Q3 2022 Applied Industrial Technologies Inc Earnings Call
[music].
Yeah.
Welcome to the fiscal 'twenty to use third quarter earnings call for the applied industrial technologies.
Ms Anne and I'll be your operator for today's call at this time, all participants are in a listen only mode.
We will conduct a question and answer session.
If you wish to ask a question at that time Nice press star one on your telephone.
You bet.
But you're asking a question you had said to ensure the best audio quality.
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 begin.
Thanks, Dan 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 apply Dot com.
Before we begin 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 factors.
Results may differ materially from those expressed in the forward looking statements.
Company undertakes no obligation to update publicly or revise any forward looking statements.
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 Dave Wells, Our Chief Financial Officer.
I'll turn it over to Neil.
Thanks, Brian and good morning, everyone. We appreciate you joining us and hope everyone is doing well I'll begin today with some perspective on our third quarter results current industry conditions, and our expectations going forward there.
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 all.
And then close with some final thoughts.
Overall, we had a very good quarter.
They're demonstrating the positive momentum sustaining across our business, we grew EBITDA and EPS, 25% and 27% respectively on approximately 17% sales growth.
Spanned at EBITDA margins above, 11% and generated solid cash flow, while continuing to invest across our business for future growth.
We did that against the backdrop of persistent and notable inflationary and supply chain headwinds that continue across our industry.
My thanks to our applied team for delivering another solid quarter and demonstrating ongoing commitment to our strategic goals.
So a couple of key points to highlight first underlying demand remains broadly positive and strengthened further from first half levels during the third quarter.
Trends were strongest across metals technology mining utilities chemicals building materials machinery and freight transportation markets.
We're also seeing incremental demand across natural resource and refinery end markets.
In addition to solid underlying market demand, we're capturing incremental growth opportunities from the strength of our industry position and internal initiatives.
Combined with greater price contribution.
Selective about the broader inflationary environment organic daily sales increased 15% compared to prior year levels and on a two year stack basis.
Last quarter, our growth on a two year stack basis was 6% so nice acceleration once again and the underlying trend.
Similar to the last couple of quarters. Our service Center network is benefiting from greater break fixed demand and required maintenance activity across our customer base.
Recent industry data indicates U S manufacturing capacity utilization is at its highest level in 15 years.
We believe this is increasing the frequency of maintenance and repair activity.
Wearing new capital spending and maintenance projects on production infrastructure.
These are meaningful trends for our service Center network, given our core focus on more highly engineered motion control products and solutions across the North American industrial supply chain.
In addition service center customer orders and new business opportunities remain encouraging as we enter the final quarter of our fiscal year.
Favorable underlying demand is persisting across fluid power and flow control segment as well in particular, we're seeing strong order trend sustaining within all three of our core application verticals, including industrial off highway mobile and technology.
OE fluid power demand is picking up within later cycle segments, such as heavy equipment metals mining and construction.
Our expertise in solutions tied to semiconductor manufacturing.
Data center cooling and <unk> build out also remain key contributors for secular tailwind to continue to increase related backlogs.
In addition orders remained strong for engineered solutions that optimize the productivity safety and efficiency of our customers' production infrastructure and off highway mobile equipment.
These solutions, including our design engineering and software coding capabilities.
Greater demand as customers focus on reducing power consumption and C O two emissions.
NAV agate, a tight labor market and integrate more predictive maintenance into their equipment.
We're also positioning our fluid power business for greater growth opportunities around Iot.
<unk> and electrification for fluid power systems.
Demand for these technology advancements is picking up across our fluid power operations and over the long term present, a significant additive growth opportunity for applied, giving our leading engineered solutions capabilities.
We're also seeing accelerating demand for later cycle flow control products and solutions.
Of note MRO activity and capital spending on process infrastructure is ramping up in core in markets, such as chemicals refining petrochemical utilities and metals.
In addition, we continued to see strong growth within hygienic and high purity applications, where we have strategic growth initiatives.
During March we saw our highest quoting and order activity for flow control products and over three years with positive momentum continuing into April .
Relax COVID-19 restrictions greater customer facility access and cross selling opportunities are increasing sales momentum across our higher margin flow control business. This is great to see and we expect additional positive trends going forward.
As it relates to our expanding automation platform. We continue to have strong growth in orders and backlog related sales during the quarter were up by a double digit percent over the prior year and over 20% on a two year stack basis.
This business, which includes our four automation acquisitions over the past three years is now annualizing around $150 million in sales and is positioned to grow significantly in coming years through both M&A and organic expansion initiatives as highlighted last quarter.
We are organically entering new markets across the U S.
As we look further to penetrate this expanding market opportunity.
Our engineered solutions focus on next generation Robotics machine vision and industrial networking combined with our historical competencies around motion control technologies is becoming increasingly recognized across the industry.
Going forward, we believe we can leverage our existing service center and operational network to support this growth in coming years.
Overall, we believe our differentiated industry position addressable market and secular tailwind are driving stronger and sustainable organic growth across our business.
At the same time, we continue to manage through supply chain constraints and inflationary pressures.
Indications suggest these pressures will likely persist in coming quarters as supplier price increases and labor bottlenecks have shown little sign of easing.
Given our LIFO inventory accounting method, we are recognizing these inflationary pressures and relatively real time.
Evidenced by the nearly $16 million of LIFO expense reported year to date.
This compares to roughly 3 million of LIFO expense recognized over the same period last year.
Despite this headwind we have held gross margins year to date relatively flat with prior year levels and as our price actions and strong channel execution are providing support.
In addition, we're seeing solid cost leverage as our growth potential plays out reflecting enhanced internal processes and operational efficiencies from system investments and our shared services model.
This is positively influencing our incremental margins year to date, which are trending toward the high end of our interim target range, Despite greater LIFO expense and other inflationary headwinds.
And so with that our EBITDA margins continue to expand and we're making solid progress towards achieving our interim annual EBITDA margin target of 11%.
Which also driving strong support and our returns on capital.
We think we're in a great spot to build on this momentum into fiscal 2023, as our growth and margin initiatives gained additional traction.
And lastly, our balance sheet is in a very solid position following strong cash generation over the past several years as well as EBITDA growth year to date.
Stronger EBITDA margins and ongoing working capital initiatives are supporting solid cash conversion.
Even with ongoing working capital investment to support growth.
Our M&A pipeline remains active and our primary focus area of capital deployment as we look to further expand our automation fluid power and flow control offerings.
As indicated in recent quarters, 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.
While the cadence of M&A activity can vary period to period, we believe we're in a strong position to accelerate this growth component of our strategy moving forward and into fiscal 2023.
At this time I'll turn the call over to Dave for additional detail on our financial results and outlook.
Okay and just another reminder, before I begin consistent with prior quarters, we have posted a quarterly supplemental investor presentation to our investor site. It.
This is made available for your additional reference as we discuss our most recent quarter performance and updated outlook.
Turning now to our results for the quarter consolidated sales increased 16, 6% over the prior year quarter acquisitions.
<unk> contributed four percentage points of growth and one extra selling day drove a favorable 160 basis point increase.
This was partially offset by a 10 basis point headwind from foreign currency translation.
Many of these factors sales increased 14, 7% on an organic daily basis.
Average daily sales rates increased nearly 7% sequentially versus the prior quarter and were above normal seasonal patterns.
As it relates to pricing, we estimate the contribution of product pricing and year over year sales growth was approximately 400 basis points in the quarter.
As a reminder, this assumption only includes and reflects measurable topline contribution from price increases on Skus sold in both year over year periods.
Looking at sales performance across our segments as highlighted on slides six and seven of the presentation sales in our service Center segment increased 13, 6% year over year on an organic daily basis, when excluding the impact from foreign currency and one extra selling day in the quarter.
In markets, such as lumber and forestry mining aggregates pulp and paper coating materials and machinery had the strongest growth I, a two year stack basis during the quarter.
Demand improvement continues across heavier industries, as well, including primary metals natural resources and heavy manufacturing what we are seeing strong acceleration in two year stacked growth trends.
Within our fluid power and broke control segment sales increased 20% over the prior year quarter with acquisitions contributing 1.3 points of growth.
On an organic daily basis segment sales increased 17, 1% year over year with a similar increase on a two year stack basis.
Cigarette sales continued to benefit from strong demand within technology end markets as well as across life Sciences, chemical utilities metals and machinery end markets.
Underlying growth on a two year stack basis remains strongest across fluid power and automation, partially reflecting solid demand for engineered solutions and system build capabilities.
In addition growth continued to accelerate nicely across our later and longer cycle flow control operations during the quarter. After lagging the segment average over the past year.
Moving to gross margin performance as highlighted on page eight of the deck gross margin of 29, 3% declined 10 basis points compared to the prior year level of 29, 4%.
During the quarter, we recognized LIFO expense of $7 $4 million compared to only $8 million of expense in the prior year quarter.
The net LIFO headwind had an unfavorable 67 basis point year over year impact on gross margins during the quarter and reflects supplier product inflation and ongoing inventory expansion year to date.
Overall, our team has responded well to broader inflationary dynamics as evidenced by gross margins holding relatively firm both sequentially and year over year, despite the incremental LIFO expense headwind in the quarter.
Our performance reflects broad based channel execution pricing actions and the ongoing margin countermeasures as well, it's all at great expense management.
Our business mix was also margin accretive as we saw benefit from growth across local accounts and our fluid power and flow control segment as well as from favorable customer mix within our international operations.
Turning to our operating cost selling distribution and administrative expenses increased nine 2% compared to prior year adjusted levels, which compares favorably relative to the nearly 17% increase in sales during the quarter.
SG&A expense was 19, 5% of sales during the quarter down from 29% on an adjusted basis during the prior year quarter.
While we are waiting 18 inflationary pressures across our operating cost stack. This year included higher employee related expenses, we continued to benefit from a leaner cost structure following business rationalization initiatives undertaken in recent years as well as benefits from our operational excellence initiatives shared services model and technology.
Investments.
Overall, our solid sales growth gross margin execution and cost control drove a 25, 1% increase in EBITDA over prior year adjusted levels, while EBITDA margin of 11, 1% was up 75 basis points over the prior year.
Including reduced interest expense reported earnings per share of $1.75 was up over 27% from prior year adjusted earnings per share levels.
As a reminder, our adjusted tax rate during the prior year quarter benefited from several discrete items.
Excluding these favorable items and using a normalized tax rate in the prior year period or year over year growth in earnings per share would have been closer to 35% in the third quarter.
Moving to our cash flow performance cash generated from operating activities during the third quarter was $52 $6 million.
While free cash flow totaled $48 $4 million.
Our third quarter free cash was up over the prior year and sequentially.
Year to date, our free cash generation of $122 million represents approximately 68, 5% of net income.
We continue to see solid cash generation across our business, considering greater working capital investments, including the ongoing growth driven inventory build.
Our operational inventory levels were up 15% year to date on an organic basis, and we expect additional inventory investments during our fiscal fourth quarter.
Yeah.
As it relates to other areas of capital deployment, we repurchased repurchased 35000 shares for approximately $3 $5 million during the quarter, bringing the year to date amount of share repurchases to approximately 147000 shares for $13 $6 million.
We ended March with approximately $188 million of cash on hand, and net leverage at one four times adjusted EBITDA, which is below the prior year level of one nine times and fiscal 'twenty, one fourth quarter level of one eight times.
Our revolver as of the end of March had approximately $460 million of available capacity with an additional $500 million accordion option.
Combined with incremental capacity on our AR securitization facility and uncommitted private shelf facility our liquidity is 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 for the second time this year to reflect our third quarter performance and constructive near term outlook.
We now project full year fiscal 2020 to EPS in the range of $6 15 to $6 25 per share based on sales growth of 14.8 to 15, 3%, including a $13 six to 14, 1% organic growth assumption as well as <unk>.
EBIT margins up 10.5 to 10, 6%.
Previously our guidance assumed EPS of $5 70 to $5 90 per share sales growth of 11, five to 12, 5%, including a 10 five to 11, 5% organic growth assumption and EBIT margins of 10, one to 10.3 per SEC.
Our updated guidance implies a fiscal fourth quarter EPS range of $1 59 to $1.69 on high single digit sales growth in each.
10.6% EBIT margin at the midpoint.
We expect gross margins during the fourth quarter to be slightly below our third quarter level of 29, 3%.
In addition, please keep in mind, our prior year fourth quarter benefited from a net $3 $7 million of LIFO income related to inventory layer liquidations.
This compares to roughly $8 million to $9 million of LIFO expense, we were assuming in our fiscal fourth quarter guidance, which will result in greater year over year LIFO headwind on our gross margins and incremental margins during the fourth quarter compared to year to date trends.
With that I will now turn the call back over to Neil for some final comments.
Thanks, Dave as we close out fiscal 2022 in the months ahead I remain constructive on the outlook for our company and the potential for sustained above market earnings growth going forward.
While we are cognizant of various crosscurrents, including the ongoing inflationary supply chain and macro uncertainties. We are uniquely positioned to drive the favorable performance, we've seen year to date into fiscal 2023 and beyond.
Of note. We believe we remain in the early innings of a potentially meaningful growth opportunity as capital investment accelerates across the North American industrial manufacturing complex.
From our legacy Service Center network supporting critical break fix applications to our leading engineered fluid power and flow control solutions and a scaling presence across advanced automation solutions, we will be an increasingly critical partner for our customers most valuable asset.
And supply chain investments in coming years.
The potential for greater manufacturing reassuring to North America U S infrastructure spending and a more meaningful recovery across the automotive industry provides additional in market growth support going forward.
Further we will continue to expand into new and emerging areas of growth across the industrial supply chain.
Following our initial automation build out in recent years, we are now a leading distributor and solutions provider.
Cross advanced machine vision, and collaborative and mobile robotic technologies. We're also investing in digital capabilities that complement our local presence and continue to evaluate and develop new commercial solutions that fully leverage our technical capabilities and applications expertise.
As legacy industrial infrastructure converges with new emerging technologies.
We expect the mix of these newer areas of growth to increase and be additive to our growth in coming years.
Lastly, we see ongoing margin expansion over the long term, reflecting a diverse set of self help opportunities tied to mix tailwind and system investments plus our competitive mode from the critical nature of our core product set applications expertise and customized.
Solutions.
Our legacy footprint and embedded customer base combined with our historical cost discipline provides a strong platform to continue to leverage our cost base as we captured new growth opportunities.
Overall, we remain poised to create significant value for our customers associates and all stakeholders within any operational environment.
As our historical track record and year to date results show.
Again, we thank you for your continued support and with that we'll open up the lines for your questions.
Thank you we will now begin the question and answer session.
I'd like to ask a question please pickup your handset.
Star then the number one on your telephone keypad.
I would like to withdraw your question from the queue question the boundaries.
We'll pause for just a moment to compile the Q&A roster.
Okay.
<unk>.
Our first question comes from the line of Chris Dankert from Loop capital. Your line is now open.
Hey, good morning, guys. Thanks for taking my question here.
I guess first off I know, it's early but as we kind of look out to fiscal 'twenty. Three is it fair to assume we kind of get back into the 20 to 30 basis point gross margin improvement for the year, assuming we do see some modest tapering in kind of inflation in pricing or maybe a flattish if these LIFO headwinds.
Would that be what you would expect kind of in those scenarios here.
You, obviously see opportunities both from our accretive mix and the pricing and other kind of margin or gross margin countermeasures to continue to expand margins. We would expect that I think one thing we do have to be cautious of Chris is that the LIFO tail you know depending on when we see some of that inflation subside.
We'll have a longer tail. If you think about the kind of the random demand we see in this business and he will have parts that will continue to hit the radar RMB replenish that have not been replenished since this inflation. It really started to ramp so there'll be some pressure we see continuing into next year, our fiscal 'twenty three in terms of LIFO, but.
You know clearly accretive mix impact the outpaced growth on the fluid power flow control, which comes with the higher margins in automation of course, as well as the blocking and tackling around the the service center side of the equation certainly we would look to continue to improve the margin trend as we move forward.
Got it Okay. That's helpful. Thank you and then.
When you highlight the pricing and then the kind of the price cost piece of very very impressive gross margin number here I guess any other comments or can you kind of walk us through kind of the impact of maybe mix and freight and you can just see there's a lot of other moving parts. There is any other comments on kind of what's contributed to that really nice gross margin number kind of full life a lot of it.
Sure I mean, if you pull out the LIFO right you know pleased that the business, even keeping everybody focused on what's right in front of us as opposed to you know whats ultimately coming through the P&L as a moving average cost. So nice work there alluded in the script that our you know our mix was accretive both the outpaced growth with some of the local.
<unk>, obviously as we grow quicker in fluid power flow control and automation does do come back you know Richard margins here that does provide a mix benefit that we've talked about before as well as international operations. We saw some nice performance there and some favorable customer mix within the international operations as well so.
Some of that you know here again, we've talked about it in terms of the opportunities in front of us to continue to drive that margin expansion, but really proud of the team in terms of the execution and staying on top of it and we're really working all the levers as we think about no.
Okay. What is it goes into that gross margin improvement and are these inflationary times.
Yes, and Chris I'd, just add that you know as we think about it we look at the quarter and perhaps to the year ahead and you know we're in our planning cycle now, but the real view is the inflation and the inflationary environment persisting.
Supply chain headwinds or are not really easing they persist.
Labor tightness and bottleneck persist in that so are we.
We've got ourselves.
Organize teams focused on on how we continue to execute in that environment.
In closing this fiscal year and as we move into fiscal 2023.
Got it well. Thank you so much for the color gentlemen, and again congrats to the whole team on a really nice quarter here.
Thanks, Chris.
Yeah.
Thank you. Our next question comes from the line of Michael Mcginn from Wells Fargo. Your line is open.
Hey, good morning, everybody congratulations on the results.
Good morning, if I could.
I wanted to dig into the different growth drivers, obviously solid organic growth.
But if we looked at within service Center, and then maybe switching to fluid power Service Center can you just kind of any commentary on how implant solutions are stacking up against the legacy Service Center, and then maybe fluid power. It sounded like low control was really the incremental growth driver to that upside I just wanted to put a finer point on.
Those items.
So I'll start on the service Center I think we continue to see just heightened activity.
If you look at manufacturing capacity utilization, our customers are operating equipment longer and harder as they look to serve that demand that creates a greater a break fix into that and then as we work with them on planned maintenance projects and solutions into that all of those continue to.
Tribute to.
To the service center side of the results and the team's performance I would say our fluid power business continues to perform very well across.
Real off highway mobile and technology, the order rates and the backlogs continue to expand so they are clearly contributed to the results.
As we point out with the flow control position and some of those later cycle segments now starting to see quotes and orders. So well control has contributed contributed this quarter, but I wouldn't characterize that it's all a flow control in those results and then the automation side of the business and you know we talk about.
Those are results on the on the orders the sales the two year stack at at over 20% year to date high teens growth on that side. So we're encouraged there as well.
Okay, and I guess on the service center side.
All of your peers have noted during the pandemic implants.
The consumables piece kind of pull back.
You know and do.
Obviously, COVID-19 concerns and that is a product category that I believe skews higher margin class C. Consumables for you guys. So just trying to gauge the level of upside as those start to pick up into your next fiscal year.
Yeah, I would say.
We will participate I think in general consumables around 5% of our sales in that side. So we will participate but I think the bigger drivers have been around the mechanical power transmission and those solutions that we're offering and helping customers maintain a high up.
Time, avoiding downtime in those areas that that's been the driver of our results.
Yeah.
Okay.
Yes.
This might be my second or third question, depending on how you count it I'm going to go with analyst numbers numbering right here, So I'll sneak one more in but.
I guess on the you mentioned.
Upside to the 11% interim target or I guess meeting that target what what is the level of competence here in terms of gross margin SG&A reached an all time low as a percentage of sales just walk us through what feels cyclical and secular in this environment.
So we will be going through the planning cycle, but if I look forward at the demand environment right now we feel very good about what are what is driving demand and what is likely coming in if we look at the trends and I think it's reflected in the capacity utilization of <unk>.
Creased re shoring and activity going on as customers look to Derisk long distance supply change to bringing some of that activity in house or they're localizing with suppliers more closer to their operations, we see that infrastructure spend really hasnt started into this and so that will.
Be a driver on the on the heavy industries. If we think about from an industrial production standpoint, we've seen 13 months of expansion and most cycles are 60 to 70 months and that side. So we feel encouraged about that so we think there's many fundamental.
Secular backdrops that are gonna be beneficial plus we have a strong focus to help ourselves.
With our technical differentiation and how we bring those solutions forward to our customers to help them run and operate and as they deal with challenges of an ageing technical workforce their own labor constraints and challenges, we can fill those gaps and voids for them and help them keep running productively.
And what we see is a strong.
Industrial manufacturing backdrop.
Got it appreciate the time thank you.
Okay.
Thank you. Our next question comes from the line of David Manthey from Baird. Your line is now open.
Yeah, Hey, guys good morning.
Good morning.
Not to keep hitting on the academic question, but you guys have such a great window into industrial America.
Neal in your comments you mentioned that the.
In the early innings of opportunity in certain areas you've talked about these mid and late cycle industries picking up if we had to pin you down how do you think about it I mean, two years out of recession, but rates going up now where are we in the U S. Economic cycle do you think.
Well not an economist, but I you know.
I'd say from my perspective.
I still think we're early I mean, as we look as we look forward I mean, what we had really two plus years of low capex and we see it with customers dialogue and planning I think we see it in and releases from various companies. Many are planning capex expenditure.
<unk> increases and so I know as a percent of G. D. P. It's normally around 9% I think we're a lot closer to 8% right now you know that's going to play out.
Contribute on the side to.
To the earlier comments I think re shoring continues into it I think it's reflected in the manufacturing capacity utilization for us that'll be very positive, especially if some of those local accounts will continue to.
<unk> and grow so I know, there's concerns or everyone would want to look is it peaking here or is this there are concerns there.
Our view is it is a constructive productive environment and that's what we're planning and executing for if the environment changes. He obviously, we know how to execute as we did before in cycles as we get through the pandemic, but it is not what we anticipate right now.
Okay, Yeah, thanks for that insight I appreciate it.
And then second on it.
As we think about just the model going forward and continued inflationary trends feeding into Opex next year.
Your model is to increase gross margin, 20% to 30 basis points annually. It sounds like you're outperforming that right now.
And then we get opex leverage or contribution margin it should be kind of mid teens.
Indeed over the cycle.
As you look to next year with the trends Youre seeing or is that still how we should think about it or are there areas that should be a little bit better or a little bit more challenging for you relative to that secular model.
And so we'll be going I mean, we're going through the planning cycle now we're closing out in some areas of the business and taking our board through long range strategic looks at the business and what we want to be doing accomplishing and investing around and then we're working the annual planning cycle right now so we will provide.
Clearly more color as we get to August , but I think one view is over the up cycle or our view of the algorithm is that pay over an up cycle will grow mid single digits organically in sales and we'll have incrementals that it'll be mid to high teens in that side, we're talking about.
In the fourth quarter, if we set aside LIFO will be.
Strong in that side from from an incremental standpoint, so that's probably where I'll leave it for now, but we're working it and we will provide a lot more as we get to August .
August and we guide for 'twenty three.
Yeah, great. So it's a good deal. Thank you.
Thank you.
Thank you again, if you would like to ask a question. Please pickup your handset press Star and then the number one on your telephone keypad.
Our next question comes from the line of Ken Newman from Keybanc capital markets. Your line is open.
Hey, good morning, guys.
Good morning, Ken.
I think our service center margins were a record this quarter and I just wanted to ask you about how you think that you know what was the primary driver for that relative to the price increases or the customer mix and just how we should think about the sustainability of those margins going forward.
So go ahead.
There wasn't favorable mix that came into play so you know it.
If you strip out obviously just talking about the service centers, you know some of that international customer mix.
The growth of the local accounts certainly those benefited from a mixed standpoint.
You clearly see in the overall volume leverage as you think about you know kind of our SG&A being roughly 30% are variable. So obviously to get that incremental volume. It does lever nicely you know.
Yes, D&A standpoint, we did have a little bit lighter than we would've expected you know Joe we have seen in recent quarters, our medical expense.
Can't count on that repeating but like the work that the service their teams are doing around staying in front of the inflationary impact you know kind of you know.
Counter even that LIFO headwind that we're seeing so as we continue to drive volume there will stay cost accountable continue to work the gross margin levers and you know like I said that that business does never licensed anything incremental volumes.
Got it.
And then for my follow up I just wanted to.
Dig into the automation comments, you made earlier I am curious if youre seeing any outsized acceleration for specific processes, whether it be for vision systems or pelletizing robotic systems.
Obviously, the growth has been pretty strong, which makes sense given the tight labor markets.
Is there any way that you can help us maybe think about what's been limited from a supply chain perspective, or you know how how high would orders have been if you could actually get the parts you needed.
I don't know that I've got any specific comments on our you know obviously, they're gonna be tightness in it can vary based on a supplier or some of the product groups. I think the teams are doing a very nice job and understanding them and unlike the rest of the business, how we engage with these core suppliers.
To work through the work through the resolution so.
Clearly, we're doing well in our envision in those systems I think more and more customers are seeing opportunities to put them in and and quality inspection. They can use them to reduce labor in some areas. We're seeing in robotics machine tending in pallet loading in the all of the those type of apps.
Occasions.
For collaborative robots also from a mobile standpoint, how you can move materials through and what that can mean for productivity and also reduce some labor requirements inside.
And it's really broad based.
Across many vertical segments and so a good performance in the quarter encourage by the continued order trends and growing backlog I think it's fundamentally set up that it's a double digit contributor as we look out over the horizon.
Yep.
I'll ask sneak one more in if you don't mind.
Maybe you could just talk a little bit about fuel and transportation costs. You know what was the drag for that on gross margins this quarter end.
How should we think about the impact that's embedded in the guide at this point.
You know I'd say, hey, it it's in the it's in the numbers I mean as a team we recognize.
Freight and cost are part of the contributing factors and just like any headwinds that you get you take it on and you find your countermeasures and an offset so across the board team is doing a very nice job thinking about <unk>.
A sale an inflation mix.
Mix and how we sell richer products and solutions in todays point earlier customer mix and with local accounts and we're doing a very nice job.
In the freighter.
Great Arena in managing input cost in and taking them forward. So.
Part of business.
Very good thanks.
Yeah.
Thank you. Our next question comes from the line of Barry Haimes from Sage asset management. Your line is open.
Thanks, So much for taking my questions first a question on automation.
Could you size it as a percent of revenue just to get a feel for size currently and related to that you talked a lot about reassuring and you know some of that comes back to the U S. But I would think a fair amount of that might go to Mexico and I'm wondering if if Mexico is part of the plan.
I had one other one I'll start with there.
Okay.
So automation in sizing and we've talked about it a little bit our annualized run rate of the business is today would be a $150 million and so those would include our recent acquisitions over the last three years with a focus around vision and robotics motion control products, but all.
So data connectivity.
I'll point out I mean, we've got a technology and degrees of automation weaving throughout our businesses in fluid power and flow control and even in our service center side of that but.
From an automation side, that's what we would have from a reassuring standpoint, I agree I think many of our customers are looking at their U S or their North America footprint as they look to develop these solutions and solve long distance supply chains of whether they would come from Asia.
Europe or other aspects so.
Well, you would see us fully or are contributing fully participating but it will be positive also for Mexico going forward and I believe you got a third.
Yeah, just one other one I wonder if you could just talk a little bit about.
The M&A pipeline and pricing you know kind of what you're seeing there obviously the.
The financial markets have been an extreme amount of turmoil and just wondering how that may or may not be affecting the M&A market that you're seeing thank you.
So I can just speak for US one we're busy we're active I think.
We've got a full robust pipeline we are.
Focused on our priorities that we think fit our business in the most attractive going forward and so we've touched on those a bit around automation and fluid power and flow control.
A little early for me to comment you know, what's it mean with rising rates on on some of the impacts of that I'd say to date.
Not as much I think as those activities or as rates rise it may prompt more properties more businesses.
To look to transact.
In the coming time horizon, so it may actually stimulate some activity.
Great. Thanks, so much thanks for the great quarter.
Thank you.
Thank you. Your next question comes from the line of Michael Mcginn from Wells Fargo. Your line is open.
Hey, Thanks for the follow up I, just wanted to piggyback on that last line of questioning.
So you've added five mice adjacent bolt ons within your automation space I think I can believe since fiscal 19, just use this as a platform you've kind of built from the ground up and its growing double digits you got the balance sheet to execute on a lot of things just thinking high level as you add these next round of opportunities.
Is there still regional gaps or are these something that are going to be melded into the portfolio and maybe become less disruptive from having to build it from the ground up initially.
So you know we have a clear platforms channels to market. Those are our focus areas as part of our long range strategy I mean, we'll continue to evaluate our segments.
Segments and potential and what's next I mean, so it's just like we went into with a.
Well control and into automation and that side, but what I would say is we have opportunities in the business from a.
Acquisition standpoint, but also organically and so as we grow.
The infrastructure the support we can go into adjacent markets, where we operate so I think in the go forward. It can be a combination and expansion combination of acquisitions and also organically.
Okay.
Thanks ill pass it along.
Okay.
Okay.
Thank you at this time I'm showing we have no further questions I will now turn the call over to Mr. Schrimsher for any closing remarks.
Thank you very much I just want to thank everyone for joining us today, and we look forward to talking to and seeing many of you in.
In the quarter and thanks again.
Thank you ladies and gentlemen, this does.
This concludes today's conference. Thank you for participating you may now disconnect.
[music].
Yes.
Okay.
Okay.
Okay.
[music].
Yes.
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
[music].
Yes.
Okay.
Yes.
Yeah.
Okay.
Okay.
[music].
Okay.
[music].
Got it.
Yeah.
Sure.
Yeah.
Okay.
[music].
Okay.
Yeah.
[music].
Okay.
[music].
Yeah.
Yeah.
[music].
Okay.
[music].
Okay.
Right.
Okay.
[music].
Thanks.
[music].