Q2 2021 Applied Industrial Technologies Inc Earnings Call

Welcome to the fiscal 'twenty 'twenty, one second quarter earnings call for applied Industrial technologies. My name is Mary Alma 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 one on your telephone keypad.

Prior to asking a question lift your handset to ensure the best audio quality.

Please note that this conference is being recorded.

I will now turn the call over to Ryan <unk> director of Investor Relations and Treasury Ryan you may begin.

Thanks, Mariana and good morning to everyone on the call. This morning, we issued our earnings release and supplemental investor deck detailing our second quarter results.

These documents are available in the industrial relations section of applied Dot com before.

Before we begin just a reminder, will discuss our business outlook and make forward looking statements. All forward looking statements are based on current expectations subject to certain risks, including the potential impact from the COVID-19, pandemic as well as trends in sectors and geographies the success of our business strategy and other risk factor.

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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.

The conference call will use non-GAAP financial measures, which are subject to the qualifications referenced in those documents.

Our speakers today include Neil Schrimsher applies 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 and hope for new year's starting well I'll begin today with some perspective on our second quarter results.

Current industry conditions, and our position going forward.

Dave will follow with a summary of our financials and some specifics on our second quarter and outlook and then I'll close with some final thoughts.

We're pleased to report a solid and productive quarter for applied along with positive momentum building as we enter the second half of our fiscal year, our team executed extremely well during the second quarter and we saw sustained sequential improvement in customer demand following the.

[noise] recovery highlighted last quarter.

We are leveraging our industry position and generating incremental traction from our strategic growth initiatives.

These include addressing customers' early cycle technical MRO needs as well as playing a vital role in supporting efficiency and performance initiatives across their critical industrial infrastructure.

We believe these customer initiatives will be increasingly relevant, giving a greater focus on operational risk management and supply chain considerations.

We are capturing these initial tail wins, while remaining disciplined with controlling cost as sales continue to recover.

Cost accountability and execution have always been key to our culture and remain integral to our operational focus going forward. This is supplemented by operating efficiencies gained from optimizing processes systems and talent across the organization in recent years.

While additional expense restoration will occur in the second half of our fiscal year. We expect these counter elements to provide further balance to our cost trajectory near term and.

And support our long term EBITDA margin expansion potential as the demand recovery continues to unfold and we leverage our operational network.

I'm also encouraged by the strong cash generation, we continue to see across the business.

Year to date free cash is up over 60% from prior year levels and over 200% of adjusted net income.

Influenced by the counter cyclical nature of our model cash flow was ahead of our expectations and up meaningfully from prior year levels. This highlights the progress we continue to make with regard to expanding our market position, while optimizing our margin profile and working capital management.

Our first half cash generation and balance sheet flexibility leave us well positioned entering the second half of our fiscal year.

As it relates to the broader demand environment underlying trends remained below prior year levels during our fiscal second quarter, but continued to improve sequentially. Despite the recent rise in COVID-19 rates, we saw greater break fix and maintenance related demand across our search.

This center network on rising production activity greater spending on authorizations and enhanced sales momentum across strategic accounts.

Customers are remaining productive in the current environment as established safety protocols are proving effective in providing support.

Demand across our fluid power and flow control segment was also encouraging with order activity and backlog momentum building.

Partially reflects firm demand from our leading service and engineered solutions capabilities as secular growth tailwind continue across various industries.

Combined the year over year organic sales decline of 10, 5% in the quarter improved from 13, 5% decline last quarter year over year trends improved each month, while sequential trends in daily sales rates were seasonally strong.

Areas, such as food and beverage aggregates technology lumber and wood chemicals, and pulp and paper continue to show positive momentum.

And while year over year weakness remains greatest across heavy industries, such as machinery metals and oil and gas.

Demand within these verticals continues to gradually improve and related indicators suggest further recovery could emerge in the coming quarters.

The positive sales momentum has continued into the early part of fiscal third quarter with organic sales through the first 17 days of January down in mid single digit percent over the prior year.

It's important to note that visibility remains limited and uncertainty persist as customers continue to manage through a challenging macro and pandemic outlook near term.

Like many we are hopeful the business environment continues to recover.

Vaccines are deployed further in coming months, but we remain cognizant of the potential impact from researching COVID-19 cases timing of mass vaccine distribution and possible physical policy changes for.

From the New administration.

As we've shown in recent quarters, we know how to manage and execute in this uncertain business environment.

In addition, I firmly believe our value proposition and company specific growth potential is the greatest and applied history.

There's evidence of this emerging across the organization.

For example, we're playing a key part in the recent vaccine rollout and related COVID-19 response, our flow control offering and support team are providing critical products and solutions for vaccine production.

This includes hygienic diaphragm valves.

Water for injection pumps and clean in place flow systems used to clean and regulate material flow and temperature as the vaccine is manufactured we're proud and grateful to be participating in this historic moment, which highlights our expanding position and capabilities across.

So central industries.

We're also seeing positive momentum across our fluid power operations as more customers integrate new technologies into their equipment and critical assets in order to optimize productivity.

Safety and energy cost, while reducing broader business and supply chain risk.

In addition demand tailwind tied to five G infrastructure cloud computing and other growing technologies are driving demand for pneumatic and electronic automation systems.

Our leading fluid power service and engineered solutions capabilities provides us a strong position to capture these growth opportunities as reflected in our growing backlog in recent months.

Our technical position and long term opportunity is further supplemented by the progress we're making in expanding our next generation automation solutions. Following three acquisitions in the past 16 months.

This includes our recent acquisition of Gibson Engineering in late December.

Our growing automation footprint and offering focused on robotics machine vision motion control and digital technologies is being recognized across all industries and presents a significant growth opportunity longer term.

As we address customers' operational technology.

Needs in an improving industrial sector.

We welcome Gibson to applied and look forward to leveraging their innovative technology and capabilities.

Overall from critical break fix MRO applications to emerging technologies and specialized engineering services, our value proposition is evident and we continue to see greater demand as industrial production ramps. These are positive developments and we are benefiting as COO.

Customers themselves benefit from the value we bring to these opportunities.

At this time I'll turn the call over to day for additional detail on our financial results and outlook.

Thanks, Neil just another reminder, before I begin regarding the availability of the quarterly supplemental investor deck Recapping key performance and discussion points, which has been posted to our investor site for additional reference.

In addition, I want to highlight several non routine items that impacted our second quarter results as discussed in our press release, and which will exclude when speaking to our operational results on an adjusted basis.

Unusual items in the quarter include a $49 $5 million pretax noncash impairment charge on certain fixed lease intangible assets as well as non routine costs of $7.8 million pre tax related to an inventory reserve charge facility consolidation in San Fran.

These charges are the result of weaker economic conditions, and resulting business alignment initiatives across a portion of our service centers segment locations exposed to oil and gas end markets.

We remain focused on appropriately aligning costs and resources with current demand levels across the organization following the pandemic driven downturn over the past year.

These business alignment actions are consistent with our internal initiatives and strategic focus going forward.

Drive additional cost savings in the back half of our fiscal year.

Now turning to our results absent these non routine charges during our second quarter consolidated sales decreased nine 9% over the prior year quarter.

Acquisitions contributed a half point of growth and foreign currency was favorable by <unk>, 1%.

Many of these factors sales decreased 10, 5% on an organic basis with a light number of selling days year over year.

So down as compared to the prior year quarter sales exceeded our expectations with average daily sales rates up nearly 3% sequentially on an organic basis and above the normal seasonal trends for the second straight quarter.

Following a slow start to the quarter in early October sales activities strength in sequentially and remained firm late in the quarter. Despite typical seasonal slowness and rising COVID-19 cases across the U S.

Compared to the sales performance was relatively consistent across both segments as highlighted on slides six and seven.

Sales in our service Center segment declined 10, 4% year over year or 10, 5% on an organic basis, when excluding the modest impact from foreign currency.

The year over year organic decline of 10.5% improved notably relative to the mid teens to low 20% declines we saw in the prior two quarters.

The segment's average daily sales rates increased nearly 4% sequentially from our September quarter and over 8% from the June quarter.

The sequential improvement primarily reflects greater customer maintenance activity and break fixed demand across our core U S Service Center network.

Positive momentum has been relatively broad based no end markets, such as food and beverage acre gets pulp and paper lumber in forestry in rubber are leading the recovery.

Heavier industries are also starting to show positive signs while ongoing growth across our Australian operations has provided additional support.

Within our fluid power and flow control segment sales decreased eight 5% over the prior year quarter with our recent acquisition of Acs contributing 1.6 points of growth.

I Didnt organic basis segment sales declined 10, 1%, reflecting lower demand across various industrial off highway mobile and process related end markets. This.

This was partially offset by from demand within technology Life Sciences transportation and chemical end markets. In addition, as Neil mentioned, we are seeing encouraging demand for fluid power solutions tied to electronic control integration equipment optimization and pneumatic automation.

This is supporting backlog, which was up both sequentially and year over year at the end of the quarter.

Moving to gross margin performance as highlighted on page eight of the deck adjusted gross margin of 28, 9% declined eight basis points year over year or 19 basis points, when excluding non cash LIFO expense of $9 million in the quarter and one $9 million in the prior year quarter.

On a sequential basis adjusted gross margins were largely unchanged overall adjusted gross margin trends were in line with our expectations and.

To reflect some volume driven headwinds year over year as highlighted last quarter, which were partially offset by the ongoing benefits from our internal initiatives.

Turning to our operating costs on an adjusted basis, selling distribution and administrative expenses declined 11, 2% year over year or approximately 12% when excluding incremental operating costs associated with our Acs acquisition.

Year over year decline reflects the ongoing benefit of cost actions taken in recent quarters to align expenses with volume.

As discussed in prior calls this includes a mix of both structural and temporary actions.

We had restored a portion of the temporary cost actions our team continues to demonstrate great discipline in controlling cost.

These results highlight the resiliency of the applied team and our operating model as well as efficiency gains from operational excellence initiatives leverage of our shared services model and technology investments made in recent years.

Year over year comparisons also benefited from juice amortization expense Halloween the asset impairment charge, we took during the quarter.

For your reference our second quarter, depreciation and amortization expense of $13 $5 million is a good quarterly run rate to assume going forward.

Overall, our strong cost control combined with improving sales trends during the quarter resulted in mid single digit decremental margins on adjusted operating income or high single digits, Decrementals, when excluding depreciation and amortization expense.

Going forward, we will remain prudent and disciplined and aging of our cost structure as we continue to roll off temporary cost actions to align with our recent performance and a more constructive outlook.

Since the start of our fiscal year, we have gradually eliminated these temporary cost actions as the business environment has slowly recovered and expect to discontinue the vast majority of the remaining temporary cost actions. During this current fiscal third quarter.

Adjusted EBIT in the quarter was $68 $3 million down eight 4% compared to the prior year quarter, while adjusted EBIT margin was nine 1% up 14 basis points over the prior year are virtually flat when excluding non cash LIFO expense in both periods.

On a GAAP basis, we reported an operating loss of <unk> 14 per share, which includes the previously referenced non cash impairment and non routine charges.

On a non-GAAP adjusted basis, excluding these items, we reported earnings per share of 98 cents, which compared to 97 cents in the prior year quarter.

Our adjusted tax rate during the quarter of 18, 6% was below prior year levels of 23% as well as our guidance of 23% to 25%.

The adjusted tax rate during the quarter include several discrete benefits related to income tax credits and stock option exercises.

Leave a tax rate of 23% to 25% for the second half of fiscal 'twenty 'twenty, one it's an appropriate assumption near term.

Moving to our cash flow performance and liquidity cash generated from operating activities. During the second quarter was $77.5 million, while free cash flow totaled $72 $7 million or approximately 190% of adjusted net income.

This was up from $55 million and $48 million, respectively, as compared to the prior year quarter and represents record second quarter cash generation.

Year to date free cash generation of $151 million is up over 60% from prior year levels.

And represents a 206% factor of adjusted net income.

The strong cash performance year to date reflects solid operational execution significant ongoing contribution from our working capital initiatives and the countercyclical cash flow profile of our business model.

Given the strong free cash flow performance in the quarter. We ended December with approximately $289 million of cash on hand.

Of note. This is after utilizing cash during the quarter for two acquisitions.

Net leverage stood at two one times adjusted EBITDA at quarter end consistent with the prior quarter and below the prior year level of 2.5 times.

In addition, our revolver remains undrawn with approximately $250 million of capacity and an additional $250 million on accordion option.

Combined with incremental capacity on our uncommitted private shelf facility, our liquidity remained strong.

This provides flexibility to fund incremental working capital requirements in coming quarters as customer demand continues to improve as well as to pursue strategic M&A.

And fund other growth initiatives.

Our M&A focus near term remains on smaller bolt on targets that align with our growth priorities, including additional automation and fluid power opportunities.

In addition, as noted in our press release today, we announced that our board of directors approved an increase in the quarterly cash dividend to <unk> 33 cents per common share.

This represents the 12th dividend increase since 2010, and underscores our strong cash generation and commitment to delivering shareholder value.

Transitioning now to our outlook based on month to day trends in January and assuming normal sequential patterns. We would expect fiscal third quarter 2021 organic sales to decline by 3% to 4% on a year over year basis.

This includes an assumption of low single digit organic declines in our service Center segment and mid single digit organic declines in our fluid power and flow control segment.

Again this direction is meant to provide a starting framework on how third quarter sales could shape up if trends follow normal seasonality going forward.

In addition, we expect our recent acquisitions of Acs and Gibson engineering to contribute approximately $10 million to $11 million in sales during our fiscal third quarter.

We expect gross margin remained relatively unchanged sequentially into the second half of fiscal 2021.

We continue to see some incremental price announcements from suppliers, though the magnitude of the increases are not materially different from what we've seen over the past year.

Our history highlight strong management of supplier inflation and price cost dynamics, reflecting our industry position internal initiatives and positive mix opportunities.

As it relates to operating cost based on the 3% to 4% organic sales decline assumption, we would expect selling distribution and administrative expenses of between $170 million and $175 million during our fiscal third quarter.

In addition, if sales follow normal sequential patterns for the balance of the year, we would expect a similar to slightly higher S. D N a range in our fiscal fourth quarter.

This represents an increase from second quarter levels and partially reflects the ongoing roll off of temporary cost actions.

As indicated we will continue to take a mindful and balanced approach to managing other operating costs going forward.

We were encouraged by our cost and margin execution year to date, which is providing a strong position to further discontinued temporary cost actions as we take an offensive approach to an emerging recovery and our strategic growth targets.

Last week from a cash flow perspective, we expect free cash to moderate in the second half relative to first half levels.

Working capital will likely become a use of cash as they are levels start to cyclically build and we begin to replenish inventory in support of our growth opportunities and the recovery as the year moves forward.

We remain confident in our cash generation potential and reiterate our normalized annual free cash target of at least 100% net income over a cycle.

With that I will now turn the call back over to Neil for some final comments.

Thanks, Dave.

Approximately three quarters ago. During the initial weeks of the pandemic I stated my belief that applied has never been in a better position to manage through the current environment and exit the pandemic driven downturn in an even stronger position.

Our performance since then provide strong confirmation of disposition the tremendous team we have at applied and the earnings potential that lies ahead.

This includes record cash generation and a 30% reduction in our net debt our strong cost execution supporting relatively stable EBITDA margins. Despite the meaningful end market slowdown.

During this time, we also completed two acquisitions supplementing our long term growth profile, while advancing other key growth initiatives, including optimizing our cross selling opportunity and strategic and market positioning.

We are delivering on our requirements and commitments, while moving the organization toward our longer term next milestone financial objectives are for 5 billion of revenue and 11% EBITDA margins.

We remain cognizant of ongoing on in market uncertainty, but we're eager to demonstrate what we're fully capable of in the years ahead as we continue to leverage our differentiated industry position as the leading technical distributor and solutions provider across critical.

Industrial infrastructure.

Once again, we thank you for your continued support and with that we'll open up the line for your questions.

Thank you we will now begin the question and answer session.

I'd like to ask a question. Please pick up your handset press Star and then the number one on your telephone keypad. If he would like to withdraw your question from the queue press the pound key.

Pause for just a moment chicken Paul for Q&A roster.

Your first question comes from David Manthey with Baird. Your line is open.

Yeah, Hi, good morning, everyone.

Good morning.

So could you outline the AR automation and the outlook for as we enter calendar 'twenty 'twenty one here with all of this a D S in Gibson.

And what I'm wondering is can you now approach the market differently with the expanded geographic coverage that you have.

So I believe we can approach the market fully and so work that would go on now as we look across these businesses. We can share best practices that go on in approach and technology for.

For cells Engineers are we can look at support and perhaps develop and work on from an applications engineering standpoint to start across the group and then as we have opportunities that can exist in some other geographies, we can leverage some back office infrastructure debt.

Start so it's early to be doing that and so each of the groups will be working their current customer base their current pipeline of opportunities, but we're broadening the effort to say where can we connect this automation took current what would've been legacy.

Our service center customers for additional growth opportunities.

Yeah. That's helpful. Neil on that last point that was my second question is.

Have you begun the process of cross selling and the legacy applied salespeople have been trained to at least be knowledgeable in automation and robotics. So they can they can pull the experts in or how is that going in and what or if you just give us a time line as far as where we are in.

Where we're going in in that prospect.

I would say you know while early we are raising that awareness of our account managers and selling teams of what is available when they are in inside of facilities, where to look for the opportunities how to start the dialogue and.

And then providing support.

With automation capable individuals to help connect the dots and so we have projects. We have early results in the pipeline across that customer base and we have growing interest in that capability and so you can imagine more in the west started in the south Eastern and were just getting started in that no.

These mid Atlantic, but now with that growing footprint and capability that can occur with customers that have sites and facilities across.

Across the geography.

Sounds great Neil Thank you alright, thanks, Dave.

Your next question comes from Adam Uhlman with Cleveland Research. Your line is open.

Hey, guys. Good morning, congrats on the solid quarter.

Okay.

I wanted to start with a question around cash flow I'm wondering what are you going to do with all.

All this cash on generating I guess, you know the inventory working capital it sounds like that's a <unk>.

For us here over the net or on a use over the next six months could you maybe dimension, how you're thinking about inventory additions as business levels start to pick up and then related to that.

Steel prices have jumped quite a bit from sort of the supplier price increases are starting to come through any opportunity either.

To buy ahead of that was that a an opportunity here in the December quarter, or maybe you can do a little bit for them to mitigate the impact of higher material costs.

Sure I mean, we're going to continue to evaluate and I think we have a very good you know.

Cross functional process put into place to evaluate the trade offs between the investment in inventory tied up working capital and are you leveraging those those pre buy opportunities. So we'll see that continue into the back half of the year. That's yielded great results as you look at arc on cash flow you year to date and with the working cap.

So efficiency being a key driver of the the overdrive that we have seen that said, yeah, I think we'd be mindful that we put back on the shelf going on pace to the rate of demand and while protecting you said, you're making device do we need to make to protect our customer base against outages and you know where where it makes sense buy in advance of potential increases.

But yeah.

Historically, you've done a very good job of matching and you being able to manage that price cost inflation. We see that trend continues to move forward as we continue to leverage the inventory position and systems in place.

So back to the original question you will see some build in working capital as a result of just the sheer volume impact on a on even.

Even though we continued to make a nice job and do a nice job of reducing our past due positions down you know there are five points year over year across the business.

But the but then you know continue to leverage that cash for.

Strategic M&A will continue to evaluate other growth opportunities to drive shareholder value.

And Adam I would add if we if we look back at our second quarter I think price was a kind of a modest contribution.

I think it's very similar in the third quarter and while the input cost of steel and other commodities start to go up. It is an input you know for many of our suppliers. They would still be processing them through we do see increased a frequency of price increases coming.

Many of them and you don't have announced periods to allow an orderly implementation to go on in that so I think there'll be greater activity there in the announcements, but for the coming through in results I'm not for sure. It's much of a change in the third quarter.

It may be an impact a little more into the fourth and then obviously as we get into next fiscal.

Fiscal year, and then to Dave's point.

We've got a good track record and history of managing that price cost inflation as it goes forward, but I do think there will be a modest ramping as we think about it through the end of this fiscal year.

Gotcha. Thank you that's that's very helpful.

And my my second question here is.

On a really on on the oil and gas. It you know it sounds like you did some more restructuring of your footprint there, but I'm wondering if you're.

Seeing any green shoots in that debt industry at all.

Well, we talked about in some of the heavy into heavier industries, perhaps having some of those for oil and gas for me in it.

We did the evaluation as we look and also extend that outlook.

Let us to making.

The adjustments are service centers that participate more in that oil and gas sector and in reducing the number.

You know, obviously and unfortunately, right that that impacts individuals', but it does free up opportunity to redeploy some of those resources to other growth initiatives. So I would say, it's probably too early to see many green shoots are in oil and gas we will have.

Our presence, where we're still wood from our from our Permian standpoint from an Anadarko standpoint.

It's a bet on that but from a percentage of our business right, it's less than 5% today and I expect that it stays at that level for a period of time.

Okay. Thank you.

Yeah.

Your next question comes from Chris Dankert with Longbow Research. Your line is open.

Hey, good morning, everyone.

I guess, just thinking about the opportunity for preventative maintenance and software revenue any sense for kind of what inning. We're in there with customers I mean, it is still really early days you know, what's the additional opportunity with some of those preventative maintenance stuff and ultimately do you think adding some of that that software revenue can be you know more.

Margin accretive for you guys or just any thoughts there would be great.

So I would say it is still early I mean, our approach on you know are applied internet of things and how we connect.

We are working very well with our leading manufacturers and we are targeting specific customers and I think most customer approaches are focused they're focused on a facility or areas of facility prove out success harnessed. The data that is available off of it.

<unk> and use that for predictive maintenance or perhaps for broader remote monitoring across multiple sites, especially it with less travel less physical presence that they're having in their own facility. So I think that is early we are having success and as we do we.

Can replicate that with.

That customer in the facility and across their landscape and as we do it within the industries, we can more but for US. We think that is a great opportunity. It is very early innings. We are excited about it and so we're we're participating but we think it's one that that ramps over a period of time.

Got it that's helpful. I guess just to kind of quick follow up on that is this an offering that you guys are kind of leading with or is that the moment preventative maintenance more of a customer poll thing where they're requesting it.

Well, we are leading with the enabling technologies.

Technologies that help in there are discrete automation opportunities. So so some of it may be predictive preventative maintenance, but in many places it's using vision products to help with quality inspection or perhaps manage out some physical labor that was previously.

Doing it are they use up collaborative robots helps from a labor density standpoint, and this time and provide some some ongoing productivity in there.

On the data connection ones are now to say, we've had sensor embedded products for a long period of time net customers are wanting to connect those and understand that operation and going through so I think there's many elements into it and it's not just a.

Allergy and monitoring for preventative maintenance.

Makes sense makes sense. Thanks for that and then I guess just the last one for me al talked a lot about automation, but we haven't heard a ton about linear motion just any comments on how the growth is progressing there any additional focus on M&A or are we still kind of are we kind of shifting the M&A focus more to automation just any comments on linear would be great.

Well I think force overall and priorities and we're active across Dave touched on them.

I'm, an automation right, which has been the most recent couple and that we continue to be focused on in and busy from a fluid power standpoint, and we will look to how we selectively add to our capabilities on footprint, whether that'd be in flow control for the.

The service center, so for us yeah.

Linear motion depending on the size.

Is a can be across some of those segments.

Industry so.

It has the opportunity to contribute as.

As we have going forward, but there's a big focus on fluid power and automation in and flow control.

Understood. Thanks, so much.

As a reminder, it is star one on your telephone keypad to ask a question.

Your next question comes from Steve Barger with Keybanc capital markets. Your line is open.

Good morning, guys.

I'm just going to stick with the growth initiatives now that you have the footprint on the west coast. The South East. The northeast are you looking for further geographic coverage in the Midwest or or can you do that here and as you as you learn more do you have the ability to organically create a business unit or do you need to do that by acquisition.

I think we'll continue to look at our companies and organizations that would provide additive benefit and capabilities and so even while were in those geographies, perhaps there's another way to further augment but as we grow in scale and start to.

Leverage some of the the back shared capabilities of the technology of the application engineers greater amount of sales engineers are even some of the virtual selling capabilities that exist today, we feel like we can grow in geographies all.

So leveraging footprint and and capability that we have so it could be a mix as we go through and so we're on and continue to be active and busy as we evaluate that but you know as we grow we're opening up the ability to build on what we have and then leverage existing <unk>.

Slide resources that are in the service center selling side, but also in fluid power and flow control.

And as you think about the automation robotics fluid power flow control I guess well.

Just bringing it back to automation and robotics, specifically and maybe I O T. Implementations can you tell us what percentage of revenue that is right now on what that growth rate is or what you expect it to be relative to the rest of the business.

I don't know if I have it top of mind of our at hand on on percentage of revenue I know we are having success.

Success in this environment and so while it's while it's new to us the things that are coming into the pipeline and as we move. These these projects along.

They are working hard to commission and get implemented what they have in that side. So.

Early to start comparing on the growth sides, Oh as we March through less declines in sales and start to returned to growth likely as we think about our fourth quarter and beyond and that I expect this area to contribute at that rate and.

Greater than that rate to be part of the polling effort.

You'll see then riot yeah, yeah, just as relates to the sites do you think about the acquisitions that had been made specifically over the last 16 months for three of them.

You know, we talked about the size of Olympus controls.

Did it around $45 million to $50 million of revenue on the last two day, we did with Acs and Gibson about half that size in terms of in terms of revenue. So that that should get you to a you know an idea for you know on an annual basis, what those three acquisitions sort of represent today.

The other point, though on top of that as you know, there's a number of offerings and capabilities that we have within our fluid power business.

And across our service Center network, where you know there is certainly automation tied to it. So when you kind of mind that on top of that that certainly would be incremental as well, but it is still probably certainly at a lower percentage of the business today, but with the view that that continues to ramp as we continue to build out the network both organically and through.

Acquisitions.

No. That's that's great detail here I guess, what I was really trying to get out is if you look at that call. It 90 $100 million in revenue, whether it's historically or on a go forward basis and I know, it's tough to compare over the last year is that part of the business growing faster than the fluid power segment itself and how how additive is that to the organization.

And I guess is that also accretive that that $100 million to the fluid power something on that.

So I think it can grow at that rate are higher and we've talked from an accretive standpoint today, probably more at a company average the potential is to be.

Above that and so that's our view and on what we'll be working towards.

Got it and then that just leads into my last question, you know freak, but free cash flow has been outstanding as you noted I mean, you talked about cash conversion moderating as you return to growth, which is understandable, but just as you think about mix and the growth initiatives is that creating sustainable changes to the cash flow profile through cycles.

Well you know if we look back right what were at higher peaks as we go through now and we think we have continued to improve and mix up our ability from a cash generation standpoint, and we do things internally with with shared services and approach how we leverage.

Our technology, and we think our effective use of our inventory management and side. So we.

We do expect it to moderate but we expect to be performing at a higher level and then in time, we think working capital as a percentage of sales can get to the 20%.

Got it okay. Thanks.

Yeah.

At this time I'm showing we have no further questions I will now turn the call over to Mr. Schrimsher for any closing remark.

I just simply want to thank everyone for joining us today and your ongoing support and we look forward to talking with many of you throughout the quarter. Thank you.

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

So from Canada.

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