Applied Industrial Technologies, Inc.

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.

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.

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.