Applied Industrial Technologies, Inc.

Welcome to the fiscal 2026 first quarter earnings call for Applied Industrial Technologies. My name is Eric, and I'll 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, 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 call 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, Eric, 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 applied.com. Before we begin, just a reminder, we'll discuss the business outlook and make forward-looking statements. All forward-looking statements are based on current expectations subject to certain risks and uncertainties, including those detailed in our SEC filings. Actual results may differ materially from those expressed in the forward-looking statements. The company undertakes no obligation to update publicly or revise any forward-looking statement. In addition, the conference call will use non-GAAP financial measures, which are subject to the qualifications referenced in those documents. Our speakers today include Neal Scrimshaw, Applied's President and Chief Executive Officer, and Dave Wells, our Chief Financial Officer. With that, I'll turn it over to Neal.

Thanks Ryan and good morning everyone. We appreciate you joining us. 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 outlook. I'll then close with some final thoughts. So overall, we had a nice start to fiscal 2026. We delivered strong earnings performance in the first quarter with EBITDA and EPS growing 13% and 11% respectively over the prior year, which exceeded our expectations. Sales growth was largely in line with our outlook and strengthened compared to last quarter against a still muted and choppy in-market backdrop. We converted stronger sales growth into even greater EBITDA growth through solid gross margin execution, cost control, and our internal initiatives. As a result, EBITDA margins expanded over the prior year and exceeded the high end of our first quarter guidance. In particular, our service center team delivered a strong quarter on both the top and bottom line. and I'm encouraged by the positive momentum building from our internal initiatives and industry position. Sales across our engineered solution segment were relatively flat versus the prior year, but orders remain positive. Hydrodyne contribution continues to increase, and the segment has solid growth potential moving forward. Overall, our execution and progress in the first quarter provides positive momentum to achieve our fiscal 2026 objectives and accelerate our value creation potential moving forward. Digging more into the sales trends, broader in-market demand remained mixed during the quarter as lingering trade policy uncertainty continued to impact customers' purchasing decisions. That said, we would describe the underlying demand backdrop as stable to slightly positive and overall moving in the right direction when looking at it over the past several quarters. Year-over-year trends across our top 30 end markets improved slightly with 16 generating positive sales growth compared to 15 last quarter. We saw stronger trends across several of our primary end markets with strongest growth in machinery, food and beverage, refining, pulp and paper, metals, oil and gas, and aggregates during the quarter. This was offset by declines in lumber and wood, transportation, chemicals, mining, and utilities and energy. Year-over-year organic sales trends were stronger in July and August relative to September, though partially reflecting more difficult comparisons later in the quarter. Combined with greater pricing contribution, reported organic sales growth of 3% was the strongest in two years, with the two-year stack trend improving sequentially for the third consecutive quarter. Organic sales growth in the quarter was led by our service center segment, with reported growth of 4.4%. accelerating nicely from the low single-digit declines we experienced in fiscal 2025. Growth was strongest across our national account base, while local account sales were up modestly year over year, which is an improvement from recent quarters. Strengthening service center sales growth is an encouraging sign for both the segment as well as our broader operations. As the shorter cycle nature of our service center operations is typically a good indicator of underlying industrial activity and potential demand for capital related spending moving forward. We believe modest firming and manufacturing production and capacity utilization combined with pent up demand from deferred maintenance activity is driving more technical MRO and break fix activity at the margin. We're seeing stronger activity across some of our heavy U.S. manufacturing verticals that are break-fix intensive. This includes primary metals market where related service center sales were up by a high single-digit percent year-over-year in the quarter. Our service center team also continues to benefit from ongoing sales initiatives, technology investments, and greater cross-selling opportunities, which is supplementing their performance beyond underlying market demand. It's also important to highlight the strong execution of our service center team in the quarter, where they levered 4% sales growth to 10% EBITDA growth. While particularly benefiting from more favorable AR provisioning over the prior year, the underlying earnings leverage was solid and highlights the team's operating discipline, ongoing cost control, and effective management of broader inflationary headwinds. Within our engineered solution segment, organic sales in the first quarter finished slightly lower compared to the prior year, but remain on a solid path to stronger growth. Of note, segment orders sustained positive momentum, increasing nearly 5% organically over the prior year during the quarter, with the two-year stack trend accelerating sequentially. Segment orders have now been positive year over year for three straight quarters, with book to bill above one during the quarter. Order growth strengthened across our industrial and mobile OEM fluid power operations during the quarter. This exceeded our expectations and leaves us incrementally constructive on related fluid power sales trends moving forward. Our fluid power team's leading engineering capabilities and customer reach are driving new business opportunities tied to mobile electrification, next generation fluid power systems, and fluid conveyance. We also believe a lower interest rate environment and tax incentives could be particularly positive for our fluid power customer base, which is primarily comprised of small to mid-sized domestic OEMs. In addition, new business development and customer indications signal a potentially active backdrop across our technology vertical and discrete automation operations entering the second half of fiscal 2026. This includes an expanding position supporting the data center market with our fluid power and flow control solutions tied to thermal management applications. and our automation teams providing robotic solutions supporting material handling applications. Our enhanced technical footprint in the southeast U.S. region following our Hydrodyne acquisition has further strengthened our data center position and related order momentum. Demand signals across our semiconductor customer base also remain encouraging and indicate a potential greater ramp in related orders and shipments during the second half of fiscal 2026 as the wafer fab equipment cycle gains momentum. I would also highlight recent investments we've made in engineering, systems, and production capacity over the past several years that provide significant support to fully leverage these demand tailwinds moving forward. As a reminder, the technology and discrete automation verticals combined represent more than 25% of our engineered solution segment sales and could be an increasing contributor to the segment's growth moving forward based on our initiatives, growing order book, and broader secular tailwinds. In addition, our flow control team is focused on capturing growth developing within life sciences, pharmaceutical, and power generation markets within the US. With established product portfolios and leading technical capabilities around calibration services, instrumentation, steam and process heating, and filtration, we are favorably positioned to win in these markets. On a side note, our flow control backlog ended the quarter at its highest first quarter level in over three years. with orders positive year over year. Combined with relatively easy comparisons, we remain optimistic on the setup of our engineered solution segment entering the second half of fiscal 2026 as recent order momentum converts and underlying end markets continue to firm. At the same time, we remain constructive on our ability to lever stronger sales and drive greater earnings growth and EBITDA margin expansion. Our first quarter performance is a good reflection on this. Of note, we achieved 17% incremental margins on EBITDA inclusive of ongoing inflationary pressures including LIFO and unfavorable M&A mix. We believe our underlying business model combined with ongoing operational initiatives and structural mixed tailwinds provide notable earnings growth levers to achieve our mid to high team incremental annual margin target and continue to expand EBITDA margins in a positive sales growth backdrop. In addition, sales growth and EBITDA margins should benefit from ongoing progress developing across Hydrodyne. As we approach our one year anniversary of the acquisition, we are very encouraged by the performance The broader team is delivering and the potential we see ahead. Hydrodyne earnings contribution continues to improve with EBITDA up over 20% sequentially in the first quarter and EBITDA margins improving nicely from the prior six-month trend. We are making strong progress with sales synergies and our teams collaborate and leverage innovative fluid power solutions. This includes connecting Hydrodyne's strong repair and field service support across our legacy MRO customer base, while enhancing their value proposition by providing access to our systems engineering team and complementary product lines. We're also tracking well to our operational synergy streams, including solid progress on harmonizing systems, processes, and operational efficiencies. Combined with a growing backlog and firming demand across their core end markets, we believe Hydrodyne could be nicely additive to our organic sales growth and EBITDA margin trend as we anniversary the transaction into the second half of fiscal 2026. Lastly, we remain on track to have another active year of capital deployment to further supplement our growth potential and shareholder returns. M&A remains a top capital allocation priority for fiscal 2026. Our pipeline is active with varying size targets across both segments. This includes several mid-size targets at various stages of due diligence that could enhance our technical differentiation and value-added service capabilities. In addition, we expect to remain active with share repurchases for the remainder of fiscal 2026 as we balance the cadence of potential acquisitions, our balance sheet capacity, and the value we see across applied from our strategy and long-term earnings potential. At this time, I'll turn it over to Dave for additional detail on our results and outlook. Thanks, Neal.