Applied Industrial Technologies, Inc.

Welcome to the Fiscal 2026 Third Quarter Earnings Call for Applied Industrial Technologies. My name is Alexandra and I'll be your 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 1 on your telephone keypad to raise your hand. To withdraw your question from the queue, press star 1 again. 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 0. 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 now begin.

Okay, thanks, Alexandra, and good morning to everyone on the call. This morning we issued our earnings release and supplemental investor deck detailing our third 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 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, Appliance 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 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 updated outlook. I'll then close with some final thoughts. So overall, we reported a solid third quarter underpinned by a stronger organic sales growth across the business. Specifically, sales increased 6% organically over the prior year, which was the strongest growth in over two years. This was up notably from 2% last quarter and at the high end of our third quarter guidance. In addition, orders backlog and business funnel activity continue to build positive momentum. We also delivered another quarter of steady underlying margin performance with growth margins holding firm year over year, inclusive of ongoing LIFO headwinds. These positive dynamics drove record quarterly EBITDA that was at the high end of our expectations, as well as 6% above the prior year. or 8% when excluding the impact of LIFO. At the same time, we continue to invest internally to support our growth potential and strategy. So taken together a very productive quarter with many encouraging signals for the business moving forward. I want to thank our applied team for another solid quarter of execution. So a few key points to emphasize. First, stronger sales growth in the quarter was broad based with several encouraging underlying trends. Of note, average organic daily sales increased 5% sequentially, which was above normal seasonal patterns. Trends strengthened as the quarter progressed with organic sales in March up 10% over the prior year period. The stronger growth was volume driven, with customer spending behavior increasingly positive and showing signs of broadening. More positive underlying demand was apparent in year-over-year trends across our top 30 in markets, where 17 generated positive sales growth compared to 15 last quarter. In addition, two-year stack trends across our top 30 markets improved notably on a sequential basis. Growth was strongest across metals, technology, machinery, aggregates, utilities and energy, mining, and construction. This was offset by declines primarily in chemicals, lumber and wood, transportation, rubber and plastics, and refining. Stronger sales activity was evident across both segments in the quarter with particular strength in our engineered solution segment, which delivered over 9% organic growth year over year. Growth was strongest across automation and fluid power, both increasing by a double digit percent year over year in the quarter. Organic sales growth across our flow control operations also improved and was a contributor. In addition, segment orders were up by a double digit percent over the prior year for the second straight quarter, with backlog and book to bill both increasing sequentially during the quarter. Overall, this performance is an encouraging sign for our engineered solutions segments, expanding and differentiated growth potential as several favorable dynamics are converging. Of note, sales cycles for our advanced automation solutions are turning faster as customers put money to work in brownfield applications to drive production agility within existing capacity and address labor constraints. Our engineering depth, tailored solutions, and comprehensive application support are helping customers navigate automation deployments in both high-tech industries as well as across our legacy industrial verticals. In addition, project activity and investment in process infrastructure across the US is gradually increasing. We're also seeing recovery continuing to take shape in our legacy industrial and mobile OEM fluid power in markets following a prolonged multi-year downturn. alongside structural and secular growth in newer verticals where our exposure has increased in recent years following the ongoing expansion of the segment. On this last point, we're seeing solid demand build across our technology vertical, which today represents over 15% of the engineered solution segment and contributed over 300 basis points to the segment's organic sales growth rate in the quarter our exposure to the technology vertical includes an established and ongoing position across the semiconductor space as well as emerging growth opportunities developing within the data center market on slide eight of our earnings presentation we've added an overview of our position and the solutions we provide within these verticals which spans across all three areas of the segment including fluid power, automation, and flow control. In semiconductor, we provide various fluid conveyance, pneumatic, robotic, and mechatronic solutions that are primarily tied to wafer fab equipment manufacturing, as well as flow control solutions used in material processing. In data center, our deep expertise of fluid management and handling combined with established supplier relationships are presenting growing opportunities supporting various thermal management applications through engineered assemblies. In addition, our automation team provides robotic and machine vision solutions that automate and trace material handling within a data center facility. Our data center service capabilities and coverage were also enhanced through our Hydrodyne acquisition, where they are providing various fluid conveyance solutions and assemblies specified in liquid cooling systems. So overall, a very diverse and embedded position within these key growth verticals that highlights our ongoing evolution and technical capabilities as we continue to expand our engineered solutions segment. I'm also encouraged by the growth potential developing across our core service center segment. Organic sales growth of 4% in the third quarter strengthened from last quarter with average daily sales up approximately 5% sequentially on an organic basis and ahead of normal seasonality. Trends were strongest during March, where organic sales increased over 6% compared to the prior year, including nearly 8% within the U.S. Customer spending behavior continues to strengthen as greater capacity utilization drives more break-fix activity and required maintenance on critical and age production equipment. This drove stronger growth across strategic national accounts as well as our local accounts during the quarter. In addition, 13 of our top 15 industry verticals were up year over year in our U.S. Service Center network during the third quarter. This compares to 10 last quarter and six in the prior year quarter. Benefits from our sales initiative and one applied value proposition are reading through as we support our customers' heightened technical MRO requirements within an increasingly positive U.S. industrial backdrop. This includes our deep knowledge and supplier relationships tied to critical motion control equipment and infrastructure supported by our local service capabilities. I would also note over the past several years, our service center team has been executing on a comprehensive strategic plan, focusing on deepening our customer relationships modernizing our sales processes and tools, and enhancing our speed to market through investments in talent systems and analytics. In addition, our service center team's value proposition has strengthened through the expansion of our engineered solution segment, giving them access to engineering, design, assembly, repair, and integration support. to address our customers' legacy industrial system needs as well as emerging required investments in automation. This is driving new business wins as well as greater cross-selling activity. We estimate cross-selling contributed over 100 basis points to the segment's organic growth in the quarter, which is up from the first half fiscal 2026 levels and an encouraging sign. Overall, these initiatives remain ongoing and provide solid company-specific growth drivers for our service center segment moving forward as in-market demand cycles higher and as customers look to leverage the many secular and structural tailwinds developing across the North American manufacturing sector. So overall, a solid quarter highlighting building top line momentum across applied and our differentiated industry position. Positive sales trends have continued in the early part of our fourth quarter, with organic sales trending up by a high single digit percent year over year, month to date in April. We're also well positioned to drive further EBITDA margin expansion and stronger earnings growth assuming the improved top-line trends sustain moving forward. During the third quarter, EBITDA margins were in line with our expectations, while our year-over-year trends improved as the quarter progressed and sales growth strengthened. As a reminder, on an annualized basis, we target mid- to high-teen incremental EBITDA margins at mid-single-digit organic sales growth. with strong support from our ongoing internal margin initiatives, continuous improvement culture, and structural mixed tailwinds. With that being said, we remain mindful that we continue to operate in a dynamic environment where customers' purchasing decisions remain sensitive to broader macro uncertainty that is persisting. This includes an ongoing dynamic trade policy and tariff backdrop. To date, we have not seen a significant impact from recent tariff and trade policy modifications. Price increase announcements from our suppliers remain steady and over the last several quarters have normalized to a more regular cadence following an active pace this time last year. However, the inflationary environment and suppliers approach to pricing remains highly fluid at this point. We continue to work closely with our suppliers as they assess the evolving backdrop, as well as other inflationary pressures on their supply chains. As evidenced by our performance over the past year, our teams continue to effectively manage broader inflationary pressures. And overall, we remain well positioned. We operate from an agile business model in well structured markets, tied to critical and technical processes with strategic supplier relationships. Combined with structural mixed tailwinds and various self-help gross margin countermeasures inherent to our strategy, we are highly confident in our ability to continue to adapt and execute as the tariff and broader inflationary backdrop continues to evolve. And lastly, before I turn it over today, just a few thoughts as it relates to capital deployment and ongoing opportunities moving forward. Year to date, we've remained active, deploying over 300 million on share repurchases, M&A, and growing our dividend. With regard to M&A, which remains a top priority and key element of our growth strategy, we are actively evaluating various targets across both our segments with our focus primarily on midsize and smaller tuck-in companies. While timing of M&A can vary quarter to quarter, I continue to believe the next 12 to 18 months will be more active period for applied given the work being done and as we continue to execute on our strategy. In that, I think it's important to reflect on the potential. Since 2018, we've closed 18 acquisitions representing over $1 billion in acquired sales. This included key strategic acquisitions that expanded our engineered solutions capabilities into areas of flow control and automation, as well as strengthened legacy positions in fluid power and within our service center network. Over that same period, we've grown EPS by 16%. and free cash flow by 18% on a compounded annual basis. I believe that flywheel position and approach to M&A is even stronger today, given the investments we've made in our team, processes, and systems, as well as the compelling value proposition we offer to many companies looking to join our leading technical industry position within a still fragmented industry. In addition to ongoing M&A activity, we remain proactive with share buybacks. Long term, we see significant value creation potential across supply, considering our strategic initiatives, industry position, exposure to secular growth tailwinds, and margin expansion potential. When appropriate, we will continue to utilize share buybacks to enhance shareholder returns. And as indicated in our press release today, I'm pleased to announce our board has approved a new authorization to repurchase up to 3 million shares. At this time, I'll turn it over to Dave for additional detail on our results and outlook.