Applied Industrial Technologies, Inc.

Fiscal 2025 Fourth Quarter Earnings Call for Applied Industrial Technologies. My name is Carly, and I will be your conference 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 that time, press star followed by the number one on your telephone keypad. Prior to asking a question, please 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 would now like to turn the call over to Ryan Cieslak, Director of Investor Relations and Treasury. Ryan, you may begin.

Okay. Thanks, Carly, 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 online. in the investor relations section of applied.com. Before we begin, just a reminder, we'll discuss our business outlook and make forward-looking statements. Our 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. I'll begin today with perspective and highlights on our results, including an update on industry conditions, and expectations going forward. Dave will follow with more financial detail on the quarter's performance and provide additional color on our fiscal 2026 guidance. I'll then close with some final thoughts. Before I discuss our fourth quarter results, I want to take a moment to acknowledge our applied team. I'm extremely proud of what we accomplished in fiscal 2025 within a muted demand backdrop. We achieved new records for sales EBITDA and EPS. Full year EPS growth of 4% exceeded the high end of our initial guidance. Growth margins expanded nearly 50 basis points and surpassed 30% for the first time in our history. We also delivered another record year of cash generation that enabled meaningful capital deployment. This included the strategic acquisition of Hydrodyne, our largest M&A transaction in six years. Overall, our performance in fiscal 2025 provides further evidence of our operating resiliency and value creation potential and builds on our compelling track record over the past five years. This includes compounded annual growth for EBITDA and EPS of 14% and 22% respectively, as well as gross margins and EBITDA margins expanding 130 and 330 basis points respectively. I'm honored to be a part of our incredible applied team and the financial performance we continue to deliver. Our progress in fiscal 2025 ended on an encouraging note with several positive trends developing. Fourth quarter sales and EPS exceeded our expectations. Our team once again executed well against an ongoing muted in-market backdrop. Sales exceeded the high end of our fourth quarter guidance by 2.5% and returned a modest positive organic growth. Underlying organic sales trends strengthened across both segments as the quarter progressed. Average daily sales increased 4% sequentially, which was ahead of normal seasonal patterns for the first time in 10 quarters. Upside compared to our expectations was primarily driven by stronger than expected engineered solutions segment sales. which grew organically year over year for the first time in seven quarters. The segment's 2% organic daily sales increase was a notable improvement from mid single-digit declines in recent quarters, with the underlying drivers encouraging on many fronts. Our ES teams capitalized on recent order strength, as well as improving demand and business development efforts across several key growth verticals. This includes double digit organic growth across our technology vertical and mid single digit organic growth across our automation platform during the quarter. Service center segment trends were also encouraging, including exceeding normal seasonal patterns for the second straight quarter and returning to positive organic growth during the month of June. M&A sales contribution was also encouraging, with progress continuing to develop at Hydrodyne, as well as initial contribution from our early May acquisition of Iris Factory Automation. Taken together, our fourth quarter sales performance highlights solid execution combined with emerging growth tailwinds tied our industry position and business pipeline. As it relates to underlying in-market demand, trends remained relatively mixed during the quarter, though with some positive signs developing. Year-over-year trends across our top 30 in-markets were relatively unchanged from last quarter, with 15 generating positive sales growth compared to 16 last quarter. Declines continued across several top markets, including machinery, primary metals, utility and energy, aggregates and chemicals. Consistent with prior quarters, declines were most pronounced across off-highway mobile OEM verticals within our fluid power operations. This was offset by solid demand across our technology vertical, which we estimate contributed approximately 100 basis points to our consolidated organic growth rate during the quarter. Sales were also positive across pulp and paper, fabricated metals, food and beverage, and oil and gas verticals. Further capital maintenance spending started to slowly pick up during the quarter within our service center network, while project activity across various process flow markets strengthens later in the quarter. In addition, orders in our engineered solution segment increased by a high single-digit percent year-over-year during the quarter, adding to the positive inflection we've seen in recent quarters. This includes positive growth in industrial and mobile OEM fluid power orders, an encouraging sign following notable headwinds in this area of our business over the past year. During fiscal 2025, reduced sales from industrial and mobile OEM fluid power customers negatively impacted our consolidated organic year-over-year sales growth rate by approximately 100 basis points, as well as the engineered solution segment organic growth rate by over 400 basis points. Overall, while in-market visibility remains limited and mixed, we believe the underlying backdrop improved modestly from last quarter. In addition, based on our core indicators, including order momentum, business funnels, and what we're hearing from our customers, we believe industrial activity and customer spending behavior are starting to pick up to some degree. It's also important to highlight the positive impact our own initiatives and ongoing evolution are having. While our overall organic sales trends in fiscal 2025 were muted, average daily sales finished the full year down a modest 2%. This was directionally in line with the midpoint of our initial guidance, despite a more challenging in-market backdrop that was highly influenced by persistent uncertainty tied to the US election, interest rates, and eventually shifts in trade policy. The negative impact to many of our legacy manufacturing in markets was evident, as reflected in the ISM hitting one of the longest contractionary stretches, as well as notable pressure we experienced in OEM and machinery related verticals. This also followed double digit organic compounded sales growth in the prior three-year period. Considering this context, we believe our fiscal 2025 performance showcases the more durable and differentiated growth profile we continue to shape across Applied. Of note, our service center segment benefited from ongoing Salesforce productivity initiatives, technology investments, and increased cross-selling momentum. which help balance softer MRO customer spending during the year. In addition, growth investments across our flow control and fluid power operations, as well as the ongoing expansion of our automation platform, have diversified our in-market exposure and supported our engineered solution segment. In particular, we benefited from encouraging growth tied to data centers, semiconductor manufacturing, new process infrastructure, advanced robotic solutions and calibration services as the year played out. This helped offset acute weakness in our legacy off-highway mobile markets and drove a return to positive segment organic growth during the fourth quarter. At the same time, we continued to expand gross margins while maintaining cost discipline in fiscal 2025. which helped drive modest EBITDA and EPS growth for the year. When excluding the impact from acquisitions, we achieved 10% decremental margins on low single-digit organic sales decline. This is inclusive of ongoing growth investment and inflationary pressures throughout the year. During the fourth quarter, gross margins increased sequentially and were in line with our guidance. As previously highlighted, year-over-year gross margin trends were impacted by a difficult prior year comparison, partially reflecting a LIFO layer liquidation benefit last fourth quarter. This fourth quarter also included higher than expected AR provisioning, which held back EBITDA margins to some degree, but is expected to normalize moving forward. Fiscal 2025 was also a year showcasing our cash generation and capital deployment capacity. We generated over $465 million of free cash, up 34%, to a new record on both an absolute basis and as a percent of sales. Over the past three years, our business has generated 40% compounded annual free cash growth which has culminated in meaningful capital deployment, including over 560 million deployed in fiscal 2025. We accelerated capital deployment on M&A, closing four transactions in fiscal 2025, including the strategic acquisition of Hydrodyne. Sales from acquisitions contributed over 400 basis points of inorganic growth in fiscal 2025, up 100 basis points from the prior year. At the same time, we were more active with share buybacks, repurchasing a total of 656,000 shares for $153 million, as well as increasing our quarterly dividend by 24%. We also continue to invest in technology platforms, distribution centers, and growth capacity. Overall, very compelling numbers that highlight the powerful flywheel effect of our operating model and strategy, including our consistency in generating elite levels of cash and shareholder returns long term. As it relates to the evolving tariff backdrop, we continue to work closely with our suppliers as they manage through the dynamic backdrop and the impact on supply chains. As expected, we received a greater level of price increase notifications from our suppliers during the fourth quarter. Our teams are proactively and effectively managing through this, and in short, we remain highly confident in our ability to execute as the tariff backdrop continues to evolve. As a reminder, we have limited direct exposure to procuring products outside the U.S. We also have a strong track record of effectively managing inflation given our technical industry position, while structural mixed tailwinds and various self-help gross margin initiatives provide strong countermeasures. The overall price impact to ourselves was limited in the fourth quarter, but we expected to slowly increase moving forward as supplier price increases take effect. Next, I'd like to take a moment to provide some initial thoughts on our outlook as we enter fiscal 2026. First, we're highly focused on accelerating growth. We remain mindful of ongoing trade and interest rate policy uncertainty, which continues to impact broader demand visibility and could remain a gating factor to growth near term. That said, when we consider the underlying fundamentals beneath this on both a secular and structural basis, we believe a productive demand environment should develop as policy clarity continues to emerge. Recent U.S. trade agreements with several primary trading partners are welcome development. In addition, the recent passage of tax reform legislation, including accelerated depreciation incentives and the potential for a more favorable U.S. interest rate policy could recatalyze U.S. business sentiment and capital investment. While it remains early, we're encouraged to see positive sales momentum continue into early fiscal 2026 with first quarter organic sales today up by an estimated 4% compared to prior year levels. Secular growth tailwinds also remain on firm footing. Our related exposure is high given our industry position supporting U.S. manufacturing and deep technical knowledge of our customers' facilities. As macro and trade policy dynamics stabilize, we believe our customers' capital investment decisions will be active given heightened considerations around reshoring. Technical service requirements will increase as break-fix MRO activity supports aged manufacturing equipment and as customers expand industrial production infrastructure across North America. Our service center segment is favorably positioned to benefit from these positive tailwinds. This could be particularly evident across heavy manufacturing, machinery, mining, metals, and aggregates given their break-fix-intensive nature, as well as potential incremental demand from U.S. trade and pro-growth policies. In addition, we expect additional benefits from technology investments, optimizing sales force productivity, and new business sourcing. We're also focused on increasing our growth with local customers through greater sales of ancillary products such as seals, material handling, fluid conveyance, chemicals, lubricants, and safety, as well as providing comprehensive service and repair solutions for their production assets. In addition, we're constructive on the growth opportunities developing across our engineered solution segment, considering ongoing positive order momentum and investments made in recent years. Underlying demand fundamentals are notable across key growth verticals, including technology and discrete automation, which combined represent more than 25% of segment sales today. The ongoing build out of data center and semiconductor infrastructure is expanding the addressable market for our fluid conveyance, flow control, and robotic solutions. We have a growing business pipeline tied to the emerging transition to electric-powered fluid power systems, where we expect to play a significant role giving our leading engineering capabilities and supplier relationships. Combined with required flow control infrastructure investments across the U.S., our engineered solution segment is in a strong position to drive above-market organic sales growth moving forward. We also expect acquisitions to remain an important element of our growth potential and we look to build on the M&A momentum we achieved in fiscal 2025. Our pipeline is developing nicely and we expect to be active in fiscal 2026 as we continue our strategic expansion. The value of our scale, broad technical solution portfolio, engineering capabilities, strategic supplier relationships, and balance sheet capacity has never been stronger in our marketplace. Lastly, we're in a strong position to further expand margins as these growth tailwinds play out. Of note, structural mixed tailwinds should strengthen as sales recover across our engineered solution segment and local customer accounts. We also have ongoing opportunities tied to pricing analytics, optimizing sales processes, utilizing AI, and expanding shared services, while synergy benefits from our Hydrodyne acquisition should ramp moving forward. Combined with leveraging recent growth investments and our scaling automation platform, we remain constructive on the EBITDA margin potential developing beyond our current intermediate target of 13%. At this time, I'll turn the call over to Dave for additional detail on our results and outlook.

Thank you.

Thanks, Neal. Just another reminder before I begin, as in prior quarters, we have posted a supplemental presentation to our investor site for your additional reference. We hope that you'll find this useful as we recap our most recent quarter performance and initial fiscal 2026 guidance. Turning now to details of our financial performance in the quarter, consolidated sales increased 5.5% over the prior year quarter. Acquisitions contributed 6.5 points of growth, which was partially offset by a negative 40 basis point impact from foreign currency translation and a negative 80 basis point impact from the difference in selling days. Metting these factors, sales increased 20 basis points year-over-year on organic daily basis compared to a 3.1% decline in the third quarter. As it relates to pricing, we estimate the contribution of product pricing on year-over-year sales growth was over 100 basis points for the quarter and slightly above the contribution from last quarter. Moving to consolidated gross margin performance, as highlighted on page 7 of the deck, gross margin of 30.6% was down 9 basis points compared to the prior year level of 30.7%, but was directly in line with our guidance and up 15 basis points sequentially. During the quarter, we recognized LIFO expense of $2.9 million, which was up slightly from the third quarter. In the prior year fourth quarter, we recognized LIFO expense of only $.3 million, which as you may recall, was favorably impacted by a layer liquidation benefit. Under that basis, this resulted in an unfavorable 21 basis point year-over-year impact on gross margins during the quarter, which was directly in line with our guidance. Excluding the adverse impact of LIFO, gross margins increased over the prior year, reflecting positive mixed contribution from our recent Hydrodyne acquisition, as well as ongoing channel execution and benefits from our margin initiatives. This was partially offset by mixed headwinds from lower sales across local accounts, as well as tougher comps against prior year fourth quarter mix tied to higher margin solution sales. Price-cost trends were relatively neutral in the quarter. As it relates to operating costs, selling, distribution, and administrative expenses increased 10.5% compared to prior levels. On an organic constant currency basis, SD&A expense was up a modest 0.3% year-over-year. SD&A expense included an unfavorable $4 million or 2% year-over-year impact from higher AR provisioning. We view the AR provisioning impact as more timing related and expected to normalize moving forward. Our provisioning requirements can fluctuate quarter-to-quarter based on various factors. In addition, the fourth quarter of last year included an AR provision benefit tied to recoveries achieved, reflecting our ongoing working capital initiatives and collection efforts. As per the context, our DSO trends remained favorable and relatively unchanged from last year, and our AR provision as a percentage of sales for fiscal 2025 was at the midpoint of our recent historical range. SD&A expense this quarter also includes an unfavorable 80 basis point impact from higher deferred compensation costs compared to the prior year. As a reminder, changes in deferred compensation costs in SD&A are primarily driven by market values of investments tied to our non-qualified deferred compensation plan. There's a corresponding offset to these fluctuations in other income and expense, which we report below net interest and income. When normalizing for the AR provision impact and higher deferred compensation costs in the quarter, we estimate SD&A expense on an organic constant currency basis with a decline by over 2% year-over-year, reflecting benefits from ongoing efficiency gains and solid cost control. Overall, encouraging sales growth trends and stable underlying gross margin performance were masked by the unfavorable prior year LIFO comparison and higher AR provisioning in the quarter. This resulted in even a margin of 12.5%, declining 73 basis points from the prior year level of 13.2%. This was modestly below our fourth quarter guidance of 12.6% to 12.8%, primarily reflecting the higher than anticipated AR provision in the quarter, which was 20 to 30 basis points unfavorable to our guidance. Normalizing the AR provision and excluding the impact of LIFO EBITDA margins would have been relatively unchanged year-over-year. In addition, reported EBITDA of $153 million was at the high end of our guidance range, reflecting stronger sales trends in the quarter. Reported earnings per share of $2.80 was up 5.9% from prior year EPS of $2.64, and exceeded the high end of our guidance by nearly 5%. On a year-over-year basis, EPS benefited from a lower effective tax rate as well as a reduced share count tied to our buyback activity. This was partially offset by higher interest and other expense on a net basis. Turning now to performance by segment, as highlighted on slides 8 and 9 of the presentation, Sales in our service center segment decreased 0.4% year-over-year on an organic daily basis. This excludes 30 basis points of contribution from acquisitions, a negative 80 basis point impact from the difference in selling days, and a negative 60 basis point impact from foreign currency translation. The organic sales decline was primarily driven by muted MRO spending fully in the quarter, particularly across our international operations. That said, the trend improved from last quarter's organic decline of 1.6%. In addition, on a sequential basis, segment sales per day increased 1.5% from the third quarter, which was above normal seasonal patterns for the second straight quarter. Sales growth remained positive across our national account base, partially reflecting benefits from our internal initiatives, including sales force investments and cross-selling actions. Segment trends were also supported by growth across fluid power MRO sales and our consumable vending and VMI offerings. Segment EBITDA decreased 8.3% over the prior year, while segment EBITDA margin of 13.6% was down 100 basis points. The year-over-year decline primarily reflects the unfavorable AR provisioning as previously discussed which had an approximate 300 basis point negative impact to segment EBITDA growth and a 50 basis point negative impact to segment EBITDA margin in the quarter. In addition, YFO expense was approximately 100 basis points unfavorable to segment EBITDA growth in the quarter or 15 basis points to EBITDA margin, primarily reflecting the prior year layer liquidation benefit as previously discussed. Lastly, as highlighted earlier, HIGHER DEFERRED COMPENSATION COSTS, WHICH ARE REPORTED IN OUR SERVICE CENTER SEGMENT, HAD AN UNFAVORABLE 20 BASIS POINT YEAR-OF-YEAR IMPACT TO SEGMENT EBITDA MARGIN. ON A FULL YEAR BASIS, OUR SERVICE CENTER SEGMENT DELIVERED SOLID MARGIN AND COST CONTROL PERFORMANCE WITH OPERATING EXPENSE PER DAY DOWN 1% ON AN ORGANIC BASIS AND EBITDA MARGINS UP MODESTLY AGAINST THE LOW SINGLE DIGIT SALES DECLINE. Within our engineered solution segment, sales increased 20.7% over the prior year quarter, with acquisitions contributing a positive 19.7 points of this increase. On an organic daily basis, accounting for the difference in selling days, segment sales increased 1.8% over the prior year. The prior year of year increase was primarily driven by solid growth across our fluid-powered pneumatic and conveyance solutions, supporting the technology vertical, as well as growth in our flow control business. In addition, organic sales and automation operations increased by a mid-single-digit percent over the prior year quarter. While partially aided by easier prior year comparisons, the segment's underlying sales performance improved noticeably. with two-year stacked trends improving across all primary business units, reflecting strong execution on recent order strength and firmer demand. The benefit from improved automation growth performance was partially offset by ongoing weakness across mobile fluid power OEM markets, though the year-over-year decline eased from the last quarter. Segment EBITDA increased 13.5% over the prior year, reflecting impact from our Hydrodyne acquisition, as well as solid cost management. Segment EBITDA margin of 14.8% was down roughly 90 basis points from prior year levels, so influenced by several dynamics. First, the prior year fourth quarter segment EBITDA margin of nearly 16% was very high and benefited from unusually strong mixed tailwinds from higher engineered solution sales. As a reminder, hydrodynes currently flows through at a lower EBITDA margin relative to the segment's average. This represented a 60 basis point year-over-year headwind in the quarter, while WIFO was unfavorable by 30 basis points over the prior year. I will note that the hydrodynes EBITDA margin mixed impact improved from last quarter with further positive direction expected moving forward as we continue to work for integration and synergy plans. Of note, Hydro9's EBITDA contribution in the quarter was up over 30% sequentially from the third quarter, compared to a 12% sequential increase in sales contribution. On a four-year basis, our engineer solution segment delivered solid underlying margin and cost control performance in fiscal 2025, excluding the impact from acquisitions, segment operating expense per day was down 5%, and segment EBITDA margins increased approximately 40 basis points against a 4% organic decline in average daily sales. Moving to our cash flow performance, cash generated from operating activities during the fourth quarter was $147 million, while free cash flow totaled $138.2 million, or 128% of net income. For the full year, We generated free cash of 465.2M dollars or 118% of net income. It's without 34% reflecting more modest working capital investment compared to the prior year. As well as ongoing progress with internal initiatives and our enhanced marketing profile. From a balance sheet perspective, we ended June with approximately 388M dollars of cash on hand. and net leverage at 0.3 times EBITDA, which is above the prior year level of 0.2 times and down slightly from last quarter. In summary, our balance sheet is in a solid position to support our capital deployment initiatives moving forward. Turning out our outlook, which is detailed on page 12 of the presentation, we are establishing full-year fiscal 2026 guidance including EPS in the range of $10 to $10.75, based on assumptions for total sales increasing 4% to 7%, including 1% to 4% growth on organic basis, as well as EBITDA margins up 12.2% to 12.5%. Our outlet takes into consideration sales trends through mid-August, as well as ongoing economic uncertainty. At the midpoint of guidance, We assume ongoing tariff and interest rate uncertainty continues to impact end market demand through the first half of the year, followed by more favorable underlying end market demand trends in the second half of the year. Guidance also assumes 150 to 200 basis points of year-over-year sales contribution from pricing, as well as ongoing inflationary headwinds and growth investments. We expect inorganic growth from completed acquisitions to contribute approximately 300 basis points to sales growth in fiscal 2026, including approximately 600 basis points in the first half, primarily reflecting two quarters of contribution from Hydrodyne, which closed at the end of December 2025. Guidance does not assume contribution from future acquisitions or share buybacks. In addition, Based on quarter-to-date sales trends through mid-August and prior year comparisons for the remainder of the quarter, as well as ongoing trade policy uncertainty, we currently project fiscal first quarter organic daily sales to increase by a low single-digit percent over the prior year quarter. Our guidance also assumes fiscal first quarter even margins between 11.9% to 12.1%. From a margin and cost perspective, guidance assumes ongoing inflationary pressures and growth investments, as well as $14 million to $18 million of LIFO expense. We expect stronger relative year-over-year EBITDA margin trends in the second half of the year, reflecting greater expense leveraging, hydrodynes energy progress, and easier comparisons. Lastly, we expect free cash generation to remain strong in fiscal 2026 but to potentially trend lower year-over-year, reflecting greater working capital investment tied to potentially stronger demand and growth opportunities. In addition, we expect ongoing organic investments supporting our strategy and technology investments with capital expenditures targeted in the $30 to $35 million range for fiscal 2026. With that, I will now turn the call back over to Neil for some final comments.

So to wrap up fiscal 2025 was another meaningful year for applied. We executed well in a slower demand environment while positioning the company for long term success through several acquisitions and internal growth investments. The year culminated in significant capital deployment, enhancing our long term earnings power while continuing to drive strong shareholder returns. Our market cap today exceeds $10 billion, and we've delivered total shareholder returns that have more than doubled primary market benchmarks over the past three and five years. A strong testament to the power of the applied team and our differentiated strategy. Moving into fiscal 2026, we're encouraged by recent sales momentum which could accelerate giving the underpinnings of various secular tailwinds and deferred customer spending the past 18 months. That said, we're taking a prudent approach to our initial outlook, pending greater clarity on trade policy, interest rates, and broader macro conditions. Our track record shows we can manage through various macro and trade scenarios as they develop. and have company-specific growth and margin tailwinds that could strengthen into fiscal 2026. In addition, we expect to remain active in M&A, share buybacks, and dividend growth. And lastly, our technical industry position, manufacturing domain expertise, and aligned strategy provide a compelling long-term growth and margin expansion opportunity as various secular and structural tailwinds continue to develop across the U.S. industrial economy. We believe this backdrop combined with our compounding cash generation algorithm and balance sheet capacity support double-digit compounded earnings and dividend growth long term. We look forward to building on our performance in fiscal 2026 and beyond. as our evolution continues to unfold. With that, we'll open up the lines for your questions.

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 1 on your telephone keypad. If you would like to withdraw your question from the queue, press star 1 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. Your first question comes from the line of Christopher Glenn with Oppenheimer.

Thanks. Good morning. That had a couple. Just first on Hydrodyne, talked about 12% sequential sales growth and 30% EBITDA. I don't know if that reflected integration costs that you incurred in the third quarter that diminished in the fourth, or just wanted to dimensionalize that a little bit.

It's a combination, you know, relatively similar integration costs, I think, about, you know, Q3 versus Q4, Chris. So, you know, what it really points to is the, you know, kind of the leverage that we saw on the SCNA following through to EBITDA, you know, the stronger margin performance is, you know, obviously a contributing factor there, as well as, you know, very pleased with the progress we've, you know, made to date in terms of, you know, quicker realization of synergy benefits. We're actually ahead of where we anticipated at this point in terms of synergy realization and continue to work that angle. So really all those factors combined, I'd say the integration costs quarter over quarter really didn't play heavily into that improvement.

I would say as we thought about synergies going in, we said roughly 80% from cost and margin and as well as 20% sales opportunity. At today's point, we're pleased on both, including the interaction with the teams and the cross-selling opportunities, especially in service and repair opportunities throughout that southeast geography, as well as things that we can do in key growth verticals around data centers and the technology segment. So pleased about the performance and our start and look forward to continuing that momentum.

Great. And then just on the market for kind of break-fix MRO and idea of any kind of pent-up coming through, it sounds like you might be starting to see some of that with the national accounts, but not so much with the locals. So another thing, just asking to dimensionalize a bit.

Yeah. So as we look at breakdown the sales, we're pleased in the last month on local accounts being positive as well as SA in the month of July. So I think that's a good indicator that things could be firming and build from here.

Okay, great. And then just the midpoint of the year doesn't have any acceleration versus the first quarter. at all, but you know, you do have easy comps. I know there's a little shift when you get to the fourth quarter. And then, you know, the ADS halfway through the quarter, really outpacing the outlook. Your reference comps, I don't know if there's a major kind of hockey stick in the September comp a little bit, but they're just a couple layers of prophylactic caution. In there with potential, you know, month to month volatility around behaviors. Is that how we should think about the guy?

Yeah, there is a ramp in the prior prior September and I just think overall because it's taken our view of a kind of the right prudent approach given some of the some of the macro and we believe some of those firm up as we move through these these summer months. But if that's what comes in, our approach to be prudent in the guide and the outlook and the specific detail we provide around the first quarter.

Makes a lot of sense. Thanks, Neal.

Your next question comes from David Manthe with Baird.

Thank you. Good morning, everyone. The first question is related to pricing. I think you said 100 basis points in the quarter and an expectation that that would slowly increase ahead. I'm hoping if you didn't, I didn't hear it, but could you scale that more narrowly for us and talk about sort of what benefit from price is baked into the first quarter guidance and the overall 2026?

Yeah. I would say, Dave, for the first quarter, I would say to be similar. And, you know, we talked about a little over 100 basis points in the quarter. So in the first quarter, similar, but with the expectations that it ramps as we move through the year in perhaps 150 to 200 basis points as we look at all of fiscal 26th. and if the demand environment is strong and there's additional uh supplier inflation and increases of that uh perhaps it'll be higher than that number or or 26. okay got it and second um es trends looking really good you mentioned technology and automation um

first question and then I've got one after that but could you give us examples of when you say technology as a vertical could you talk about what you mean by that as an area you're seeing growth today yeah so that would include the data center it would include semiconductor manufacturing in the side so I think those would be

you know, the most significant components of that tech vertical, and we're broadening our participation. And so we've historically had a strong presence with fluid power, but today we're doing more with fluid conveyance and also our automation business participates in that vertical well.

Okay. And then on automation, which you said grew mid single digits, There are two. I guess you sort of touched on that as saying that data center and technology are getting more applications in those verticals. But as it relates to ES overall, are you seeing a benefit? Are people talking about this bonus depreciation as helping mainly on the flow control side, which seems like a higher ticket maybe? I mean, any color you can give us on that would be helpful in terms of – you mentioned some of the growth tailwinds, and I'm just wondering if that's one of them that you're hearing about or not.

And so as we think about where the businesses participate, even in automation doing well in some other segments, you know, be it food and beverage, life science, and pharma, I would say yes. We have a full pipeline of projects with customers. They have great return profiles. We've talked about in prior quarters perhaps the approval process of those had elongated while still strong returns. And our view of customers are in a very good cash position. I think the opportunity for accelerated depreciation on those will be a further stimulus of those projects being acted and converted. So as we look out over 26, that could be a positive development for our pipeline.

Great. All right. Thanks, Neil.

Thank you.

Your next question comes from Ken Newman with KeyBank Capital Markets.

Hey, good morning, guys. Morning. Morning. So maybe the first one, Neil, I just want to go back to the low end of the four-year organic sales growth guide. I think it kind of implies that volumes at the low end are kind of assuming, you know, down 50 basis points year-over-year organic on what's a pretty easy comp throughout the entire year. I guess the question is, if you're assuming 1% to 2% of price contribution, outside of, you know, maybe the time on comps in this first quarter that you talked about, Is there anything else structural that's kind of assumed within that low end of the guide or anything that we should kind of be aware of?

I think again, Ken, as we think about the full range of the guide, including the low end, we just want to be prudent in the approach given still some of the uncertainty that would be out. If we think about more the midpoint, you know, that's going to assume some headwinds continue on the macro and the tariff environment and some of that, and certainly in the first half, and then with those headwinds abating somewhat into the second half. And so that's when more of the approach and the consideration going in.

Okay.

And then for my follow-up, Maybe just help us fine-tune the comments about normalizing LIFO and AR provisioning through the year by segments. You know, obviously, yes, EVIP margins kind of took a bigger hit sequentially year over year. I think part of that was the AR provisioning and hydrodynamics. How should we think about segment margins implied at the midpoint of the 1Q guide and how that trends through the rest of the year?

Yeah, just, you know, A little bit of clarification in terms of our, you know, Q4, you know, the majority of that AR provisioning was more skewed to the U.S. service centers or the service centers as opposed to the engineer solutions. Again, that's a formulaic process, you know, kind of based on several variables in terms of credit ratings, you know, age balances. Don't see anything, you know, problematic there. We had a couple customers that were just, you know, kind of, you know, delayed on some payments. You know, if you look back, I look and kind of benchmark our, as I said, our DSO has maintained stability. You know, our provisioning as a percent of sales for the year was at, you know, really the midpoint of right where we've been the last five-year average. So, we've made some good progress in terms of the initiatives yielding some, you know, kind of improvements in terms of past dues and, you know, just this timing issue. Unfortunately, unfortunately, I should say maybe. The a lot that came back in, like, the 1st, or 2 weeks or so of July. So we see that normalized, you know, in terms of the, you know, the EBITDA margins we talked about in the service centers. They're also impacted this past quarter by, you know, that's where the deferred comp mark to market adjustment hits and then gets offset another income and expense. So. That also distorts things. I would expect, you know, the margins to normalize as we talk about, you know, kind of as we think about 26, the LIFO, you know, we'll read through proportionately. And then, you know, we'll continue to see the mix-up benefit from Hydrodyne and improvement in the drag that it is right now on the engineered solutions segment, even the margins, as we continue to realize those synergy benefits, which, as we discussed, are coming, you know, quicker than we'd anticipated. like the progress there.

Yeah, Ken, I'd just add, you know, if we think about the quarter-over-quarter comparison, I mean, if we reflect back last fourth quarter in engineered solutions, I mean, it was really strong, you know, 16% record high. You know, we benefited from strong mix of solutions going across, so I think that demonstrates the strong potential. You know, to Dave's point on Hydrodyne, we're pleased with the progress. but he touched on or talked about the 60 basis point headwind and EBITDA margins there. So if we think about the potential around engineered solutions on the full year, you know, we were very cost accountable and, you know, OPEX and expense, you know, down 5% into that side, but with EBITDA margins up on, lower organic daily sales of 4% in that side. So as we see an inflection coming in growth and that opportunity, we feel like, hey, we're well positioned.

And of course, that Q4 noise just really distorted some underlying stronger performance between the air provisioning, which I see getting back, obviously, as we move into 26, the deferred cop noise. And like I said, the It was, you know, if you look back at last year, the quarter performance on gross margins across the business, you know, Q4 was the only one that even started in the thirties, right? Everything else was started with less than a three. So at 30.7% comp in the prior year quarter, you know, that was very, very challenging comp. And, you know, even with the life that we rolled through this quarter, you know, versus the favorability last year. Within nine basis points of that, I think it was a pretty good story.

Thanks.

Our next question comes from Sabrina Abrams with Bank of America.

Hey, good morning, everyone.

Good morning.

You guys have given some helpful color around hydrodine, but maybe I guess what I'm just going to ask, could you disclose, I guess, hydrodine contribution in dollars to EBITDA in the quarter and maybe any color from either an EBITDA or EPS standpoint, what's in fiscal 26 guide?

In Q4, hydrodine contributed just over $7 million of EBITDA, just to help frame it up. if we, you know, all in, factor in some lost interest income from, you know, financing that deal with cash on hand, about $0.03 contribution. We had said at the time of, you know, we announcing the deal, we would expect be, you know, $0.15 accreted EPS in the first 12 months. So we're right on track there when you think about still some of the integration costs at play. We have not framed up necessarily, you know, kind of that impact on On 26, but here again, like the traction in terms of running ahead on expectations on the cost synergies, um, as well as the, you know, kind of the traction that we are seeing on cross selling. So, you know, I would expect it to certainly, you know, meet those 1st, 12 months expectations as a, you know, kind of frame it up as a, at least a guide for you. Uh, if not potentially beat that, uh, that initial expectation we set for the 1st, 12 months.

Thank you. That's super helpful. Second point, I guess, second question for me, maybe if you could give a little color. I know there was some comment on LIFO in 26, but maybe if you could just give some color on what is like the amount of LIFO expense embedded in guide and either dollars or bits and anything else to sort of call out other than, I guess, like organic incrementals as we look at the fiscal 26 margin guide?

Sure. We paid LIFO at $14 to $18 million in the guidance. So, you know, that would kind of work across the guidance range. Obviously, that's a function of, you know, tied to obviously the inflationary increases that we see that impact indices as well as inventory levels. So, goes part and parcel with some of the work around the, you know, kind of what's happening in terms of pricing and inflationary impact.

And then, Sabrina, I'd say on incrementals, you know, at the midpoint, you know, which would be 2.5% growth, we talked about low teens, incrementals, you know, that includes M&A mix coming in lower in the side, some ongoing growth investments that we'll make into the business and today's point, that range of LIFO that we laid out. More at the higher end, we'd expect mid-teen incrementals of EBITDA margin on that. So, you know, when we think about the outlook, again, we just want to be prudent in the approach. But if we consider the business incrementals X M&A and X LIFO at the midpoint of our guidance, You know, that's a high teen incremental, which I think talks to our views, our outlook as we think about year ahead and ongoing business capabilities.

Thank you so much, guys. I'll pass it on.

Your next question comes from Chris Dankert with Loop Capital Markets.

Hey, morning, guys. Thanks for fitting me in here. I guess just to hold on ES for a second here, fourth quarter, as you mentioned in the remarks, well ahead of typical seasonality in the fourth quarter. Just wanted to ask, do you feel like there was anything pulled forward or anything one time in nature that came in the fourth quarter? Is that a fairly clean kind of growth figure, do you think?

Chris, I would say, hey, no big pull forward. Did a nice job recognizing some of that order conversion that we had in doing it. I think as this is kind of normal as we move through to close the fourth quarter, sequentially backlog would be down a little bit. Booked a bill slightly below one. into the side, but this year is higher than the prior year in that. And then as we look forward at the start of the year, we're encouraged by the order rates around engineered solutions. So we feel like we've got a very good pipeline to work on and execute across fluid power, flow control, and our automation businesses.

Got it. Super, super helpful there. I guess just as a follow-up, you mentioned some softness in the international markets. Is that principally the Mexico market? Is it the domestic headwinds we've heard about there, or is it something else going on? And I guess, does that impact kind of what you're seeing at Grupo Copar? Any cause there would be great.

Yeah, Chris, I'd say more related maybe in Canada. And I think there's just a settling out of some tariff impact and what it means for flows of products, but also in-country Canadian business industry of that. We feel like a business is doing a very nice job. We're well diversified into that segment, but I'd say a little more in Canada than the other geographies. Those headwinds did less as we moved across the quarter, which was encouraging.

Glad to hear that. Well, thanks again, guys, and best of luck into 26 here. Thanks, Chris.

Your next question comes from Ken Newman with KeyBank Capital Markets.

Hey, thanks for squeezing me in. I just had one quick follow-up, more higher level. Neil and Dave, just curious, what's the thought on potentially kind of maybe adding back some of this intangible amort to the earnings power? It seems like You know, obviously, hydrogen was pretty solid for EBITDA and, you know, despite some of the negative mix in the in this part of the cycle. But I wonder how much you're maybe getting negatively comped just because some of your peers do add that back and your thoughts on potentially kind of normalizing that to make the earnings power apples to apples.

I'd say, you know, I think we're pretty transparent in terms of the way we break it out. And I'd prefer to, you know, kind of maintain the approach of, you know, being consistent there and just continue to break it out so you've got that visibility. I mean, to your point, a headline read would, you know, maybe skew things. But our focus is on continuing to improve it and make it not a talking point, right? And I think we're hard at work with that with the synergy realization we've seen and driving that cross-selling.

Understood. Thanks.

At this time, I'm showing we have no further questions. I'll now turn the call back over to Mr. Scrimshaw for any closing remarks.

I just want to thank everyone for being with us today. We look forward to talking with you throughout the quarter. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.