Applied Industrial Technologies, Inc.

If you would like to ask a question at that 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. And I will now turn the call over to Ryan Cieslak, Director of Investor Relations and Treasury. Ryan, you may begin.

Okay, thanks, Abby, 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 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. And with that, I'll turn it over to Neal.

Thanks Ryan and good morning everyone. We appreciate you joining us. 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 fiscal 2025 guidance. And then I'll close with some final thoughts. So first I'd like to acknowledge and thank our applied team for the hard work and consistent execution throughout fiscal 2024. While we faced a more mixed in market backdrop during the year, the commitment to our strategy and relentlessly serving our customers is standing out across the industry and strengthening our long term potential. It's an honor to be part of this team as we work together. as one applied to achieve our commitments now and fully capture the tremendous opportunity we see ahead for the company. Overall, the strength of our team and strategy was apparent in our fourth quarter. We delivered double-digit earnings growth on strong execution, positive margin momentum, and cost control. This more than offset weaker than expected in-market demand as the quarter played out, which I'll touch on more shortly. As it relates to our margin performance, it was very encouraging end to another solid year of progress in expanding our margin profile with gross margins close to 31% and EBITDA margins exceeding 13% for the first time. While lower LIFO expense provided some benefit in the quarter, It's important to note LIFO expense is normalizing from record levels in prior years. Additionally, when excluding LIFO expense, both gross margins and EBITDA margins expanded nicely over prior year levels in the quarter. We saw benefits from several areas, including strong channel execution, favorable mix across our engineered solution segment where EBITDA margins approached 16% in the quarter, as well as variable expense adjustments and cost control inherent to our model and operating discipline. For the full year, we expanded gross margins by nearly 70 basis points and EBITDA margins by approximately 50 basis points, both reaching new highs. When looking back to fiscal 2017, which is when we began implementing various initiatives around our current strategy, Gross margins have increased nearly 150 basis points, while EBITDA margins have expanded over 400 basis points. Overall, these results provide further evidence of the benefits of our strategy and ongoing evolution, as well as the margin improvement potential ahead as we continue to leverage our differentiated industry position and internal initiatives. This includes ongoing mixed tailwinds long term as we expand our solutions portfolio and grow our local account base, as well as continued benefits from technology investments, analytics, increased scale, and an enhanced organic growth profile. As it relates to sales trends consistent with broader industrial data points, In recent months, we saw additional moderation in the in-market demand as the quarter played out. This resulted in organic daily sales declining 2% over the prior year compared to a 0.7% increase in the third quarter. The year-over-year trend improved some in June on a firm finish to the month and an easier comparison. Similar to last quarter, trends were bifurcated, with sales declines primarily concentrated in the fluid power operations of our engineered solution segment, where equipment OEMs continue to work through excess fluid power component inventory. Sales within our MRO-focused areas of our business, including service center and flow control operations, held in better, with related sales up slightly year over year. As a reminder, MRO-related sales represent approximately 70% of our overall business. That said, MRO billing activity was more mixed compared to last quarter as customers conservatively managed maintenance spending within the uncertain business environment. This bifurcated demand backdrop is evident when looking at our top 30 in markets, where 14 generated positive sales growth year over year compared to 15 last quarter. We're still seeing decent growth across areas such as food and beverage, metals, transportation, refining, and mining. This was offset by declines in machinery, energy, pulp and paper, fabricated metals, rubber and plastics, and utilities. Muted demand trends have sustained into early fiscal 2025 with organic sales through mid-August trending down a mid-single digit percent compared to prior year levels. We would point out early first quarter trends are always difficult to gauge given seasonal slowness in the summer and some normalization following our year end. Also, July started off relatively slow, but improved as the month progressed with the back half finishing flat compared to prior year levels, including a strong finish in the last week. So the demand backdrop remains choppy, which we believe reflects impact from higher interest rates and uncertainty around the upcoming U.S. election. This is resulting in customers conservatively managing production schedules and taking a more methodical approach to capital projects pending near term. It'll be important to see how the latter part of the first quarter shapes up, including activity in September, which is typically a better gauge for underlying demand as production schedules normalize following summer breaks and related plant shutdowns. Looking more into each of our segments, sales in our service center segment declined modestly over the prior year on an organic daily basis. Year-over-year trends held relatively steady through the quarter, but sequential trends were below normal seasonal patterns. Sales were softer across our local account base and within our consumables MSS business, partially offset by ongoing growth across larger national accounts. and fluid power aftermarket sales. Technical break-fix demand, which represents about half our service center sales, held relatively steady during the quarter, as broader production activity was consistent at a more normalized pace. This aligns with the U.S. industrial capacity utilization readings during the quarter, including increases in May and June. On the other hand, spending on general MRO and capital maintenance projects was more mixed, as we saw customers tighten controls and operational expenses and defer capital spending. That said, relative to broader market indicators and benchmarks, our service center operations continue to show outperformance, as well as more resilient growth profile compared to prior cycles. It's important to note that the segment grew 8% organically on a two-year stack basis during the quarter and 29% on a three-year stack basis, which we believe highlights top-tier industry growth over a multi-year period. Overall, our service center team continues to benefit from a strong industry position, service capabilities, and ongoing Salesforce initiatives. as well as greater cross-selling opportunities. We're also seeing incremental growth through our digital channels, including EDI and Applied.com, where related sales increased approximately 9% during fiscal 2024 and including over 6% in the fourth quarter. Combined with ongoing talent initiatives and our local service capabilities, we continue to capture new growth opportunities across both legacy and emerging end markets. Within our engineered solution segment, sales declined 4.6% on an organic daily basis compared to the prior year, primarily reflecting ongoing softness across our fluid power operations. As mentioned earlier and consistent with last quarter, most of the weakness in fluid power is tied to reduced shipments of off-highway mobile OEM components and systems. We estimate fluid power off-highway mobile sales represent about 20% of segment sales or 7% of total sales. we expect the off-highway market to remain somewhat muted for another quarter or so as OEM customers continue to work through excess inventory. However, we remain constructive on the growth trajectory developing in this core area of fluid power given our leading market position and capabilities serving growing industry trends tied to machinery automation, power management, electronic control integration, connectivity, and electrification. The pace of required innovation across off-highway mobile equipment is accelerating faster than ever, given these secular trends and the growing focus on safety, skilled labor constraints, and sustainability. Our strategies and teams are aligned to support thousands of specialized OEMs engineer, design, and integrate these advanced features into their equipment with world-class technologies from top fluid power suppliers. In addition, demand for stationary fluid power systems across industrial-focused end markets remains steady and should continue to positively develop in coming years given various tailwinds. This includes required investments focused on updating aging manufacturing equipment including enhancing the efficiency and life cycle of hydraulic systems, power units, filtration systems, and hydraulic presses. During the quarter, the engineered solution segment was also pressured by ongoing sales decline across the technology vertical, which we estimate negatively impacted segment organic sales growth by approximately 100 basis points. This vertical has been a headwind on the segment for nearly six quarters, but we see positive signs developing. As a reminder, our focus in this vertical provides various fluid conveyance, pneumatic process control, and automation solutions to production supply chains and infrastructure across semiconductor and electronics manufacturing, as well as data center facilities. Recent indicators suggest demand for semiconductors and related fabrication equipment could begin to recover in fiscal 2025, following an extended downturn for more than a year, with commentary from related customers increasingly positive. We're also positioned to benefit from ongoing growth across data center infrastructure, including providing various flow control and robotic solutions, for server cooling, material handling, and technical maintenance. Some of these trends in the technology sector are poised to benefit our automation operations as well. During the quarter, automation sales declined organically by a mid-single-digit percent, but increased 7% sequentially. Our automation business funnel remains high, and demand signals from several high-profile in-market verticals suggest billing and shipment activity could pick up soon. We're also in a great position given our expanding automation footprint and network capacity, including greenfield initiatives, a recent facility expansion in the Pacific Northwest, and our May 2024 acquisition of Grupo Copar. Within our flow control operations, which represent about 45% of our engineered solution segment, sales increased by a low single-digit percent over the prior year. Consistent with prior quarters, our flow control operations are benefiting from new business tied to customers' decarbonization and energy transition efforts, including supporting process systems used for carbon capture utilization and storage as well as producing alternative fuel sources. We continue to see a solid pipeline developing around this industrial megatrend that should directly benefit our leading flow control operations for many years. We're also benefiting from new business tied to data center growth tailwinds across the U.S., including providing valve and inspection solutions in support of liquid processing. The data center end market was a nice incremental contribution to our flow control sales growth in fiscal 2024 and we see additional growth opportunities developing moving forward. I'm also encouraged by the segment's margin performance in the quarter with EBITDA margins of nearly 100 basis points over the prior year and EBITDA growing nearly 5% year over year despite the sales decline. The performance partially reflects a stronger mix of engineered solution sales growing during the quarter, as well as benefits from ongoing pricing and margin initiatives. Our Grupo Copar acquisition also had a modest positive mix impact to the segment gross margins, and we look forward to seeing additional contributions moving forward as they fully onboard. Overall, the segment's margin performance highlights the positive tailwind we expect to persist long-term as we continue to scale the segment and grow our position across engineered solutions and systems. Lastly, we had another record year of cash generation in fiscal 2024, and we accelerated capital deployment with over $250 million spent on organic investments, acquisitions, share buybacks, dividends, and debt repayment. Over the past five years, we deployed over $1 billion in capital towards these areas. During the last three years, we deployed nearly $70 million in CapEx, which represents a nearly 30% increase compared to the prior three-year period. This includes investments in technology, distribution centers, advanced equipment supporting our technical capabilities, and facility expansions tied to our technology vertical and automation operations. Our system investments have enhanced our working capital management and inventory sourcing, both of which will remain key to our ability to gain share and service customers, while optimizing our investment in inventories to effectively do so. As it relates to M&A, we've made five acquisitions over the past year, including two bolt-on transactions we announced today in Total Machine Solutions and Stanley Proctor. Both companies bring strong technical knowledge and service capabilities and align supplier relationships in their regional markets that will enhance our competitive position. Of note, TMS will supplement our service center growth potential in the U.S. Upper Northeast with local customer focus and capabilities across the food and beverage vertical. Stanley Proctor will join our fluid power network and bring specialization and capabilities in the design and assembly of hydraulic power units, as well as fluid power rebuild and repair services. M&A remains a top capital allocation priority in fiscal 2025. Our pipeline is active with varying size targets across both segments and focused on enhancing our technical differentiation and value-added service capabilities. We were also active in share repurchases in fiscal 2024, acquiring nearly 400,000 shares for $73 million. With over $460 million cash on our balance sheet and our attractive cash flow potential, as well as over 1 million shares remaining on our authorization, we see ongoing scope for share repurchases moving forward, considering valuation on our long-term growth potential and our enhanced margin profile. We will also remain focused on growing our ordinary dividend moving forward. Overall, our balance sheet and cash generation potential provides significant firepower and flexibility to further scale our business and accelerate stakeholder returns in fiscal 2025, regardless of near-term end markets. This presents a compelling component of our long-term value creation potential when considering industry-wide fragmentation, required investments to support evolving customer demands, and differentiated industry position and related M&A opportunities. As always, we will maintain our disciplined returns-based approach and be transparent on capital allocation priorities as they develop. Lastly, before I turn it over today, I'd like to take a moment to thank every stakeholder of this great organization, from our customers, associates, suppliers, to other business partners, communities, and shareholders. We value your ongoing support and commitment to our journey. We've accomplished a great deal together in the past five years. This includes EBITDA and adjusted EPS compounded annual growth of 11% and 17% respectively, EBITDA margin expansion of nearly 300 basis points, more than $1.3 billion in free cash generation, and a meaningful increase in our returns on capital. That said, in many ways, we feel like we're just getting started with the significant opportunity we see ahead and that we're planning for, which we believe will further compound our recent success into even greater value creation in coming years. So at this time, I'll turn the call over to Dave for additional detail on our financial results and outlook. Thanks, Neal.