Q2 2023 Applied Industrial Technologies Inc Earnings Call
Greetings and welcome to the fiscal 2020 three second quarter earnings call for applied Industrial technologies. My name is Melissa and I'll be your operator for today's call. At this time all participants are in a listen only mode. Later, we will.
We conduct a question and answer session.
If you wish to ask a question at that time. Please press the one followed by the four on your telephone keypad.
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Any time during the conference call you need to reach an operator. Please press star Zero. 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.
Okay. Thanks, Billy 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 dotcom.
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 and uncertainties, including those detailed in our SEC filings.
Actual results may differ materially from those expressed in the forward looking statements.
Company undertakes no obligation to update publicly or revise any forward looking statement. In addition, the conference call will use non-GAAP financial measures, which are subject to the qualifications referenced in those documents.
Our speakers today include Neil Scripture applied President and Chief Executive Officer, and Dave Wells, Our Chief Financial Officer with that I'll turn it over to Neil.
Thanks, Brian and good morning, everyone. We appreciate you joining us.
Usual I'll begin with some perspective and highlights on the key drivers of our results include.
Including an update on industry conditions, as well as expectations going forward, Dave will follow with more detail on the quarter's financials and provide additional color on our outlook and guidance, which we've raised this morning, and then I'll close with some final thoughts.
So overall, we had another solid quarter with favorable performance across really all of our businesses year over year organic sales growth strengthened exceeding 21% in both segments. Our teams are doing an exceptional job at managing cost and driving continuous improvement initiatives.
We expanded EBITDA margins to a new quarterly record of slightly under 12%.
Looking at it over an extended period, our EBITDA margins have expanded nearly 300 basis points over the past three years.
At the same time, we continue to invest in talent safety technology, and our service solutions further enhancing our capabilities and operational strength for the future.
Taken together, our respective sales EBITDA, and EPS was 21%, 36% and 41% over prior year levels.
As a reminder, we're facing more difficult comparisons. These days so to see this level of sustained sales and earnings growth is noteworthy and a strong indication of our enhanced growth profile and earnings power.
I want to thank our entire team for their ongoing effort and focus on optimizing and positioning applied to achieve these results.
This progress is particularly exciting as we reflect on our company's history, including celebrating our 100 year anniversary a couple of weeks ago with more than 6000 associates are very proud and gratifying moment for applied and our talented teams around the world.
Our rich history, and culture will remain a guiding framework to our strategy and evolution going forward.
Along with our valued supplier and business partners, who work every day to help us serve our customers and advance our leading technical capabilities throughout our industry.
So a few key points in areas I want to emphasize to provide more detail on what's underpinning our performance and opportunity moving forward.
As it relates to underlying demand, we saw positive momentum sustain across many areas of our business during the quarter sales growth held strong throughout the quarter and exceeded our expectations sequential sales rates were above normal seasonal patterns, including solid trends through <unk>.
During December .
While order rates are slowing to more normalized level in some areas of markets as expected.
Customer commentary remains fairly positive and we've yet to see any meaningful slowdown to date.
We are mindful of the ongoing crosscurrents facing the broader economy, which likely will continue to impact industry wide activity in the near term.
That said, we remain constructive on our position and growth prospects long term.
With our first half performance reinforcing this view.
Oh, no. We believe we're benefiting from a more diverse mix of end markets and grow tailwind.
This is partially tied to our multichannel strategy and business.
Evolution in recent years.
As we've highlighted before we are favorably positioned to capitalize on key secular growth trends gaining momentum across the north American industrial sector.
Including greater infrastructure spending re shoring and aging and scarce technical labor force and incremental growth opportunities, resulting from government stimulus spending.
Similar to last quarter customers continue to work through elevated backlogs. There are also embracing a higher level of technical maintenance requirements and capital spending focused on reinforcing supply chains and equipment within their production facilities.
This is particularly meaningful considering an aged U S production infrastructure.
Service reliability and efficient access to leading suppliers premium brands and technologies are more critical than ever.
Overall this is supporting demand for our comprehensive maintenance and engineering solutions.
We're also executing on a number of internal initiatives aimed at driving greater sales force effectiveness, we're using more analytics and various sales process tools to identify and capture new business opportunities.
Ongoing the talent investments continue to supplement our sales momentum as well.
In addition, we're seeing solid traction with our cross selling initiatives from flow control products supporting process maintenance to emerging robotic technologies addressing labor and safety initiatives at our customers' facilities.
The full suite of our technical solutions, we offer today is meaningful to our value proposition.
Our teams across our multi channels are increasingly collaborating and solving problems for our customers.
As they face labor constraints reassess supply chain strategies and embrace required technology investments.
More and more our customers recognize us as a leading solutions provider.
Integral to their most valuable production assets and supply chain reliability.
Many of these internal sales growth initiatives have been instrumental to our service Center segment results were organic sales growth exceeded 20% for the third straight quarter.
In addition, our local service centers continue to benefit from a productive U S manufacturing backdrop and related demand for break fix MRO support.
They're also remain focused on managing ongoing inflationary pressures and working effectively through supplier price increases.
Gradual increases in infrastructure spending are driving greater demand from our aggregate mining and machinery customers.
We also believe growth opportunities are rising as customers continue to consolidate their spend with more capable distributors offering leading technical support and solutions.
This is particularly relevant given our market focus around critical emotion and powertrain products in demanding applications, including notable requirements around supplier brands and local service reliability.
We did see some slowing in select end markets during the quarter, such as metals milling and lumber and wood. However.
However, booking levels remained relatively firm month to date in January as customers reset budgets and remained generally productive.
While our service center segment is not immune to cycles and potential slower industrial production activity in coming quarters.
We believe this segment is exposed to more secular and company specific tailwind today that in prior cycles potentially providing a greater level of sales support if a slower environment does manifest.
Within our engineered solutions segment, which includes our fluid power flow control and automation offerings organic sales growth accelerated 300 basis points from last quarter.
Increasing over 21% year over year, despite a meaningful prior year comp of 19% growth.
Backlog strength is providing solid revenue coverage with no material signs of cancellations at this point.
Modest improvement in some areas of the supply chain is helping released shipments are various system assemblies previously pent up by component shortages.
In addition underlying growth prospects remain favorable within our core fluid power industrial and off highway mobile verticals.
Our technical and engineering capabilities are in greater demand from smaller tier Oems as they face rapid innovation and accelerate integration of advanced features into their equipment.
While we're in the early innings of the development of these opportunities they are positively influencing our business funnel and represent an emerging area of potential growth for applied longer term.
In addition demand and booking levels remain solid for our higher margin process flow control products and solutions.
Morrow activity and maintenance project spending on process infrastructure remains positive in core in markets, such as chemicals refining petrochemical utilities and metals.
We also continue to benefit from our customers de carbonization efforts and other required infrastructure investments as in markets transition around new energy requirements.
Additionally, we are seeing sustained progress in cross selling our flow control solutions through our service Center network as we connect customers to these leading process capabilities.
Our strategic expansion into flow control back in 2018 is a great example of the evolution of our channel capabilities and end market mix that we believe is providing more resiliency to our growth and margin profile today.
We continue to make further progress expanding our advanced automation platform as well, we saw solid organic sales growth in the quarter and underlying order momentum remains healthy.
Customer interest in new business opportunities are being driven by labor constraints and evolving production considerations.
These trends are expanding the need for our leading engineering capabilities across functions, such as machine tending pelletizing and quality control.
We're making traction with our greenfield expansion initiatives and developing new approaches to best serve our embedded customer base and further enhance our market position include.
Including through proprietary turnkey solutions and leading application expertise.
In addition, we announced the acquisition of automation, Inc. In November which represents the fifth automation acquisition over the past four years with.
With annual sales around $25 million the transaction further optimizes, our automation footprint in the Midwest as well as our strategy of providing leading next generation solutions around machine vision robotics and motion control.
We welcome automation, Inc, and look forward to leveraging their capabilities going forward.
Overall, the momentum sustaining across our core operations and emerging solutions is encouraging at the same time. Our teams remain focused on driving strong returns as this growth continues to manifest through both consistent execution and continuous improvement actions.
Those that have been around applied for a while you know we have a deeply ingrained culture of operational execution and cost accountability.
This remains apparent as we continue to manage inflationary pressures and drive high teens incremental margins despite ongoing LIFO headwinds.
At the same time, we've significantly improved our return on capital profile over the past several years hitting strong double digit levels in recent quarters, highlighting the value creation potential embedded across our business and strategy.
And lastly, we ended the quarter with a healthy balance sheet and net leverage at one times and over 1 billion in balance sheet capacity.
Our M&A pipeline is active across our priority areas of fluid power flow control and automation.
We remain disciplined as always and continue to evaluate a number of attractive M&A opportunities that could enhance our growth and competitive position going forward.
At this time I'll turn the call over to Dave for additional detail on our financial results and outlook.
Thanks, Neal and good morning, everyone.
And as a reminder, that our supplemental quarterly recap is available on our investor site for additional reference.
Turning now to the details of our financial performance in the quarter consolidated sales increased 29% over the prior year quarter.
Acquisitions contributed 50 basis points of growth, which was more than offset by a 70 basis point headwind from foreign currency translation.
The number of selling days in the quarter was consistent year over year.
Many of these factors sales increased 21, 1% on an organic basis.
As it relates to pricing, we estimate product pricing was it mid single digit percent contributor to the year over year sales growth in the quarter.
As a reminder, this assumption only reflects measurable topline contribution from price increases on Skus sold in both year over year periods.
Turning now to sales performance by segment as highlighted on slides six and seven of the presentation.
Sales in our service Center segment increased 21, 1% year over year on an organic basis, when excluding the impact of foreign currency.
Year over year sales growth strengthened across our largest national accounts during the quarter. We also continued to see favorable growth from smaller local accounts.
When looking at the sequential increase in segment growth. The biggest end market contributors were chemicals pulp and paper aggregates rubber and plastics and mining.
We also saw solid fluid power aftermarket sales growth in the quarter, reflecting strong execution and service support from our leading fluid power MRO specialists network.
Within our engineered solutions segment sales increased 22, 5% over the prior year quarter with acquisitions contributing 140 basis points of growth.
This reflects two months of contribution from our automation, Inc acquisition, which closed in early November .
On an organic basis segment sales increased 21, 1% year over year and over 41% on a two year stack basis.
Segment sales growth continues to be supported by strong backlog levels across our fluid power division.
Stage customer MRO, and capex spending into process flow infrastructure and ongoing healthy demand for our next generation automation solutions.
Extended supplier lead times and inbound component delays continued to weigh on say goodbye sales growth during the quarter, though we did see some modest improvement in lead times and supplier deliveries benefiting system completions and shipment activity during the quarter.
Okay.
Moving now to gross margin performance as highlighted on page eight of the deck gross margin of 29.1% decreased 28 basis points compared to the prior year level up 29, 4%.
During the quarter, we recognized LIFO expense of $8 $9 billion compared to $4 $7 million in the prior year quarter.
This net LIFO headwind had an unfavorable 39 basis point year over year impact on gross margins during the quarter and reflect supplier price inflation and ongoing inventory expansion year to date.
We also faced a difficult comparison for the favorable mix and performance, which boosted gross margins in the prior year quarter.
On a sequential basis gross margin performance increased over 20 basis points during the quarter and was slightly ahead of our expectations.
We're all we continued to manage brighter inflationary dynamics, well, reflecting broad based channel execution pricing actions and ongoing margin countermeasures.
As it relates to our operating costs selling distribution and administrative expenses increased 9% on an organic constant currency basis compared to prior year levels.
SG&A expense was 18, 4% of sales during the quarter down from 25% during the prior year quarter, which is a new record low.
Despite ongoing inflationary headwinds, including higher employee related expenses. Our teams are doing a great job of controlling costs in the current environment as we leverage our operational excellence initiatives shared services model and technology investments.
Combined with the robot sales robust sales growth, we saw in the quarter EBITDA increased 36% over prior levels, while EBITDA margins expanded 128 basis points over the prior year to 11, 8%.
This includes an unfavorable 39 basis point year over year impact due to LIFO.
We continued to see strong operating leverage resulting in incremental margins in the high teens, despite the ongoing LIFO headwind year over year.
Combined with the reduced interest expense reported earnings of $2.05 per share increased 41% from prior year earnings per share levels.
I am pleased to highlight that this represents the second consecutive quarter of greater than 40% growth in EPS and the eighth consecutive quarter of adjusted EPS growth exceeding at least 25%.
Moving to our cash flow performance cash generated from operating activities. During the second quarter was $62.9 billion, while free cash flow totaled $55 $6 billion.
Compared to the prior year free cash flow nearly doubled reflecting higher earnings and stabilizing working capital investment.
Looking ahead, we expect easing working capital trends into the second half of our fiscal year, including some benefit from the conversion of work in process inventories tied to our engineered solutions segment as well as continued benefits from our working capital initiatives.
Yeah.
From a balance sheet perspective, we ended December with approximately $166 million of cash on hand, and net leverage at 1.0 times EBITDA, which is below the prior year level of one six times adjusted EBITDA.
Our leverage remains below our normalized range of 2.0 to two five times, partially reflected the significant EBITDA growth we have experienced in recent years as well as ongoing debt reduction.
We also remained disciplined with our M&A approach focus on targets and valuation supporting our return requirements and strategic priorities.
As it relates to recent areas of capital deployment, we announced in our press release today that we increased our quarterly dividend for the 14th time in 12 years.
In addition, as Neil highlighted we're excited by the acquisition of Automation, Inc. In early November which further enhances our automation portfolio.
Our strong balance sheet industry position and historical M&A focus our valuable attributes for our strategic acquisitions as they look to align their business and associates with the most capable and supportive organizations to best drive future growth and success.
Overall, we're in a great position to continue to drive our strategic priorities going forward, including the remaining proactive across our organic expansion initiatives as well as executing ongoing accretive M&A.
Okay.
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 2023 guidance to reflect our strong second quarter performance and an improved outlook for the second half of the year.
We now project EPS in the range of $8.10 to $8 50 per share based on sales growth of 13% to 15% and EBITDA margins of 11 five to 11, 7%.
Previously our guide assumes EPS of six hours 92.
Two $7.55 per share.
Growth of 5% to 9% and EBITDA margins of 10 nine to 11, 2%.
We are encouraged by our year to date performance and see ongoing opportunities supporting our growth and earnings potential in the back half of fiscal 2023.
That said our sales outlook continues to take into consideration broader economic uncertainty as well as ongoing inflationary and supply chain pressures.
We expect ongoing moderation in order rates and more modest pricing contribution in the second half of the year.
We will also face more difficult sales growth comparisons in coming months, including most notably during our fiscal fourth quarter.
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 low to mid teen percentage over the prior year quarter.
Please note that prior year sales comparisons are more difficult in February and March relative to January .
We're also assuming some moderation in underlying billings, all the way and strong backlog conversion in back order shipments in recent months combined with easing demand tied to the uncertain macro environment.
We expect gross margins to be relatively unchanged from fiscal 'twenty, three second quarter levels of around 29%.
In addition, we assume incremental margins in the mid teens based on a low to mid teen sales growth increase assumption for the quarter combined with considerations around our annual focus merit increase effective January 1st ongoing inflationary pressures and reduced operating leverage as sales growth eases.
With that I'll now turn the call back over to Neil for some final comments.
Thanks, Dave so to wrap up I'm extremely proud of the applied team and our performance through the first half of fiscal 2023.
Underlying industrial backdrop remains promising long term across North America, and we are benefiting from our industry position the ongoing build out of our advanced solutions and operational focus.
We believe various secular and structural tailwind or providing support to the broader demand environment.
This includes an incremental focus on refreshing and expanding industrial production infrastructure and capacity across North America, and greater demand for advanced engineered solutions, particularly as customers manage through labor constraints and accelerate actions to reduce energy consumption.
Sumption.
Our strategy and growth initiatives are strongly aligned with these trends and the requirements our customers are facing.
Consistent with our commentary from last quarter, the uncertain economic backdrop is reducing transparency into the cadence of underlying orders and growth in the interim as expected in our updated guidance. We continue to take a cautious approach to our outlook and anticipate a moderating growth environment.
In coming quarters.
That said, we believe any near term slowdown could be transitional and shorten nature, given positive tailwind underpinning the industrial sector and a greater focus on supply chain reliability in the wake of meaningful shock spaced in recent years.
In addition, we entered the second half of fiscal 2023, with our balance sheet and liquidity in a solid position and the opportunity to drive stronger cash generation, reflecting our improved margin profile and normalizing working capital requirements.
This will support ongoing strategic growth opportunities and shareholder returns going forward.
And lastly, following our first half performance, we've made meaningful initial progress toward our intermediate financial targets of $5 billion in revenue and 12% EBITDA margins.
These targets provide clear milestones to achieve significant value creation for all of applied and our key stakeholders long term is.
As always we thank you for your continued support and with that we'll open up the lines for your questions.
Yeah.
Thank you.
We will now begin the question and answer session. If you would like to ask a question. Please press. Please pickup your handset. That's one followed by the four on your telephone keypad. If you would like to withdraw your question. Please press the one followed by the team.
If any time you need to reach an operator. Please press star zero, we will now pause for a moment to compile the Q&A roster My mother. Please.
Yeah.
Ladies and gentlemen, once again that is one four to ask a question.
Our first phone question is from the line of Ken Newman with Keybanc capital markets. Please go ahead.
Hey, good morning, guys congrats on the excellent quarter.
Thanks.
First question for me I'm curious if you could just contextualize what your macro outlook assumes for the back half and I think last quarter, you mentioned that the outlook. Assuming there are 500 basis point contraction of 19 year over year in your fiscal back half and.
Is that still your expectation or just how is that how has that evolved.
So Ken I think one way we're looking at it we take it at the mid point, we would assume low single digit to flattish year over year.
A pea in the third quarter.
And then low single digit to perhaps a mid single digit contraction.
In the fourth quarter.
And if we think about are we look at perhaps the core manufacturing or capital goods portion of those markets ex inflation, it's probably closer to the low single digit to mid single digit growth in Q3, and then perhaps flattish to a low single digit year over year contraction in in the fourth quarter.
So we still believe the consumer oriented industries are facing more of this potential contraction in some of our core industrial markets.
That's helpful.
For my follow up.
You talked a little bit about pricing.
And obviously, it's been a positive contributor here similar to the prior quarter.
Any way you can just kind of help us understand the moving buckets within the organic growth outlook, you're still expecting pricing to mirror 2022 at this point and then you know any other way to talk about the benefits of better make versus volumes.
Yeah. So I can start and then play Dave will come in as I think about pricing, we would still see increases coming from our suppliers, if we compare perhaps to a year ago or they're lower in count and frequency, but we still expect our annual lifts or increases.
Coming from suppliers into this time.
As we also think about the backdrop of things you know not easing and in an inflationary environment things.
Things around the labor the supply chain and what has been and continues to be a good demand environment that we don't think those abate. So we think theres going to be pricing contribution to.
Two the overall business and into the top line results as we work through the the rest of the fiscal 2023, no, albeit perhaps at a lower level than we had in the last quarter.
Is it really as I talked last call. So assume we were gonna see that tail off some modest incremental pricing as Neil indicated in response to some of those factors, but you got more of a E. You could've.
Lower obviously T O as we move off here.
Below mid single digits, as we get into Q3 and lower single digits as we get into Q4 were driven by the comp issue.
And then you referenced the mix.
Referenced the mix side of it we're still encouraged that as we bring more advanced solutions into the business.
We have the opportunity for a positive mix contributions around our products and solutions.
Some of the end markets that we're participating in solution set up favorably as well.
And we said in the remarks right. We will believe for Q3, you know we're in the second half kind of gross margins in a similar range.
Understood, maybe if I could just squeeze one more in here.
Talked about the benefit of infrastructure spending and federal stimulus being a stronger secular tailwind versus prior cycles.
Is there any way that you can help us size, what the exposure is for AIC in those end markets today, and maybe what kind of benefit are you assuming if any.
And the new guide.
Well, so we would say it's inclusive into what we think about into the second half with that said I think some of it's just just getting started into that side. So that'll probably you I'd be for us more color.
And physical 24, because I think it will still take some time to ramp, but if we think about our exposure to kind of some of these mid cycle later cycle industries that are heavier industries.
Correct, Lee and indirectly, we're probably between 30% to 50% and you know those industries machinery, and metals and aggregate and equipment and such that are going to benefit from this in infrastructure build out and also the technology sector that will participate in that as well be it a five G and data warehouse in store.
And others. So we think the underpinnings of that occur more late this fiscal year and really into the back half of the calendar year.
Excellent thanks for the color.
Thank you. Our next question is from the line of.
At Dunkirk with loop capital. Please go ahead your line is now.
Hey, good morning, I guess Ah Congrats first on the near term impressive results and on the 100 year anniversary so that the whole team there.
I guess kind of jumping in here you know core organic growth in both businesses really accelerated versus the first quarter I mean that wasn't in in all of our expectation I don't think in yours, either I mean, you touched on some pieces, but can you just kind of.
Maybe sharpen up what the real driver of the outperformance in <unk> was on the kind of the.
Core organic basis.
Well I think there are a few things I'd take it across and you know we think about on our our service center side break fixed demand activity stayed strong throughout the quarter that was positive we're still seeing a benefit coming from the cross sell and the collaboration of those more.
Advanced solutions is helping in that front, we think our industry position service real liability the inventory that we have in place for some of those critical break fix times and plus our local presence all help that service center side of the business performed very well.
Within fluid power, we saw nice execution on projects.
And we've talked about having a productive backlog in fluid power. So the team were able to execute on a portion of that backlog as suppliers improved some availability of products or perhaps the availability of smaller component tree that was holding up.
Mike going out the automation team benefited from that and so organic growth into the 24% in that period, which was positive and then we're seeing continued strength around our flow control and it's typically a later cycle business and so we think that sets up well for the process flow.
Roll business in ourselves as we think about going into the second half.
Gotcha. So it really is a lot of pieces I'll pull it together that's great color. Thank you.
And then just kind of a follow up here you know inventory was up again sequentially, but a days are still kind of well below the long term average maybe how should we think about inventory positioning today and maybe working capital into the back half of the year here.
I just expect working capital as we talked about in the script to be a bit of a tailwind as we move across Q3, but more pronounced in Q4. So we did see some stabilization to your point you know we did see further increase once again really driven by those project focused businesses and that strong backlog position that we enjoy there.
You did see some stabilization, though as I said as we moved through November and December in terms of inventory levels would anticipate you know kind of that being flattish as you move across Q3 as we continue to work through you know some of that project backlog and see some of those supplier constraints start to ease further and then you would be targeting a reduction of inventory as we move in Q4.
So a tailwind when you think about the cash generation.
Understood and if I could just sneak in one last one in here.
Given the rise in interest rates and just kind of what we're seeing and you know very low leveraged from you guys. Today I mean as the target leverage range changed from kind of that one and a half to three times just given what interest rates are doing are still that's kind of the long term target for that.
We talked about longer term in a more normalized environment, you know two to two and a half being the target putting the balance sheet to work you know working at accretive M&A that we've been so successful in driving value with we are sensitive to the interest rate environment and you know the implications I can leverage could you be prudent in terms of the M&A and <unk>.
And you got to really stay focused on the priorities. So.
Well, we'll be cognizant of that but you know on the longer term over a cycle. It's still a two to two five times target in terms of that leverage ratio as we move forward.
Got it thanks, so much for the color and best of luck in the back half here guys.
Thanks, guys.
Thank you once again, ladies and gentlemen, as a reminder, you can pass one four on your telephone if you have a question.
Next question is from the line of David Manthey with Baird. Please go ahead. Your line is now.
Thank you and good morning, everyone.
To dig in a little bit more here on the guidance just so I understand that it isn't a fair statement to say that your assumption for.
The economic backdrop has shifted a few months to the right based on your new starting point that you've seen here in the first half of the fiscal year or as they're bad and in fact that have changed in your view on the depth and duration of the downturn.
I can start David I would say, it's a it could be a shift to the right. You know we know what we can see from a visibility standpoint, and so we touched on you know January and a solid start we know the oh, the comps get a little more challenging.
And in February and in March in that side.
And so you know our view is we feel like we have very good line of sight to Q3 with that Oh sales up to the mid teens and you know the expectations around margins and thus those mid teen incremental so we see that we just can't ignore what.
It could potentially be some of these crosscurrents in and when they develop we know our service Center segment in Q4 has a tougher comparable I think last year. It was up plus 21 and in the side and even around the engineered solutions segment.
It was a it was good last quarter as well. So we just want to be mindful as we are as we inform or lay out the guidance.
That's that's very rational.
He made a comment in the release that said the business is more resilient and paas than in past cycles due to your channel strategy could you elaborate on what you mean by that.
I think it's a lot of the build out of our our capabilities.
Not only service centers, and our bearing and power transmission and the importance of those products, but what we're doing in engineered solutions around our fluid power edition of process flow control and and now the start with with automation and you know with its run rate now at a 107.
<unk> $5 million to $180 million.
That's adding to our our value proposition and offering that is very important to customers plus our participation and presence in our maintenance supplies and consumables on that front. So as we build out those capabilities very helpful. Because I contend that customers are looking to.
To consolidate their spend with fewer more capable suppliers to partner with someone that can help them deal with.
Their labor constraints and challenges and their operational desires for a much greater uptime as they continue to serve their industry demand in it.
As we've said you kind of regardless, what depth and you know because it comes out as in terms of a market slowdown really feel like you know because of that a more comprehensive offering the ability to continue to drive you know kind of market outperformance with cross sell we have the ability is certainly the soft and that impact as we work through the next cycle as it comes.
And regardless, we still know how to be operators and like I said, you know gauge the business Accordingly, as we've demonstrated reached the downturns.
Okay. Thank you for that.
I guess I'll stick with the theme of three questions. If it's okay with you guys.
Could you talk about the average order size.
And average discrete automation solution, maybe a little bit about the sales cycle. There I assume these are capital items for customers. Just anything you can share with us regarding the what that type of sale looks like in terms of magnitude and.
The sort of the length of time, it takes to gear up something like that.
Yeah. So I don't know that I have the average order size, but let me let me come at it a couple of ways I'd say, one we're doing more to have product tie solutions that can make this sales process go very quickly and so if a customer wants to deal with labor constraints and how.
As machine tending and they have want to have fewer operators to to each fabrication equipment. They can leverage collaborative robots and perhaps have one operator per four pieces of equipment and so that that's been an area. That's been helpful. But we're doing more in palletize and can help.
You know distribution oriented companies are to help the volume of outflow is if people have dealt with challenges perhaps around warehouse labor. We're also active win envision for safety type products and so move from manual inspection on those so great and.
Hansman Sim and improvement, but also on consumer packaged goods, where you cannot have a labeling or product defect, especially if it's going to some key retailers.
Packaging has to be pristine.
And you just can't afford or do it effectively from.
From a manual vision standpoint, so those systems are very helpful. So that's helping the sales process go quickly I'd say, Dave on the other side then we have our sales engineers and application engineers that are connecting with customers, especially on our now our legacy service Center side.
We know there are production equipment, so well in solving a discrete automation problem or challenge and so that will start a focused and perhaps small.
How mobile or mobile and collaborative robots can help our vision or our motion control type products or maybe connectivity in the plant and we're solving small projects and I would say not all of them are going to the level that these are extensive capital projects that they're bringing along.
But theyre getting approved but they opened the door for other projects within that plant and based on the ownership equation of those companies into their other facilities as they look to replicate that success over impact that we could have so we're encouraged by the business activity in the presence it it's not.
Extremely long cycle massive investments that customers have to undertake to positively impact their performance with automation.
That's very helpful. Neil Thank you.
Youre welcome.
Thank you.
At this moment I'm showing we have no further question I will now turn the call over to Mr. Schrimsher for any closing remarks. Please go ahead.
Thank you Malika and I just want to thank everyone for joining us today, and we look forward to talking with you throughout this quarter.
Thank you, ladies and gentlemen that does conclude today's call. We thank you for your participation and disconnect. Your line have a good day.
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