Applied Industrial Technologies, Inc.

Welcome to the fiscal 2027 first quarter earnings call for Applied Industrial Technologies. My name is Al, 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 to raise your hand. To withdraw your question, press star 1 again. Ryan Cieslak, Vice President of Investor Relations and Treasury. Ryan, please go ahead.

Okay, thanks, Dale, 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 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, we will use non-GAAP financial measures during the conference call, which are subject to the qualifications referenced in our SEC filings. Our speakers today include Neil Schrimsher, Applied's 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 fiscal 2027 guidance. I'll then close with some final thoughts. So overall, we had a nice start to fiscal 2027. We delivered strong earnings performance in the first quarter with EBITDA and EPS growing 10 and 13% respectively over the prior year. Customer activity was directionally positive throughout the quarter with organic sales growth of 7% in line with our outlook provided in mid-August. On a two-year stack basis, organic growth of 10% was up modestly compared to the seasonally strong trend we had in the fourth quarter. We also drove solid margin performance in the quarter against ongoing inflationary headwinds, with EBITDA margins expanding year over year and achieving the high end of our guidance. Favorable Mix, Ongoing Internal Margin Initiatives, and Cost Leverage are supporting our margin trajectory. Of particular note, our Engineered Solutions segment delivered a strong quarter on both the top and bottom line with orders continuing to strengthen. Underlying demand across our Service Center segment also remains positive with sales growth strengthening as the quarter progressed and into October. Overall, we're executing well with a productive growth environment and on track to deliver solid performance for the year. Digging more into the sales trends, underlying demand remained favorable throughout the quarter. Market conditions were strongest across our U.S. operations, where organic sales increased 8% year over year. Company-wide volumes were up 5% from the prior year, reflecting greater technical MRO and capital spending activity, combined with ongoing benefits from our internal sales initiatives and industry position. From an in-market perspective, 18 of our top 30 market verticals generated positive sales growth, which is down from 20 last quarter, but up from the prior year quarter. On a two-year stack basis, 18 were positive compared to 17 last quarter, highlighting a sustained positive underlying trend. Growth was strongest across metals, technology, machinery, utilities and energy, mining, and oil and gas. This was partially offset by declines primarily in lumber and wood, aggregates, and rubber and plastics, and food and beverage. Sales growth during the quarter was led by our engineered solution segment, which delivered 14% organic sales growth year-over-year, up slightly from 13% last quarter. Segment order trends also remained positive during the quarter, increasing by more than 30% year-over-year, with backlog continuing to strengthen and booked a bill at its highest level in more than four years. Sales growth in the quarter was strongest in automation, where organic sales increased by more than 20% year-over-year for the second straight quarter. Demand for our automation solutions focused on robotics, machine vision, and digital technologies remained solid as customers addressed structural labor constraints, safety and quality requirements, and supply chain resiliency initiatives with a favorable production environment. It is increasingly evident customers are investing in automation to meet lasting operational requirements and strengthen their competitive position long term. Our scaling footprint across the U.S. and Mexico combined with the leading engineering and application expertise in strategic relationships with premier automation suppliers is providing a clear competitive advantage as we connect these solutions across our legacy customer base. With our automation backlog growing more than 30% sequentially and year over year during the quarter, we see sustained solid growth momentum moving forward. Fluid power also remains a bright spot with organic sales increasing by a high teens percent over the prior year, reflecting strength within semiconductor and data center markets, as well as positive demand across industrial and mobile OEM customers. The growth outlook across fluid power remains strong as well, with related backlog ending the quarter at its highest level in four years. Secular tailwinds within both legacy and emerging customer verticals are driving durable demand for fluid conveyance, industrial power, pneumatic automation, and next generation hydraulic systems. We're in a great spot to leverage these growth catalysts as the largest fluid powered distributor and solutions provider in the US with premier system engineering and assembly capabilities. I'm also encouraged by the stronger demand developing within our flow control operations where organic sales increased more than 6% year-over-year, a solid pickup from last quarter. We're seeing stronger flow control demand across metals, utility and energy, and technology in markets, while customer activity across process-heavy chemicals and refinery verticals is starting to firm. Overall, all three areas of our Engineered Solutions segment are trending nicely to start the year, a positive sign for the segment's growth durability as well as earnings contribution potential. This was evident in the quarter where the segment's inherent operating leverage read through nicely, with 14% sales growth translating to 25% EBITDA growth representing incremental margins of 24%. Demand signals across our service center segment also remain positive. Organic sales growth of 3.5% moderated from 8% last quarter, though primarily reflecting a more difficult comparison, with a two-year stack of 8% up modestly from the seasonally strong trend last quarter. Year-over-year growth improved every month in the quarter, with the positive trend continuing into October. for segment organic sales are up a high single digit percent month to date. Demand conditions were strongest across the U.S. Service Center operations during the quarter, where organic sales increased approximately 6% over the prior year, with break-fix and technical MRO activity remaining firm throughout the quarter. We also continue to see stronger demand across local accounts. providing another positive signal on the durability of the cycle. In addition, customer sentiment and demand indications remain constructive, reflecting elevated technical MRO requirements and a positive U.S. manufacturing backdrop. Of note, U.S. Service Center bookings increased 7% sequentially from the fourth quarter, which was nicely ahead of normal seasonality. Segment growth was partially offset by muted in-market demand in Canada and Mexico, which is consistent with more subdued manufacturing and industrial indicators within those regions over the past several quarters and partially reflects the evolving trade backdrop. Canada and Mexico represent approximately 12% of our service center segment sales, and while near term trade dynamics remain uncertain, we expect improving trends within these regions as the year progresses based on current business pipelines, easy comparisons and internal actions. Overall, our core service center business is tracking directionally in line with our expectations year to date, with demand indicators remaining supportive moving forward. In addition to an overall positive demand backdrop, we're in a great position to continue to translate the current trajectory of sales growth into greater earnings growth and ongoing EBITDA margin expansion through cost leverage and internal initiatives, as well as benefits from favorable mix. Our first quarter performance is a good reflection of this. Of note, gross margins expanded 25 basis points over the prior year or nearly 50 basis points excluding the impact of LIFO. This was ahead of our first quarter guidance with underlying gross margin performance favorable across both segments during the quarter. We benefited from positive mix during the quarter reflecting stronger growth across engineered solution segment and local accounts. We're also executing well across various margin initiatives, which are helping offset higher employee-related costs, freight and fleet expense inflation, and ongoing growth investments. As a result, we achieved 15% incremental margins on EBITDA during the quarter, or 19% when excluding LIFO, which was at the high end of our first quarter outlook, and against a difficult prior year comparison. Our underlying business model combined with ongoing operational initiatives and structural mixed tailwinds provide solid support levers to continue to expand EBITDA margins and drive solid earnings growth in the current demand backdrop. and 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 2027. Our pipeline is active with varying sized targets across both segments. This includes several mid-sized targets at various stages of due diligence that could enhance our technical differentiation and Value Added Service Capabilities. Our balance sheet and cash generation provide meaningful capacity to further compound our growth through M&A. As always, we remain disciplined with our approach with a primary focus on generating appropriate returns while enhancing our competitive position and long-term growth opportunity. At this time, I'll turn it over to Dave for additional detail on our results and outlook.