power components and systems within our engineered solution segment. We believe this partially reflects ongoing recalibration across various mobile end markets as supply chains stabilize and higher interest rates balance more capital-intensive machinery production. As such, we saw slightly more mixed trends out of our top 30 in markets during the quarter, where 15 generated positive growth year over year compared to 18 last quarter. Growth was most favorable across food and beverage, primary metals, utilities, mining, lumber and wood verticals during the quarter, offset by declines such as machinery, energy, pulp and paper, and fabricated metals. As it relates to the solid performance within our service center segment, we continue to see strong growth across larger national accounts and fluid power aftermarket sales. We also began to see some improving growth out of our local customer accounts during the quarter, partially reflecting demand for our conveyance and shop services. In general, technical break-fix activity remains resilient across many of our key service center markets. We believe our service center customers remain focused on sustaining appropriate MRO activity on core equipment as they position and refresh production capacity for growth in years to come, especially when considering aged industrial production assets across the U.S. and an increase in focus on energy efficiencies. Our technical domain expertise and access to core industrial equipment puts us in a leading position to help customers manage through these operational requirements, particularly as they struggle with finding skilled labor. In addition, our sales initiatives continue to drive new growth opportunities. We're leveraging technology investments to streamline processes and digitally enhance capabilities and business intelligence. Our service center teams are going to market today as key consultants to our customers' most important capital equipment, making our relationships and interactions increasingly strategic and less transactional. This is driving increased account penetration and account openings, as well as expanding opportunities to cross-sell our technical solutions, including new industrial technologies tied to robotics and IoT. Overall, our service center team is executing at a high level and remains in a strong growth position moving forward. Within our engineered solutions segment, MRO activity and capital spending on process infrastructure remains positive across our flow control operations. Consistent with prior quarters, flow control is benefiting from new business tied to customers' decarbonization and energy transition efforts. This includes technical support for the configuration, assembly, and testing of process systems used in carbon capture, utilization, and storage, as well as producing alternative fuel sources. Combined with internal business development and solid sales execution, we saw flow control booking activity gain momentum during the third quarter with related orders up by a high 10% both year over year and sequentially. In addition, demand and order activity for stationary fluid power systems across industrial-focused end markets remains relatively firm. We believe this partially reflects the many positive secular tailwinds across the U.S. manufacturing base, including investments focused on updating and expanding industrial production infrastructure and aging manufacturing equipment. This includes enhancing efficiency and lifecycle of hydraulic systems and power units, filtration systems, and hydraulic presses, and is reflected in positive fluid power sales growth within metals, mining, and rubber industries during the quarter. That said, these trends were more than offset by reduced activity for off-highway mobile OEM components and systems within fluid power. and to a lesser degree ongoing organic sales declines within our automation operations as expected. We believe the lower number of operating days and holiday timing in March had some impact on the completion and timing of engineered solutions in these more technical and assembly heavy areas of our business. Nonetheless, underlying demand and backlog conversion from mobile OEM fluid power customers was mixed in the quarter, partially reflecting more balanced production activity across various machinery and markets. Overall, while the sales backdrop within our engineered solution segment remains bifurcated near term, we are constructive on the segment's potential into fiscal 2025. Of note, the year-over-year headwind tied to technology vertical has stabilized and could emerge as a positive growth catalyst in coming quarters as comparisons continue to ease and demand within this key end market recovers. Early leading indicators have been directionally positive across the semiconductor space in recent months. In addition, we are favorably positioned to benefit from the ongoing secular growth across data center infrastructure, including providing various fluid conveyance, flow control, and robotic solutions for server cooling, material handling, and technical maintenance. We also note that customer interest in our automation operations remains positive, with our sales funnel and pre-sales engineering activity remaining active. We have meaningful growth opportunities developing in automation Given the scale, service, and engineering capabilities we are developing around advanced technology such as smart vision and mobile robots, as well as the market access our service center network provides. Combined with the building order activity, cross flow control, and easing comparisons, we look forward to seeing a rebound in segment growth in coming quarters. At this time, I'll turn the call over to Dave for additional detail on our financial results and outlook. Thanks, Neal.
spk07: Just a reminder before I begin, as in prior quarters, we have posted a quarterly supplemental investor presentation to our investor site. This is for your additional reference as we recap our most recent quarter performance and updated guidance. Turning now to details on our financial performance in the quarter, consolidated sales increased 1.3% over the prior year quarter. Acquisitions contributed 120 basis points, and foreign currency translation had a positive 20 basis point impact, while the difference in selling days had a negative 80 basis point impact. Netting these factors, sales increased 0.7% year-to-year on an organic daily basis and approximately 16% on a two-year stack basis. As it relates to pricing, we estimate the contribution of product pricing on year-over-year sales growth was in the low single digits for the quarter and relatively unchanged from last quarter. Turning now to sales performance by segment, as highlighted on slides 7 and 8 of the presentation, sales in our service center segment increased 2.6% year-over-year on an organic daily basis when excluding a 1.5% positive impact from acquisitions and a 30 basis point positive impact from foreign currency translation. On a sequential basis, segment sales per day increased 4% from fiscal second quarter, only slightly below normal seasonal patterns, and an improvement from relative trends in recent quarters. Growth in the quarter was strongest across our U.S. service center network, led by solid contributions from strategic accounts, as well as improving growth among local accounts. This was partially offset by more muted sales trends across our international operations. Within our engineered solution segment, sales decreased 3.6% over the prior year quarter. This includes a positive 40 basis points of growth from acquisitions. On an organic daily basis, accounting for one less selling day in this year's quarter, segment sales decreased 3.2% year-over-year. Stronger growth across process flow control markets was more than offset by lower fluid power sales against a difficult prior year comparison, as well as ongoing sales declines within our automation operations. That said, both fluid power and automation sales were unchanged sequentially and, as mentioned earlier, were likely adversely impacted by more muted system shipments due to the calendar shift and holiday timing during March. In addition, contribution from the technology vertical remained subdued during the quarter, though the year-over-year headwind abated relative to recent quarters, reflecting easier comparisons and demand stabilization. Moving to gross margin performance, as highlighted on page 9 of the deck, gross margin of 29.5% increased 8 basis points compared to the prior year level of 29.4%. During the quarter, we recognized LIFO expense of $4.8 million compared to $8.2 million in the prior year quarter. This net LIFO tailwind had a favorable 30 basis point year-over-year impact on gross margins. Third quarter life expense was, however, up sequentially and slightly higher than our expectations. In addition, we estimate gross margins in the quarter include approximately 10 basis points of unfavorable mix compared to prior year levels. This primarily reflects lower engineered solution segment sales, as well as strong national account sales growth and a lesser mix of automation engineered solutions compared to the prior year. Overall, we continue to manage broader inflationary dynamics well through our ongoing initiatives, including enhanced analytics, rate expense management, and channel execution. As it relates to our operating costs, selling, distribution, and administrative expenses increased 5.3% compared to prior year levels. SD&A expense was 18.9% of sales during the quarter, up from 18.2% during the prior year quarter. on an organic constant currency basis, SD&A expense was up approximately 3% over the prior year period. We saw slightly greater than expected expense deleveraging in the quarter given muted sales growth combined with higher employee costs, professional fees, and investments tied to a growth and supporting our constructive outlook. In addition, year-over-year SD&A expense comparisons were impacted by some cost favorability in the prior year period relating to strong AR collection performance and related provisioning reversals. We continue to manage costs well as we balance expense controls against our growth initiatives and outlook, as well as face ongoing inflationary pressures. Overall, slightly greater than expected engineer solution sales declines, combined with unfavorable expense absorption, mix, and difficult prior year comparisons, resulted in reported EBITDA declining 3.3% year-over-year during the quarter, while EBITDA margin of 11.8% decreased 56 basis points year-over-year. We view the year-over-year declines in EBITDA and EBITDA margin as a transitory near-term dynamic and largely isolated to the third quarter, particularly when considering prior year comparisons. On a year-to-date basis, we note EBITDA has increased 4% compared to a 2% sales increase, while EBITDA margins are up approximately 20 basis points year-to-date. We also continue to reflect benefit from lower net interest expense, which was down nearly $5 million from the prior year, and primarily reflects reduced debt levels and greater interest income from higher cash balances and investment yields. combined with a lower tax rate relative to prior year levels, reported earnings per share of $2.48 was up 4% from prior year adjusted EPS levels. Moving to our cash flow performance, cash generated from operating activities during the third quarter was $84.2 million, while free cash flow totaled $76.7 million, or 79% of net income, and was up 14% from the prior year level. Year-to-date, we have generated nearly $235 million of free cash, which is up 64% from the prior year, reflecting sustained earnings growth, our enhanced margin profile, and ongoing progress on working capital initiatives. From a balance sheet perspective, we ended March with approximately $457 million of cash on hand and net leverage at 0.3 times EBITDA. which is below the prior year level of 0.9 times and unchanged from last quarter. Our balance sheet is in a solid position to support our capital deployment initiatives moving forward, as well as enhance returns for all stakeholders. During the third quarter, we repurchased approximately 100,000 shares for $18 million. This brings our year-to-date total on share repurchases to $29 million. Turning now to our outlook, As indicated in today's press release and detailed on page 12 of our presentation, we are updating full year fiscal 2024 guidance to reflect third quarter performance and our fourth quarter expectations. Specifically, we now project adjusted EPS in the range of $9.55 to $9.70 based on sales growth of 1.5 to 2.5%, including a 0.5 to 1.5% organic growth assumption, as well as EBITDA margins of 12 to 12.1%. Previously, our guidance assumed EPS of $9.35 to $9.70, sales growth of 1 to 3%, and EBITDA margins of 12.1 to 12.3%. The updated adjusted EPS guidance range excludes the $3 million net tax benefit realized in fiscal 2024 second quarter related to the tax valuation allowance adjustment. Our updated guidance implies a fiscal fourth quarter EPS range up $2.44 to $2.59 on an organic sales per day range of down one to up 2% year over year, and EBITDA margins of 12 to 12.4%. Our fourth quarter sales guidance takes into consideration organic sales month to date in April, which are down by a low single-digit percent year-over-year, combined with ongoing economic uncertainty. In addition, we expect year-over-year sales declines to persist in our engineered solution segment during the fourth quarter, reflecting softer fluid power OEM demand and uncertainty around the timing and magnitude of recovery across the technology vertical. Overall, while we remain constructive on our setup moving forward, considering easier prior year comparisons, favorable trends within our shorter cycle service center operations, and sustained benefits from our internal initiatives, we believe it remains prudent to take a balanced approach to our near-term outlook pending more definitive and broader signs of a positive inflection in macro and industry conditions. Lastly, from a margin perspective, we expect fourth quarter gross margins to be flat to up slightly sequentially, inclusive of ongoing mixed headwinds near term. We also expect ongoing expense deleveraging near term, based on our fourth quarter sales outlook and growth positioning, go to a lesser degree than in the third quarter and balanced by cost controls and reduced professional fees. Combined with lower LIFO expense compared to the prior year and easier comparisons, We expect year-over-year EBITDA trends to show improvement from third quarter performance. With that, I'll now turn the call back over to Neil for some final comments.
spk03: Thanks, Dave. As we prepare to close out fiscal 2024, I'm proud of the ongoing progress we're making to strengthen our industry position, customer experience, and growth potential. This is evident in our year-to-date performance, where we have sustained year-over-year organic sales growth, against difficult high team growth comparison during a period of sub 50 PMI readings, declines in industrial production, and notable technology vertical headwinds. We've also expanded margins and sustained earnings growth year to date while strengthening our cash generation to record levels. These results clearly show the traction of our strategy and internal initiatives are having, including diversifying our in-market mix, gaining exposure to sustainable non-cyclical growth tailwinds, and enhancing our operational capabilities. As we look ahead to fiscal 2025, I remain constructive on the outlook for our company and the potential for sustained above-market sales and earnings growth. While we are cognizant of various cross-currents that remain, we are encouraged by recent improvements in various industrial macro indicators that correlate with our business. This includes the ISM PMI above 50 during March, including the production sub-index at its highest level in nearly two years. In addition, durable goods orders are showing improvement and federal stimulus for infrastructure build-out is starting to flow at a greater rate. We're also uniquely positioned to benefit from many secular and structural tailwinds continuing to play out across North American manufacturing and industrial sectors. Our technical domain expertise within industrial facilities across North America, including local MRO and engineering support on critical capital equipment, is increasingly vital as customers manage through an aging skilled labor force, along with continuing requirements tied to reshoring and U.S. infrastructure investments, both of which are expected to gain momentum moving forward. We see additional support levels from energy security and supply chain hardening. In addition, our strategic positioning and capabilities in areas of pneumatic automation, fluid conveyance, and robotics have expanded our addressable market and organic growth profile across the technology sector, which we believe could reemerge as a meaningful earnings tailwind, giving ongoing and critical build-out of semiconductor manufacturing and data center infrastructure. Combined with our balance sheet capacity, we expect to make ongoing progress in fiscal 2025, to move towards our intermediate objectives of $5.5 billion in sales and 13% EBITDA margins, while also developing the next step in Applied's evolution and long-term potential. I want to recognize our entire Applied team. They're the foundation of our performance and evolution. Their perseverance and customer focus and operational focus provide a strong position to accelerate our potential moving forward. As always, we thank you for your continued support. And with that, we'll open up the lines for your questions.
spk01: Thank you. We will now begin the question and answer session. If you would like to ask a question, please pick up your handset and press star, followed by the number one on your telephone keypad. If you would like to withdraw your question from the queue, press star one again. As a reminder, if at any time you need to reach an operator, please press star zero. We'll pause for just a moment to compile the Q&A roster. The first question comes from the line of David Manthe from Baird. Please ask your question.
spk05: Thank you. Good morning, everyone. First question is on your positioning the company for accelerating growth. in the coming fiscal year, could you just talk a little about the type of investments that includes? And then, of course, everyone has a plan until they get punched in the face. And obviously, if things don't materialize as expected, how can you adjust the posture of that growth that you're leaning into? If things don't materialize as planned, if at all, maybe some of those things you'll just wait it out. But if you could give us an idea of the plan here for the coming fiscal year, I'd appreciate it.
spk03: Yeah. And, hey, David, I'd say still a little early as we think about the fiscal 25. Obviously, we're working through it and we'll talk more later. specific on it. I did tell some of the team, in my view, this is almost the most wonderful time of the year, right? We work to close a fourth quarter. We build long-range three-year plans, plus our next year's operating plan. So we're active into it. I think on preparing the company for growth, I think we've been doing that. As we look at our position in around technical mro and our service centers position there and the benefits that we have for ongoing secular trends from reshoring and heightened investment and our customers dealing with probably low capex in that industrial capacity for a period of time and then this aging technical workforce so stay well positioned there and then the trends that we see around infrastructure and technology and how we've diversified the company and engineered solutions. And so even now, right, we absorb some off-highway mobile headwind with that diversification that we've had around flow control, the industrial side of fluid power, and now even more on automation. So I think specifically in the quarter, as we saw a little bit of that volume softening late in March, You know, we knew in that with some of the holiday timing, the businesses around off-highway mobile and certain degree automation are a little labor intensive of building out those solutions, either on our part or customers accepting them. So I think that played into a little bit of the result in that period. But our view is obviously we're staying committed to having the right technical resources and in both sales engineering and application engineering to convert these projects. I like the work that we have in emerging areas, including things like electrification in that. And so those will be the investments that will continue. If some of this doesn't materialize or the environment changes, obviously we've got natural shock absorbers in the business as we think about our cost position in that. If there's lower volumes, things in commissions and incentives adjust, freight adjust, so there's those natural shock absorbers. And then if it's beyond that, I think obviously we've demonstrated the cost accountability and have the history that will respond accordingly. But if I look out, I don't think that's the environment that we're preparing for. Obviously we know how, but I am constructive on the outlook that we have for performance and really some continued outperformance as we turn into 25.
spk07: I'd just tag on there, David, and add that a lot of this investment was more transitory in nature. If you look back, obviously, to the last couple of years and especially during the COVID downturn, we continue to make investments in the business while leveraging some of the shock absorbers that you indicated and some of the benefit from our systems investments, shared services, process improvement, etc., So if I strip apart the SD&A for you, you know, point out the impact of currency, the M&A, you know, kind of cost that's been added on a year-over-year basis, and the AR provisioning that was, you know, an unusual prior year benefit that we call it out, up only 1.2% operationally year-over-years. And as I look at the, you know, kind of the impact of staffing, you know, only, you know, 30 basis points of that was really driven by higher staffing costs, the merit impact, et cetera, and some of the investments that we've made in personnel resource, a lot of these investments were more transitory in the terms of supporting the co-power acquisition, the legal work that went on behind that, some of the automation greenfield activity we have going on, as well as some of the expansion that we have ongoing with both Olympus to support some of the automation opportunities we've seen going forward. as well as some expansion of facility in the tech side of the fluid power business, thinking about what's coming at us there with the, particularly out of the semi-space. So, you know, just give some further clarification on some of those investments and how we see some of this, you know, normalizing to a degree in terms of the deleveraging in Q4.
spk05: Yeah. Thanks for all that detail. You guys are clearly well positioned and You've historically been very nimble as it relates to changing economic landscape. So just another quick one on this Grupo Copar. If you pro forma this fiscal year, say fiscal 24 for that acquisition, assuming it goes through, what would be the revenue run rate at that point? Second, I'm assuming that COPAR works with these maquiladoras. Are some or many of the customers that they deal with domiciled or have U.S. operations that becomes a cross-sell opportunity for you now?
spk03: So I can start. Based on the footprint and the capabilities, they would be – more than just Maquiladora's strong presence in the interior and throughout Mexico. Obviously, we're encouraged if we think about the amount of foreign direct investment going into Mexico and many people looking at it as an additional place to do business as supply chains more regionalized or localized, you know, U.S.-North America perspective. So, We view that as very encouraging. There will be some opportunity for cross-selling and further customer cooperation in U.S. and Mexico, but also we have a very strong position in Mexico on our service center side of our business today and operate, so we think about bearings and power transmission and fluid power. In time, that will open up some of those opportunities. If I think about it from an annualized basis on sales, we touched on it to around the $60 million of sales. And basing on the time it closed, we can look at calendarizing it. But I'd say at first pass, it'd be pretty orderly from a rate standpoint.
spk05: All right. That all sounds great. Thanks a lot, guys. Thank you. Thanks, Abe.
spk01: The next question comes from the line of Christopher Glynn from Oppenheimer. Your line is now open.
spk06: Thanks. Good morning. I wanted to ask about the tenor you're seeing from the smaller customer base. One concern we've had is the kind of lagged effective rates and inflation on the less resourceful portion of the industrial economy. So I'm wondering if you're seeing any particularly interesting insights into that smaller customer base.
spk03: Yeah, I'd say specifically as it relates to that, we saw positive developments that helped contribute to the overall service center performance on that. We're also seeing that customer segment look to more things for us to do and help them with. Obviously, they too can be challenged with workforce, aging technical workforce in that. And so just like large customers have been looking at that and outsourcing some of those requirements, we're seeing local customers expand. So, you know, we remain encouraged. I think, you know, we touched on our overall markets. All in all, still a good productive environment, you know, with 15 of them up, slight decline from the prior quarter at 18. But Those local customers participating, especially in those vertical segments, are active and doing well. And I think local customers are getting pulled into and benefiting from ongoing reshoring. Because I think some of these larger customers and these global customers are either pulling the work internal or they're finding qualified, localized suppliers to help them with. And I think that's been an additive lift for some in the local economy.
spk06: Thank you for that. And I wanted to follow up on the linearity. I think that things improved throughout the month. April was low single digits. I think that has favorable Easter timing in the comparison. So just curious how to kind of plug that into our thought process on the fourth quarter guide with April seeming a little less constructive toward that.
spk03: Okay, no fair. Good question. You know, clearly March was good across the service center network. A little bit of normalizing in there, but still positive trends. If I think about April from a comparable standpoint, it does step up a little bit, a little tougher comparison, I think, by maybe a couple hundred basis points there in the side. And so still a few days to go in that April side. So I don't read too much into it, but obviously, hey, we want to be prudent and have the right balance as we look ahead at some of these crosscurrents and as we prepare for fiscal 25 and the opportunities that we see ahead. Got it. Thank you.
spk01: The next question comes from Ken Newman with KeyBank Capital Markets. Your line is now open. Mr. Newman, your line is going to open. All right, thank you.
spk08: Hey, sorry about that. Good morning, guys. Good morning. Just curious, you know, can you just talk through the implied 4Q ADS growth guide? You know, obviously the midpoint is assuming a sequential step down from the 70 basis points up you put up this quarter. But the comp next quarter looks like it's stepping down again, and the end is much easier. any color on whether the the guide is really just conservatism or is it just taking a more prudent approach to what you're seeing so far in april just any color to help us think about uh you know your expectations for the sequence of ads growth as we move throughout the next quarter you bet uh you know here again guys some so really the guide does assume some continuation you know of the
spk07: the trends that we saw and no real recovery out of the tech or the, you know, the fluid power OEM space. So that, like I said, just a couple of the market uncertainty, we said, you know, we wanted to be prudent as we think about the guide. So, you know, the Q4, once again, that would imply organic sales growth, you know, in the updated guidance of, you know, overall 1% to 4% up on an organic basis, you know, down potentially 1% to an up 2%. You know, so at the midpoint, that would assume some, slight further deterioration in the overall markets. So we'll work to offset that, obviously, with the continued push on some of the opportunities and the stronger booking trends that we are seeing in that engineered solution space, where for the first time in about seven quarters, we did see kind of a one-to-one book-to-bill ratio. So that was encouraging as we've seen some of those order trends come back, which have continued to supplement some of that stronger flow control, you know, kind of, like I said, high single-digit, you know, growth that we saw there in the most recent quarter. So that's how I'd frame it up, you know, really a continuation of the same that we saw, you know, this quarter with the, you know, just the further uncertainty and it's a potential, you know, further market contraction centered around that midpoint.
spk03: Yeah, I'd say further into it, Ken, if we look at the detail, you know, we think the Service centers in that could be flat, up low single digit, but while the engineered solution segment preps down low single digit as we take it forward. So there's sequential improvement at the midpoint, but probably slightly less, maybe 100 basis points below that normal seasonal pattern. Understood.
spk08: That's very helpful. For my second question, just going back to Copar, I think this may be one of the first deals that you've made that's really focused on the Mexican market. I'm just curious, how large of an opportunity is Mexico for you? And should we think about this deal or view it as a modest shift for focusing more on the international market rather than the U.S. North American market?
spk03: Well, you know, I started saying, hey, one, we're excited about the addition. We see a lot of alignment from a strategy standpoint. I mean, we have a common approach in thinking about vision and robotics and linear motion and connectivity. Teams have known one another for an extended period of time now. And so we see a lot of growth opportunity. Back to the earlier, the economy in Mexico, the amount of foreign direct investment coming in. So we think that is very positive. We've said for a while, our focus clearly remains on our U.S. opportunities and U.S. North America. And in time, we'd like to add to our capabilities outside of the U.S., in North America with automation and some of the other engineered solutions areas. So, hey, it's a logical extension, but we still will remain to have a clear U.S.-North America focus because market-backed, that's where we see significant opportunities. Yep.
spk08: Maybe if I could just squeeze one more in here. On the automation business specifically, where is that run rating and revenue today, and Do you have a sense of when sales there starts to bottom out?
spk03: We think probably sales would be similar in the fourth quarter. So in this last quarter, we were mid-single-digit decline in that side. If I look at pre-order or order activity, what our sales engineers are involved with, projects that our application engineers are working with, the cooperation, the opportunities that our service centers are opening up on that side. We think as we go into fiscal 25, there's a return to growth in that segment. If we look down below in some of those product groups, we think there's going to be more and more mobile robotics opportunity in that side. So I think that's what we would expect going forward. We entered the fiscal year. at a run rate of a couple hundred million with automation. Obviously, as we progress forward and move towards closure with COPAR, we'll add to that 60 million of sales or so in that side. So we continue to scale this business. We'll look for opportunities to organically grow. We've green-filled in a couple of geographies, and so we'll also look at perhaps right acquisition opportunities to further build out that footprint and platform. But we're encouraged by it, as we are with the amount of automation that exists in some of our other parts of engineered solutions right now, because there's elements of that that reside in, you know, fluid power, but also our flow control as well.
spk07: I just remind you, Ken, we did say on the airbergs that the, you know, sequentially the automation shipments were ruined with Q2. So it feels like, you know, we've seen Seeing that trough, I said, you know, did see stronger order intake, you know, that kind of one-to-one parity, obviously, as we talked about with the shipments in the quarter. So that was a positive sign. So hopefully we've seen that trough and do see some improvement given some of the booking rates and the project quotation activity that we're still enjoying right now.
spk08: Great. Thanks.
spk01: The next question comes from the line of Chris Dankert with Loop Capital. Your line is now open.
spk09: Hey, good morning, guys. Thanks for taking the question. I guess just first off, obviously not a principally backlog-driven business, but is backlog still kind of 2x what the normal level is in engineered solutions? And if so, is there any kind of bottleneck kind of still slowing down some of those shipments from moving forward here?
spk03: It is. Go ahead, sir. I would say yes. It's still running at that, if we think about it, pre-pandemic levels of 2X normalized backlog, so that is encouraging. There's probably pockets that some things could be held up by some component or assembly or where the solution fits in the overall project with the customer in that side, so there could be some of that. But we view the backlog at its level constructive. You know, hey, we touched on in the remarks, you know, flow control added to it in that side. So we think there's a productive base to operate from. And we would think that orderly works its way out as we look forward, especially as we go into 25. Got it.
spk09: Got it. Makes sense. And then just anything to write home about in terms of the Northwest facility expansion, any update on the facility there?
spk03: Continue to make good progress in that side. We'll move to beneficial occupancy soon into that. And so we're encouraged by that progress as well as, you know, Dave mentioned one other that we have. in the fluid power space as well. So they're good projects. They take a little bit of time, effort, focus, and attention. I appreciate the resources that are working on it. Some of that expense creeps in to the results into the quarter, but we think those are very much investments to be making in the automation, in the technology, in the support of the semiconductor build-out overall. good progress, and perhaps we'll look forward to showing it to a few in the coming periods.
spk09: Yeah, exciting developments for sure. Well, thank you, fellows, and best of luck finishing out the year here. Okay.
spk01: The next question comes from the line of Aaron Reed with North Coast Research. Please ask your question.
spk00: Great. Thanks for taking my question. Just taking a step back and looking a little bit broader here. Can you speak on really what you're seeing in terms of on the inflation front? I know some of your competitors are seeing it come down quite a bit. You know, what is your experience and kind of what are you seeing right now?
spk03: Yeah, I would say, I mean, we will have continued expectations for inflation. And so if I look at obviously down from the pandemic-driven type inflationary periods. But if I look at prior to that, the number of increases are similar, right? Suppliers are getting orderly on that. But the rate of the increase is higher. And I think perhaps that could translate to roughly 100 basis points more with the rate of the increase in the side. And I can contend there's going to be continued inflation into the business uh looking forward while material inputs may soften or abate to a degree the labor side of that has not the general gna type expenses of medical and some other things have not in those fronts so from our side we continue to see supplier increases The pace is, you know, more normalized in that. Perhaps the amount of the increase slightly higher than they've been by historical standards.
spk07: Which still reads through to some of the higher LIFO expense that we talked about in the quarter, a little bit higher than expectations. So, you know, we historically hear again, you know, kind of nice steady inflation like this, you know, very good for industrial distributors, have demonstrated the capability of taking that, you know, passing it on. Just a reminder, it does not necessarily always come in the form of price. There are some offsets to the degree that we have strategic or large national accounts where we've got contractual pricing. Our key suppliers will work with us to absorb those price increases for the interim and make us whole so that we're not seeing that. So it doesn't necessarily read through as a one-to-one price, but certainly Neil indicated seeing that steady inflation continue, which overall is a positive for the business.
spk03: Okay, great. Thank you. Thank you.
spk01: At this time, I'm showing we have no further questions. I will now turn the call over to Mr. Scrimshaw for any closing remarks.
spk03: I just want to thank everyone for joining us today, and we look forward to talking with you throughout the quarter. Thanks.
spk01: Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.
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