Q2 2022 Applied Industrial Technologies Inc Earnings Call
Welcome to the fiscal 'twenty, two 2022 second quarter earnings call for applied Industrial technologies. My name is Shelby and I'll be your operator for today's call.
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I will now turn the call over to Ryan sees Black director of Investor Relations and Treasury Ryan you may begin.
Okay. Thank you Shelby and good morning to everyone on the call. This morning, we issued our earnings release and supplemental investor deck detailing our second quarter results. Both of these documents are available in the Investor Relations section of applied Dot Com before we begin just a reminder, I 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 factors.
Actual results may differ materially from those expressed in the forward looking statements.
<unk> 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 Neil Schrimsher applied President and Chief Executive Officer, and Jay 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 everyone is doing well I'll begin today with some perspective on our second quarter results current industry conditions, and our expectations going forward, Dave will follow with more specific detail on the quarter's performance and provide some additional.
Color on our outlook and guidance, which we raised this morning.
And I will then close with some final thoughts.
Overall, we reported a strong second quarter that highlights the enhanced earnings potential across applied we achieved record second quarter sales EBITDA and EPS with respected growth of 17%, 36% and 49% over prior year adjusted.
Levels, we're benefiting from a solid fundamental backdrop as well as our teams consistent execution across strategic initiatives.
These dynamics are increasing our growth momentum and returns on capital across applied I want to thank our entire team for their ongoing effort and focus on optimizing and positioning the company to achieve these results. It's rewarding to see as we continue to leverage our leading technical.
Coal industry position.
As it relates to the quarter and our views going forward I want to emphasize a few key points driving our performance.
First underlying demand and sales growth accelerated as the quarter progressed.
Second our team is responding and executing well in the face of ongoing supply chain and inflationary pressures.
And third our enhanced operational capabilities and organic growth potential leave us increasingly favorable with our outlook.
In terms of underlying demand trends were broadly positive across both segments during the quarter.
<unk> growth exceeded our expectation with strength persisting each month, including strong sales activity during December .
We saw strong year end budget and capital spending across our customer base.
Strength was broad based across our served end markets, including demand improvement with heavier and later cycle verticals.
Trends were strongest across technology metals lumber and wood machinery aggregates and chemical markets.
In addition, our technical solutions capability.
Inventory availability and expanded the addressable market.
Positively influencing our growth.
Combined with greater price contribution sales increased a healthy 16% organically versus prior year levels.
On a two year stack basis organic sales were up 6%.
Strengthening from the 3% reported last quarter while.
While sequential trends and daily sales were seasonally strong.
And our service Center network customers are increasing production output and running facility equipment harder and longer to address pent up orders and higher demand for durable goods. This.
This is driving greater break fix and required maintenance activity as well as ongoing release of capital spending as customers look to optimize their equipment and production capabilities following pandemic and supply chain related challenges over the past several years.
Our technical support and local inventory availability are vital to our customers and the current supply and labor constrained marketplace. In addition, we're seeing stronger sales execution across our service center team.
We believe our investments and initiatives around analytics sales process and talent in recent years had been key to our performance as well as the ability to cross sell more technical fluid power flow control and automation solutions.
Overall, our service centers, we're in a great spot to capture incremental organic growth as the industrial up cycle continues to play out.
In fluid power and flow control segment, various secular tailwind and company specific growth initiatives are supplementing and ongoing cyclical recovery across this more technical and solution based area of our business.
Year to date. This segment represents approximately 33% of total sales.
From 31% a year ago and 16% during fiscal 2017.
From an end market perspective, the segment continues to benefit from strong demand with the technology sector, where we are designing and producing various solutions that are integral to areas tied to semiconductor manufacturing by G infrastructure infrastructure and cloud computing.
We estimate these technology related industry verticals represent over 15% of segment sales to date on a direct and indirect basis.
In addition fluid power customers, we are proactively investing in solutions that optimize the productivity safety and efficiency of their production infrastructure and off highway mobile equipment as they focus on reducing power consumption and C O two emissions and manage.
Through a tight labor market.
This is driving demand for our leading fluid power service and engineered solutions.
This includes electro hydraulic control and automation integration.
Customized software programming and digital Iot solutions.
From tailored approaches to turnkey applications, our team is deploying and developing cutting edge technology solutions across both mobile and industrial fluid power equipment.
We see sustainable growth potential across these customer solutions as reflected in our ongoing increases in our fluid power backlog.
Combined with the sustained recovery and longer and later cycle markets, such as industrial OE and process flow as well as a growing position across areas such as life Sciences and metrology.
We believe the underlying demand backdrop across our fluid power and flow control operations remains favorable.
As it relates to our expanding automation platform, we continue to see strong growth with related sales up over 25% organically compared to the prior year.
Our teams are uniquely positioned to capitalize on a growing secular automation trend, giving application expertise and engineered solutions as well as an accelerated adoption of more advanced technologies that are aligned with our product focus including collaborative robots.
Machine vision and digital solutions.
Overall, we're encouraged by the demand potential we see we see across this new and emerging growth area for applied.
And remain focused on expanding our automation reach and capabilities in coming quarters.
This includes the potential for additional M&A as well as organic footprint expansion as we identify new markets leverage our internal resources and collaborate with suppliers.
Our progress while notable is just beginning in this area and we look forward to developing ongoing business opportunities aimed at connecting our automation and smart technology capabilities across varied markets, such as semiconductors, and electronics medical and life Science.
Food processing logistics and data centers.
Overall, the demand environment remains positive and were seeing ongoing contribution from our internal growth initiatives moving forward.
At the same time, we continue to mens manage through supply chain constraints.
And inflationary pressures across the industrial space.
These dynamics remain challenges so our teams are responding well and leveraging our industry position.
To mitigate related pressures on underlying operations, while supporting our customers growth requirements.
This is reflected in our second quarter results, including ongoing strategic expansion of our inventory levels.
In addition, our price actions and strong channel execution drove year over year and sequential improvement in gross margins during the quarter.
Combined with our cost discipline enhanced internal processes and greater operational efficiencies, we reported strong high teen incremental margins in turn driving record second quarter, EBITDA and EBITDA margins.
Overall these are great results and an indication of our capabilities and earnings potential as cyclical secular and company specific tailwind gained momentum.
At this time I'll turn the call over to Dave for additional detail on our financial results and our outlook.
Thanks, Neil just a reminder, before I, but again consistent with prior quarters, we have posted a quarterly supplemental investor presentation to our Investor site. You just know reference as we discuss our most recent quarter performance and updated outlook.
Turning now to our results for the quarter consolidated sales increased 16, 7% over the prior year quarter.
Acquisitions contributed one six percentage points of growth in foreign currency drove a favorable 30 basis point increase.
This was partially offset by one less selling day over the prior year period, which negatively impacted sales growth by one six percentage points.
Many of these factors.
Increased 16, 4% on an organic daily basis.
Average daily sales rates increased roughly 3% sequentially on an organic basis versus the prior quarter.
As it relates to pricing, we estimate the contribution of product pricing and year over year sales growth was between 230 and 270 basis points in the quarter.
As a reminder, this is something only reflects measurable topline contribution from price increases on SKU sold in both year over year periods.
Looking at sales performance across our segments as highlighted on slides six and seven of the presentation.
And our service Center segment increased 15, 1% year over year on an organic daily basis, when excluding the impact from foreign currency.
One less selling day in the quarter.
On a two year stack basis.
Organic sales were up nearly 5% and approve them from fiscal 'twenty to first quarter trends.
And Mark Aspersers machinery, lumber and forestry mining food and beverage and pulp and paper had the strongest growth I two year stock basis during the quarter.
We are also seeing ongoing demand improvement across the heavier industries, including primary metals energy and transportation related verticals.
Within our fluid power flow control segment sales increased 22, 9% over the prior year quarter with acquisitions contributing 5.2 points of growth.
I know organic daily basis take myself increased 19, 3% year over year and over 9% on a two year stack basis.
Hey, good sales continued to benefit from strong demand within technology end markets as well as across life Sciences, chemical utilities metals machinery end markets.
By business unit segment growth remained strongest across fluid power and automation, partially reflecting strong demand for our engineered solutions and system build capabilities.
Demand across our later and longer cycle until operations also continues to improve with customer quote activity and order momentum further ability in the quarter.
Moving to gross margin performance as highlighted on page eight of the deck gross margin of 29, 4% expanded 51 basis points compared to prior year adjusted margin of 28, 9%.
During the quarter, we recognized LIFO expense of $4 $7 million compared to $9 million of LIFO expense in the prior year quarter.
The net LIFO headwind had an unfavorable 42 basis point impact on gross margins during the quarter.
Headwinds from supplier price inflation and strategic inventory expansion year to date.
Overall, our team is responding well to go out or inflationary dynamics as evidenced by the sequential and year over year gross margin improvement in the quarter.
The favorable performance was broad based across the businesses and reflects channel execution pricing actions and the ongoing margin countermeasures as well as solid freight expense management.
Business mix was also favorable in the quarter, reflecting growth across local accounts.
Power inflow control segment as well as more favorable business mix across our international operations.
Turning to our operating costs selling distribution and administrative expenses increased 10, 8% compared to prior year adjusted levels or approximately 9% on an organic constant currency basis.
SG&A expense was 25% of sales during the quarter down from 21, 6% on an adjusted basis during the prior year quarter.
<unk> had another solid quarter of SG&A expense control, reflecting our.
Leaner cost structure following business rationalization initiatives undertaken in recent years as well as ongoing benefits from our operational excellence initiatives shared services model and technology investments.
These dynamics are helping mitigate the adverse impact from inflationary pressures higher employee related expenses lapping of prior year temporary cost actions and normalize it medical expense.
Combined with solid sales growth and gross margin improvement EBIT grew 35, 6% over prior year adjusted levels, while EBITDA margin at 10, 6% was up 147 basis points over the prior year.
Including reduced interest expense and a slightly lower tax rate reported earnings per share of $1 46 was up over 49% from prior year adjusted earnings per share levels.
Moving now to our cash flow performance cash generated from operating activities. During the second quarter was $32 $6 million, while free cash flow totaled $28 $7 million.
Year to date, our free cash generation of $74 million represents approximately 67% of net income.
As expected, we are seeing greater working capital investment across our operations.
Ah levels continued to cyclically build combined with a focus on supporting growth ongoing strategic inventory expansion.
Of note our operational inventory levels are up 8% year to date, including 11% across the U S.
As it relates to other areas of capital deployment, we repurchased 35000 shares for approximately $3 $5 million during the quarter, bringing the year to date share amounts of share repurchases to approximately 112000 shares for $10 $1 billion.
In addition, we successfully execute the refinancing of our credit facility in early December the new $900 million all revolver facility expands our available liquidity provides more favorable terms and create additional balance sheet flexibility moving forward.
In conjunction with the refinancing we paid down $98 million of outstanding debt with available cash on hand.
Since early 2018, we have paid down over 30% or approximately $350 million about sandy debt.
We ended December with approximately $155 million of cash on hand, and net leverage at one six times adjusted EBITDA, which is below the prior year level of two one times and the fiscal 'twenty, one fourth quarter level of one eight times.
Our new revolver currently has approximately $460 million of available capacity and an additional $500 million accordion option.
Combined with incremental capacity on our AR securitization facility and uncommitted private shelf facility, our liquidity remains strong.
Turning now to our outlook as indicated in today's press release and detailed on page 10 of our presentation. We are raising full year fiscal 2022 guidance to reflect strong performance year to date and even more favorable outlook moving forward.
We now project EPS in the range of $5 70 to $5 19 per share based on sales growth of 11, and a half to 12, 5%.
<unk> 10, and a half to 11, 5% organic growth assumption as well as EBITDA margins up 10, one to 10, 3%.
Previously our guidance assumed EPS of $5 to $5 40 per share sales growth of 8% to 10%, including a 7% to 9% organic growth assumption and EBITDA margins of 979, 9%.
We are encouraged by our year to date operational performance and the ongoing opportunities pulling our growth and earnings potential in the back half of fiscal 2022.
That said, we remain cognizant of ongoing supply chain inflation labor and COVID-19 related dynamics, which continue to present challenges across our business and do remain key variables to how the remainder of the year could play out.
We also will face more difficult sales growth comparisons in the second half of the year.
Our updated guidance incorporates these various factors.
In addition, based on month to date sales trends in January and our near term outlook. We currently project physical third quarter organic sales to grow by a high single digit percentage over the prior year quarter.
We expect gross margins at or higher than 29% during the quarter, which assumes slightly higher LIFO expense versus second quarter levels as well as some normalization of mix benefits and overall performance following the favorite ability we saw in the quarter.
Speaker 1: 29 percent during the quarter, which assumes slightly higher LIFO expense versus second quarter levels, as well as some normalization and mixed benefits and overall performance following the favorability we saw in the quarter.
Speaker 1: As it relates to operating costs, based on high single-digit organic sales increase assumption and our annual focus merit increase, which is effective January 1st, we would expect selling, distribution, and administrative expense in the high $180 million range during the fiscal third quarter.
As it relates to operating costs based on high single digit organic sales increase assumption in our annual focus Merit increase which was effective January one we would expect selling distribution and administrative expenses in the high $180 million range during the fiscal third quarter.
Speaker 1: In addition, if sales follow normal sequential patterns for the balance of the year, we would expect a similar, but slightly higher, SD&A range in our fiscal fourth quarter.
In addition, if sales followed normal sequential patterns for the balance of the year, we would expect a similar to slightly higher SG&A range in our fiscal fourth quarter.
Speaker 1: Lastly, from a cash flow perspective, we expect free cash flow to remain lower year-by-year in the second half of fiscal 2022 as AR levels continue to cyclically build, and we continue to replenish and grow inventory to support our growth opportunities.
Lastly from a cash flow perspective, we expect free cash flow to remain lower year over year in the second half of fiscal 2022.
Our levels continued cyclically build and we continue to replenish and grow inventory to support our growth opportunities.
Speaker 1: With that, I'll now turn the call back over to Neil for some final comments.
With that I'll now turn the call back over to Neil for some final comments.
Speaker 2: Thanks, Dave. So to wrap up, we feel very good about the momentum building across our business today. We're delivering on our commitments and moving closer to our interim financial objectives of $4.5 billion of revenue and 11% EBITDA margin.
Thanks, Dave so to wrap up we feel very good about the momentum building across our business today, we're delivering on our commitments and moving closer to our interim financial objectives of $4 5 billion of revenue and 11% EBITDA margins.
Speaker 2: While supply chain, inflationary and COVID-19 related challenges continue to present some uncertainties entering the second half of the fiscal year, our team is executing at a high level with strong engagement and alignment across our growth and margin strategy.
While supply chain inflationary and COVID-19 related challenges continue to present, some uncertainties entering the second half of the fiscal year. Our team is executing at a high level with strong engagement and alignment across our growth and margin strategy books.
Speaker 2: Bookings within our service center network remain broadly favorable with increasing demand across heavier and later cycle in markets such as metals, mining, and machinery.
Bookings within our service Center network remained broadly favorable with increasing demand across heavier and later cycle in markets, such as metals mining and machinery.
Speaker 2: In addition, backlog within our fluid power and automation businesses is at record levels, and we continue to see incrementally positive signs emerging across longer cycle areas including specialty flow control.
In addition backlog within our fluid power and automation businesses is at record levels, and we continue to see incrementally positive signs emerging across longer cycle areas, including specialty flow control.
Speaker 2: We also believe our diversification and expansion into verticals, such as technology, life sciences, and hygienics, are enhancing the breadth and sustainability of our growth trajectory.
We also believe our diversification and expansion into verticals, such as technology life Sciences, and Hygienics are enhancing the breadth and sustainability of our growth trajectory.
Speaker 2: greater evidence of manufacturing reshoring and investment in U.S. production capacity or other encouraging signs. This includes recent announcements for domestic capacity additions across the semiconductor space.
Greater evidence of manufacturing re shoring and investment in U S production capacity or other encouraging signs. This includes recent announcements for domestic capacity additions across the semiconductor space.
Our team remains focused on fully leveraging our industry position.
The addressable market and enhanced internal capabilities to drive stronger organic growth across our business. We're seeing this emerge in our results providing encouraging evidence of the opportunity that lies ahead.
From critical break fix MRO support at a local level to an expanding portfolio of emerging technologies and specialized engineering solutions.
Our products services team and value proposition has never been stronger as customers deal with an aging technical workforce equipment.
Optimization initiatives and increased manufacturing investment across the U S.
Lastly, we entered the second half of fiscal 2022, with our balance sheet and liquidity in a solid position to support strategic M&A opportunities. This includes an active in building pipeline across our key priority areas, our fluid power and automation and flow control.
We're maintaining a disciplined approach as we focus on assets that drive strong double digit returns on capital and enhance our competitive position, while increasing our differentiation and growth potential long term.
Overall, I'm very encouraged by what I see developing across our company. Once again, we thank you for your continued support and with that we'll open up the lines for questions.
Thank you we will now begin the question and answer session. If you would.
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For just a moment to compile the Q&A roster.
Your first question is from Adam Uhlman of Cleveland Research.
Hey, guys. Good morning, Congrats on.
The solid performance.
Couple of questions here for you first of all the price realizations.
Pretty strong I guess, where do you see that unfolding here.
Over the next few quarters and then you know with the you know the gross margins are expected to stay strong as well and to the until the next quarter I'm just.
Wondering if you could remind us kind of what your longer term goals are.
Gross margin expansion.
Yeah. So.
Adam I'll start and and thanks, I think in the quarter, just very strong execution on on margins across and our team executed well on point of sale and pricing I think it goes back to a good practices leveraging our systems focus on variation I think we had a.
Good understanding of an inflation that was coming at us and its impacts on on costing moving average cost replacement cost. So good execution on that side I think contributing to margins was overall mix I think the teams did a nice job at supporting customers, we're seeing strength.
And local customers. So that's beneficial on a customer mix side.
But also as we sell more technical solutions and services in that it has helped us on that product service mix in the side I.
I think good recognition and performance around freight and in some other areas on that.
As we look forward at margins right, they Dave laid out expectations there for the for the second half we could see mix from a perhaps a little bit of the international market contribution be be slightly less in the area, but still very good performance across the business and then on the on the ongoing.
Targets I mean, we just target.
On an annual basis, a continued improvement in that side and right. If you go back and look at US from a you know 2016 2017, we increased 100 basis points in that period in 'twenty, we had good performance and the ability to hold margins in those times and we feel like we're executing.
Very well and so gross margins will just be one of the components that will play in and contribute to our view of breaching the 11% EBITDA margins and beyond.
Okay. That's great and then it seems like inventory availability has been a competitive advantage for you guys.
Should we think about further inventory growth here in the second half of the year.
Yeah, we would we would expect inventory to continue to increase in the second half to be a a use of cash in the side. We think that's important as we work with our suppliers, but also look to insulate our.
Our customers from some of the supply chain dynamics I mean, our view is this is a this is the opportunity. This is the need when quality distribution performs.
In these times. So we would expect inventory to continue to increase but we're focused we're engaging with our suppliers.
What products make most sense understanding backlogs understanding Qs any increased our lead times and productions in the side. So it's just not putting in any inventory our view is to put in the right inventory across our supplier base.
Great. Thank you.
Your next question is from David Manthey of Baird.
Thank you Hey, good morning, guys.
The first question that Neil you touched on this a bit in terms of capital allocation and I remember a couple of years ago. You told me you'd prefer not to go below one and a half times net leverage given your opportunity set.
Hum.
Could we see more aggressive share repurchase in the near term or are you just content to sit on more dry powder today, given the pipeline that you referred to.
You know as we think our overall I mean, one we will continue to look at our organic growth opportunities that we have and make right smart investments you now with that said the business doesn't have high high capital intensity and those requirements, but we we intend they generate great returns.
In the in the quarter the board, we increase the dividend and so that's oh, the 13th increase since 2010, we will continue to look at that modest share repurchase activity. There really just to look at creeped up.
Or any dilution on that side and so we think in this space. There. It is an attractive M&A time, we're busy on.
On that front and so we're at a healthy or we have a healthy balance sheet. We're at a good position, we think our optimized leverage across our longer term as more two and a half times with the ability to go over and migrate back we are under it are right now but.
But we'll continue to look for REIT M&A, and then right ongoing capital deployment as we work through the cycle.
Okay. Thank you and second there's a lot of positivity here around the quarter and the outlook.
But if you look over the past 100 days and sort of think about the future.
Future.
Where there are items, either internal or external that didn't quite go as well as you planned.
Just what are you focused on in terms of opportunities here over the next quarter.
Yeah. So if I think about the performance and the and the results I mean, there was really a broad based contribution in the side and shared it with the team.
Hey, there's a lot to feel good about and it but it is a broad belief across the company with that said, we still have many opportunities going forward and and so we think about underlying demand a dialog with our customers I think in many respects.
The mid to later cycle. The heavy industries are just getting started in this similar with near shoring and reassuring for them from that perspective, I think about the Capex cycle. It's really below you know long term contributions as a percent of G. D P.
And I expect that to move up I think many companies are going to be making investments in the side. So I can see and there there's a good industrial AR.
End market.
For calendar 2022.
In 2023, we talk about even infrastructure those contributions haven't started yet and we know those monies will come in and benefit the heavy industry and then we take on our technology side.
Backlog.
Across fluid power expanding in flow control and our automation opportunities and how we can connect that to with.
Our legacy position across many of these end market segments.
We think we're in a very good operating environment for a good period of time.
Sounds good I suppose of Intel drops $20 billion until Ohio that can't hurt either so best of luck deal.
Alright. Thanks.
As a reminder, if you would like to ask a question. Please press star one that is star one to ask a question.
Your next question is from Chris Dankert of loop capital.
Hey, good morning, guys.
I guess looking at the automation growth you know, 25% organic very impressive and I fully appreciate where the scale is today, where we're pretty early days, but I mean, how does that 25% growth kind of compare with what the team had been expecting here. I mean are we kind of trending ahead of what you really been looking for another quarter.
I would say as we think about it in the quarter a little ahead of expectations. So pleased I think there's great engagement with our customers.
More ability to get on site and commission and pull projects through within customers on the side and good work between sales engineers and application engineers on new solutions and and teaming.
The other areas of the business, whether it be in service centers or other aspects on working new opportunities. So I would say, perhaps a little bit ahead still those businesses working with some supply chain constraints at various times that can impact project timing not great moves, but can impact some project timing so.
So pleased encouraged by the backlog in the building momentum.
Across that.
Pace.
Got it guys glad to hear it and then you touched on you know analytics is being.
Our contribution to some of the gross margin execution here I guess going forward, what's the additional investment in analytics like could be helpful. Here I mean, AI is it kind of helping improve the speed and cadence of a pricing or are there kind of other opportunities for investment there and then the medium term.
Yeah.
You're talking about I think there's greater use for automation and intelligence across the business, but aren't or are not going to be high high investment requirements and so I mean, we'd have work today with robotic process automation.
Automation and various other businesses that can help us in back office, streamline and just be more productive and effective and we have the ERP systems and data analytics to think about price and products and customers and variation. So we continue.
To use those on the front, so and then the other.
Use of analytics.
Market opportunities and where we're at with customers and geographies and how we can just bring forward more of our expanded solutions to them to address their needs whether it be around their aging technical workforce.
Their need to deal with regulations or increase productivity requirements, we're able to to help on those fronts and we're going to continue to use our data and analytics to contribute to that and our teams engage with those customers on a local basis.
Got you.
Would you say that you know some of these tools have really helped apply to get paid for the value added services that you've been providing for years and years. So there's always been kind of a.
Nothing to quantify has actually gotten easier to kind of sell the value. These days.
I think we've done a good job looking back and we continue to know the value of the solutions to problems that we're solving in the.
How to appropriately.
Price Accordingly, and that I think the analytics are helping us with opportunities and identification and then how we can accelerate those.
With our customers and solving those problems.
Got it yeah that makes sense and then last one for me I guess you know generally speaking you guys Havent had any trouble attracting and retaining talent, but I guess just given the current market any comments on kind of the state of play for for labor and kind of cost to keep and bring people on board here.
You know I believe across the business. We continued to do a very good job. We've made the investments in our H R. I S information systems things, we do and learning management systems for growth and development and so I believe we're very good at appropriately with the right track to recruit.
Ages, but also what we're doing for our associates on ongoing development and career opportunities in that and so across the board teams are doing a very nice job were active at our universities and internships and in the space. So.
In in a physical distribution logistics, I mean, we're not immune to it but.
But I would contend we're performing very well.
In this environment and I think that shows in our overall results.
Got it quite glad to hear it and best of luck in the back half here guys.
Thank you.
Your final question is from Steve Barger of Keybanc.
Hey, Good morning, guys. This is Ken Newman on for Steve.
Good morning, Ken.
Good morning.
I just wanted to first ask about the SG&A leverage that it seems to be slightly weaker into the third quarter versus second quarter.
Obviously gross margins came in better in the second quarter.
Curious if you can help us understand how much of the of the margins for third quarter is just cost cashing out the price versus maybe incrementally worse mix or roll off and efficiency gains.
You've got several factors at play there Ken I mean, certainly you have the focus now is to take effect on January 1st they are a factor you have to do.
As a sequential step up as we move from Q2 to Q3.
So when you think about the comp issues you know we were still lapping some of the prior year cost actions.
In Q2 that normalizes for the most part in Q3 as those start to roll off so a little more pressure on the year over year comparative there and then.
Certainly see a volume impact did you see your volumes being up pretty.
Pretty significantly as we move from Q2 to Q3, just given the typical seasonality that we would see plus.
Continued stronger demand.
With that so those are really the three factors that come into play a long list of additional head count investment in G&A to capitalize on some of the opportunities and drive that growth. So all of that kind of gets us to that high high 180. Your number in terms of SG&A expectations for Q3.
Right.
And when I think about the the price increases that you announced for this quarter I mean can you rank the vendor price increases by type.
I'm curious, where you're seeing the biggest increases across the portfolio.
I don't know that I have it.
Signed up any specific.
Product category, I'd say, it's pretty universal.
The increases that have that had been coming through.
In the side. So I don't think there's one area that that's standing out above the other.
Okay.
I think someone earlier in the call asked a question about John had mentioned the handheld plant here in Ohio and <unk>.
Just wanted to know I know, it's a year or two out.
Is there any way for you to kind of frame the opportunity set for a project of that magnitude.
How do you envision approaching something of that size from an organizational standpoint.
It may be a little earlier to to size it but it's it's gonna be at its large size, but it's similar to other industrial investments and projects that would go on.
From our standpoint, some of that will be original OE equipment provider. So our participation would be with them as that.
Volume increases and then naturally the as the site is up and running over periods of time it creates its own ongoing maintenance and break fix requirements and doing it. So it's in front of US I think it's exciting.
One the overall investments in the semiconductor space I think that's gonna continue whether it lands in the west and in Arizona or other markets, it's going to pool, greater cloud computing requirements five G requirements and in the case of living here in <unk>.
It's good to see our investment that will come to Ohio, and and leverage the technology base and employee expertise that resides within the state.
Right.
And then just last one for me.
Obviously, we're seeing supply chain constraints kind of persist here.
We've heard customers talk and complain about the availability for bearings and machine parts and obviously, there's a there's still an opportunity.
Complaints about the electronics and semiconductors.
Any color as to where youre seeing the tightest availability for parts as it relates to your business and just how you think about it.
If there was any revenue that's kind of being pushed.
Pushed out a corner due to these due to the tighter conditions.
And then there would be areas and are in the backlog that I would say it would go across.
The product categories.
We're we're closely linked with those suppliers on not just providing demand signals about the right order signals to go through and work with them.
And that's really been.
A driver in our increase in inventory from a U S standpoint, 11% year to date I would expect that number.
To continue now some of those orders are for products that are coming in turn quickly to the marketplace as it would go through so we're engaged with our suppliers, but also close to our customers and understanding their needs and not just letting you know demand pyramid pyramid in the side, we're meeting their needs as it goes across.
Yeah.
Very helpful. Thanks.
Okay. Thank you.
I'm showing we have no further questions I will now turn the call over to Mr. Scrimshaw for any closing remarks.
I just want to thank everyone for taking time, joining us today, and we look forward to talking with many of you throughout the quarter, thanks for being with us.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Okay.
Okay.
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Yeah.
Uh huh.
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All right.
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