Applied Industrial Technologies, Inc.

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 that time, please press star followed by the number one on your telephone keypad. Prior to asking a question, lift your hands up 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 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, Liz, and good morning to everyone on the call. This morning, we issued our earnings release and supplemental investor deck detailing our second quarter results. Both documents are available in the investor relations section of applied.com. Before we begin, just a reminder that 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 that are 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 Neil Scrimshaw, Applied President and Chief Executive Officer, and Dave Wells, our Chief Financial Officer. With that, I'll turn it over to Neil.

Thanks, Ryan, and good morning, everyone. We appreciate you joining us. I'll begin today with perspective on our second quarter results and current industry conditions, followed by some thoughts on the recent acquisition of Hydrodyne and expectations going forward. They will then provide additional financial detail on the quarter's performance and updated outlook. And I'll then close with some final thoughts. Overall, we had a productive second quarter that highlights the operational resiliency and self-help opportunities of our differentiated industry position and strategy. We grew earnings and expanded margins over the prior year in an environment where demand remained soft and sales declined slightly. We also made progress in positioning the company for stronger growth moving forward. This includes ongoing investment in our sales tools and operational systems and technical talent, the building of business funnels, which is driving stronger orders, as well as the announcing and closing of our strategic acquisition of Hydrodyne, which I'll discuss in more detail in a moment. As it relates to the quarter's results, both EBITDA and EPS exceeded our expectations, increasing approximately 3% and 7% over the prior year, respectively. We benefited from strong gross margin performance and cost controls. While low FIFO expense contributed to margin performance in the quarter, both gross margins and EBITDA margins still expanded nicely over the prior year when excluding the change in LIFO expense. The positive performance was primarily driven by channel execution and ongoing margin initiatives across various areas of our business, as well as variable expense adjustments and cost control inherent to our model and operational discipline. Margin improvement was led by our engineered solution segment, where EBITDA margins expanded 115 basis points over the prior year and exceeded 16% for the first time. Our engineered solution segment EBITDA margin has expanded over 450 basis points the past five years. We're making solid progress with our internal initiatives and operational enhancements. as we continue to scale this strategic area of our business. The segment's margin expansion highlights the strong market position and value proposition we have across our portfolio of fluid power, flow control, and automation solutions, and should enhance our mixed tailwind and overall margin expansion potential moving forward as segment sales begin to reaccelerate. As it relates to top line trends, average daily sales declined 3.4% over the prior year, which was in line with the guidance we provided in October of down mid-single to low single digits. We continue to operate within a muted in-market backdrop with customers conservatively managing MRO spending and delaying capital investments. Underlying demand improved slightly following the slow start to October but moderated and was below normal seasonal patterns during December. Most of December's weakness was concentrated later in the month and in our view was primarily tied to the timing of holidays this year with Christmas and New Year's falling midweek as well as extended customer plan idling and deferred maintenance activity within our service center segment. We estimate softer sales during the last two weeks of December negatively impacted the quarter's overall organic sales growth by approximately 100 basis points. When looking at our top 30 in markets, 11 were positive year over year in the second quarter, which is below the 13 reported last quarter. In markets that were up year over year included chemicals, food and beverage, pulp and paper, and technology. This was offset by declines primarily in machinery, transportation, aggregates, fabricated metals, oil and gas, and mining in markets. Mixed in-market demand has continued in the early part of our fiscal third quarter as customers are settling into the new year. and continue to operate at a gradual pace. Of note, January sales are currently trending down a mid-single-digit percent year over year on an organic basis. We believe ongoing macro policy and interest rate uncertainty remain headwinds. Weather has played a role across the southern U.S. region over the past month as well. That said, we do not view January sales as indicative of how the third quarter and the balance of the year could play out based on several directionally positive trends taking shape. Of note, various industrial macro data points are showing some signs of improvement. The new orders component of the ISM index was in expansionary territory in November and December. Bookings across our service center network are improving following a slow end to December, while feedback and sentiment among customers are more positive post the election. Our service center segment is well positioned as in-market demand re-accelerates. with approximately 50% of our service center business tied to technical break-fix situations across critical industrial processes, systems, and infrastructure. We believe demand for our service center products and technical support could ramp quickly and broadly over the next year as customers reengage production and catch up on required technical MRO activity. This will be particularly evident across heavy manufacturing, machinery, mining, metals, and aggregate markets, given their break-fix intensive nature and deferred maintenance in recent periods. In addition, a lighter regulatory agenda with the new U.S. administration represents a potential incremental new tailwind in many of our legacy end markets across our service center operations as well as within our flow control network. Combined, we estimate these break-fix intensive and more regulated markets represent about 40% to 50% of our total sales today. In addition, order momentum and business funnels are building across the technology vertical, which represents approximately 15% of our engineered solution segment and 5% of our overall sales. We're beginning to see stronger demand across the semiconductor sector and related spending on wafer fab equipment following the demand headwind we experienced in this sector over the past several years. Stronger customer activity across the technology vertical is encouraging and a potentially strong growth tailwind moving forward. We also continue to see positive momentum developing across our automation business, with orders strengthening year to date as various secular tailwinds continue to positively influence demand. These dynamics are driving ongoing adoption of collaborative and mobile robots, machine vision, and IoT solutions. Our strong application and engineering capabilities, along with an expanded footprint and facility capacity, will further supplement our potential in this high growth area of our business as discrete automation investments re-accelerate in coming quarters and demand for aftermarket and service support starts to emerge. On another encouraging note, order trends are beginning to stabilize and improve slightly across fluid power industrial and mobile OEM customers. If you recall, this has been a primary area of sales weakness for us over the past year. During the second quarter, reduced sales from industrial and mobile OEM fluid power customers negatively impacted our consolidated organic year-over-year sales growth rate by approximately 150 basis points. However, related orders from these customers were up 9% sequentially from the first quarter. and relatively unchanged year-over-year during December. Combined with more normalized OEM inventory levels following recent destocking and much easier comparisons, we expect the year-over-year sales trend and related impact in this area of our business to improve moving forward. This includes potentially re-emerging as a growth tailwind in coming quarters considering secular demand, and required investments developing across fluid power systems, as well as ongoing strategic investments we are making into this more specialized and highly technical area of industrial distribution. Of note, we are extremely excited about the growth and operational momentum we expect to build following the completion of our Hydrodyne acquisition at the end of December. Based in Dallas, Texas, Hydrodyne is one of the largest U.S. distributors focused on fluid power and motion control systems with advanced service capabilities and product offerings in hydraulics, pneumatics, electromechanical, instrumentation, filtration, and fluid conveyance. The addition of Hydrodyne aligns extremely well with our strategy With anticipated sales of $260 million and EBITDA of $30 million in the first year of ownership, Hydrodyne strengthens our number of one fluid power position by extending our footprint across the southern U.S., where they operate with a team of nearly 500 associates out of 33 locations. Hydrodyne also brings strong technical capabilities that complement our current fluid power service and solution portfolio, with approximately 30% of sales tied to repair, engineering and design, system fabrication, hose assemblies, and other value-added solutions. Our combined technical capabilities and access to premier fluid power, motion, flow control, and automation technologies present a powerful value proposition for our customers that will accelerate cross-selling and market penetration. This includes enhancing our collective efforts to serve the rapid pace of innovation developing across fluid power systems. Our strategy and teams are aligned to support thousands of specialized OEMs and industrial manufacturers, engineer, design, and integrate these advanced features into their mobile and industrial equipment with world-class technologies from top fluid power suppliers. The strength of our combined technical teams and footprint will also allow us to more effectively and broadly capture growth opportunities developing across emerging end markets and commercial applications. We provide more detail around Hydrodyne acquisition in slides five and six of our second quarter earnings presentation. And Dave will cover off on some of the key financial considerations, including our initial accretion expectations. In summary, we're very excited to welcome Hydrodyne and their capabilities to the applied platform. Overall, I'm encouraged by the progress we are making with our strategy, including the ongoing build-out of our engineered solution segment. Following the Hydrodyne acquisition, the segment is now approaching 40% of overall sales compared to 15% 10 years ago. The strategic expansion of this segment has further differentiated our industry position and strengthened our competitive moat. We've established and fortified our leading market positions, building and serving critical motion, power, and control systems across nearly every industrial vertical. It's created a unique and potentially significant cross-selling opportunity throughout our legacy embedded customer base, while increasing exposure to faster growing end markets and secular tailwinds. It's also expanding our addressable market and allowing us to evolve and enhance our competitive position as the industrial sector and related systems advance with new age processes and technologies. Combined with a positive margin profile and ongoing operational enhancements, we expect our engineered solution segment to be a strong and differentiated driver of earnings growth and returns going forward. Lastly, I'm encouraged by the ongoing capital deployment opportunities with our industry position, balance sheet, and cash flow generation continue to support. Year to date, we've deployed over $380 million in capital focused on enhancing our growth position and shareholder returns. This compares to $251 million of capital deployed for all of fiscal 2024. While partially reflecting our recent Hydrodyne acquisition, we also continue to return capital to share buybacks, including deploying $30 million on share repurchases year to date. In addition, we announced this morning a 24% increase in our quarterly dividend. The increase is in line with our expectation for greater dividend growth as we align annual increases with normalized earnings growth, including the strong earnings and cash generation achieved in recent years. Our capital allocation priorities remain unchanged and highly focused on organic investments and M&A. However, our broader capital deployment trends year to date showcase the multiple opportunities and ways we can deploy capital to optimize shareholder returns as we continue to scale our business and achieve our strategic goals. Moving forward, our balance sheet and financial capacity remain extremely well positioned to continue to support M&A and other capital deployment opportunities. We have ongoing scope for additional buybacks for the remainder of fiscal 2025 based on our current financial capacity and the intrinsic value we see across our company long-term. In addition, our M&A pipeline and related due diligence remains active across both segments, with a primary focus on bolt-on and midsize targets, where we can create significant shareholder value. At this time, I'll turn the call over to Dave for additional detail on our financial results and outlook.