Applied Industrial Technologies, Inc.

welcome to the fiscal 2025 first quarter earnings call for applied industrial technologies my name is angela and i'll be your operator for today's call at this time all participants are in listen only mode later we'll conduct a question and answer session if you wish 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 then 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, Angela, 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 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 Scrimcher, 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 I'll then close with some final thoughts. So first, a few high-level comments on first quarter results. Overall, our applied team continued to make significant progress on our strategic initiatives during the quarter as we positioned the company for above-market growth and margin expansion in the future. Organic daily sales declined 3% over the prior year, but exceeded our expectations on encouraging September trends. We also had a record first quarter of free cash generation that nearly doubled from the prior year. as expected margin trends were impacted by comparisons and sales declines early in the quarter, as well as adverse mixed dynamics and the impact of growth investments. Our margin guidance for fiscal 2025 remains unchanged, and we expect margin trends to improve for the balance of the year. Netting these factors, EBITDA came in largely in line with our expectations during the quarter, while EPS benefited from lower tax rate, interest in other income, and reduced share count from recent buybacks. So a good start to the year that we look to build on going forward. Digging more into the sales trends in the quarter, broader in-market demand remained generally mixed. This is consistent with industrial macro data points in recent months. and resulted in subdued customer activity early in the quarter. That said, the quarter finished strong with several encouraging trends. Of note, organic average daily sales during September were seasonally strong and relatively unchanged compared to the prior year. While the improvement in September came from several areas, it was led by stronger shipment and order trends in our engineered solution segment. Sales in our U.S. Service Center operations also improved in September on stronger break-fix activity and ongoing benefits from our sales process initiatives. This was partially offset by sustained weakness in machinery in markets, including across our fluid power mobile OEM customers. When looking at our top 30 in markets, 13 were positive. over the prior year, which is slightly below the 14 reported last quarter. Growth was strongest across food and beverage, primary metals, transportation, aggregates and technology during the quarter. This was offset by declines in machinery, oil and gas, lumber and wood, fabricated metals, pulp and paper, rubber and plastics, and utilities. While showing signs of an initial recovery, the demand backdrop remains bifurcated and somewhat uneven. This is reflected in some easing in early fiscal second quarter sales trends following September's outperformance. Organic sales through the first 16 business days of October are down by a mid-single-digit percent over the prior year. We estimate this includes some modest disruption from recent hurricanes in the southeast. We would also highlight the timing of system and solution shipments in our engineered solutions segment can vary month to month. And with nearly a week left in the month and U.S. election uncertainty now front and center, we hesitate to extrapolate too much from initial October trends but remain mindful of ongoing crosscurrents. Digging more into each of our segments, average daily sales in our service center segment declined 1.4% organically over prior year levels, on top of stacked growth of 25% the prior two years. Consistent with last quarter, spending on general MRO and capital maintenance projects was more muted as customers continued to tightly manage operational expenses. That said, sales trends across our core U.S. Service Center network held in relatively well, with September billings seasonally strong on improved break-fix and general MRO activity. We saw ongoing health across larger national accounts and fluid power aftermarket sales, Our service center team also continues to benefit from our service capabilities, local inventory investments, and ongoing sales initiatives, as well as greater cross-selling opportunities. Investments in technology and predictive analytics are continuing to enhance our business intelligence and Salesforce productivity. Over the past five years, Sales per U.S. Service Center Associate have increased over 7% on a compounded annual basis. We've also enhanced our local market position through bolt-on acquisitions made over the past year, which are augmenting growth in new and under-penetrated vertical markets while supplementing our margin mix. Overall, our Service Center team is in a strong position moving forward. particularly as in-market demand re-accelerates within the short cycle and break-fix-focused area of our business. While hard to measure, we believe there's some pent-up technical MRO demand across various in-markets following subdued activity and deferred capital maintenance over the past year. This could release following the U.S. election and if interest rates continue to moderate. In addition, our technical expertise across critical capital equipment and production processes combined with our locally focused distribution network is a powerful value proposition for our suppliers and customers as secular trends around reshoring, infrastructure, technical labor shortages, and energy efficiency gain further momentum. Within our engineered solution segment, sales declined 6% organically over the prior year. Consistent with last quarter and our expectations, segment sales continue to be impacted by ongoing destocking headwinds and softer in-market demand across fluid power mobile OEM customers. Flow control and automation sales were also lower over the prior year, reflecting softer trends early in the quarter. On a positive note, segment sales and orders strengthened as the quarter progressed, including seasonal strength in component and system sales during September. Of note, segment orders in the first quarter increased by a mid-single digit percent organically over the prior year, with the trend strengthening each month. This was led by double-digit order growth across automation and technology-focused fluid power customers, which combined represent over 20% of our segment sales. Sales funnel activity and channel commentary are increasingly positive across these higher growth areas of our business following an extended period of reduced activity the past couple of years. Flow control orders were also up year over year in the quarter as we continue to see healthy project demand tied to decarbonization and data center investments. Overall, we remain measured with our expectations as one quarter does not create a trend. These dynamics taken together are nonetheless an encouraging sign for our higher margin engineered solution segment. We believe segment momentum could build in the second half of fiscal 2025 as customers reengage capital spending, interest rates potentially ease further, and we continue to leverage growth investments tied to our strategy. Overall, we're encouraged by positive signs and potential catalysts developing across both our segments. We are continuing to invest and position teams to be fully prepared to serve our customers and suppliers as the next phase of growth unfolds. This includes ongoing investments in engineering talent, digital sales tools, and e-commerce capabilities. We also have expanded into new facilities and invested in advanced tooling and machining capabilities across our engineered solutions segment. We've modernized technology systems across our distribution centers while also updating conveying systems and logistics equipment. Our automation platform and footprint is much larger today than it was entering the prior upcycle. This will supplement our potential in this high-growth area of our business as adoption of specialized robotics and machine vision accelerates. while demand for aftermarket and service support starts to emerge from these next generation automation technologies. Further, we've invested in fluid power engineering and system build capabilities to serve growing secular demand tied to the modernization of industrial and mobile equipment. We're also beginning to leverage AI through our ongoing investments around sales process, AR and AP automation, and recruiting. These are just some of the many investments we've made to supplement our growth capacity, speed to market, and operating leverage going forward. And then lastly, nearly $2 billion in balance sheet capacity, including over $500 million of cash on hand. Our available capital puts us in a strong and an advantaged position to accelerate our growth, and margin potential moving forward. This includes both organic investments and accretive acquisitions that further extend our technical service capabilities, enhance our business mix, and reinforce our competitive moat. The evolution of our portfolio through both greenfield investments and acquisitions in recent years has been highly intentional and disciplined. It's been a critical driver of our ability to become a faster growing, higher margin, and more cash generative business, while driving a meaningful increase in our returns on capital. We remain committed to this focused and returns-based approach that centers on serving our customers most critical industrial assets and processes more completely. Our M&A pipeline is active across both segments, with our primary focus on bolt-on and mid-size targets where we can create significant shareholder value long-term. We also have flexibility to return capital through other avenues. This includes share buybacks, considering our positive long-term outlook and the underlying intrinsic value we see across our company, as well as ongoing focus on growing our ordinary dividend moving forward. Overall, we're targeting greater capital deployment in fiscal 2025 that aligns with our return requirements and strategy. At this time, I'll turn the call over to Dave for additional detail on our financial results and outlook.