Q4 2023 Applied Industrial Technologies Inc Earnings Call

Okay.

Welcome to the fiscal 2023 fourth quarter earnings call for applied industrial technologies.

My name is Frank and I'll be your operator for today's call.

At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. If you wish to ask a question at that time. Please press. The one followed by the four on your telephone keypad.

So asking your question. Please lift your handset to ensure the best audio quality.

If at any time during the conference you need to reach an operator, Please press star zero.

Please note that this conference is being recorded.

Ill now turn the call over to Ryan Cieslak director of Investor Relations and Treasury Ryan you may begin.

Okay. Thanks, Frank and good morning to everyone on the call. This morning, we issued our earnings release and supplemental investor deck detailing our fourth quarter results. Both of these documents are available in the Investor Relations section of the applied dotcom.

Before we begin just a reminder, we will discuss our business outlook and make forward looking statements.

All forward looking statements are based on current expectations and subject to certain risks and uncertainties, including those that are detailed in our SEC filings.

Actual results may differ materially from those expressed in the forward looking statements.

The company undertakes no obligation to update publicly or revise any forward looking statement.

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

Our speakers today include Neil Schrimsher applies President and Chief Executive Officer, and Dave Wells, Our Chief Financial Officer with that I'll turn it over to Neil.

Thanks, Ryan and good morning, everyone. We appreciate you joining us I'll start today with some perspective on our fourth quarter results.

Current industry conditions, and our expectations going forward, Dave will follow with more specific detail on the quarter's performance and our forward outlook, including physical 2020 for guidance.

I'll, then close with some final thoughts.

First I'd like to start by acknowledging and thanking our applied team for their hard work in delivering a record and pivotal year.

We continue to exemplify best execution and commitment to consistently serving our customers with industry, leading technical expertise.

From our core legacy operations to our expanding engineered solutions, our customer focus and operational execution are evident as the evolution that applied continues to unfold.

This is apparent when considering the strong finish to fiscal 2023 with fourth quarter sales, EBITDA, EPS and cash flow growing nicely and exceeding our expectations.

EBITDA grew 17% on 9% sales growth driving full year, physical 2023, EBITDA growth to 28% on 16% sales growth.

This is on top of significant growth achieved last year and against normalizing in market demand during the quarter. So really solid performance that is top tier within our core markets.

We're achieving this growth while continuing to expand gross margin and EBITDA margins with both reaching new record highs in fiscal 2023, despite meaningful LIFO headwinds.

Other point to highlight is the strong cash generation in the fourth quarter.

Bringing our full year fiscal 2023 free cash to a record level of approximately $320 million.

This is nearly two fold increase over the prior year and inclusive of working capital investment and higher Capex.

Very encouraging progress and a strong indication of the enhanced cash flow power of applied as we scale and optimize our operations and margins as well as drive various internal initiatives.

Furthermore, our competitive position and operational rigor has never been stronger.

This is evidenced by the significant improvement in our return on capital metrics throughout the year, which are the highest in over 10 years.

Overall in the year that faced ongoing headwinds from supply chain constraints and persistent inflation to a mixed macro and demand backdrop, we exceeded our commitments and created meaningful value for our customers suppliers and all stakeholders. Once again, thanks to the entire.

Applied team for driving this performance.

So several key points to highlight more detail first in terms of underlying demand, we saw generally firm trends through the quarter, including a solid finish during June .

Average daily sales increased 3% sequentially largely in line with normal seasonal trends, while our organic growth was strong on a two year and three year stack basis at 27% and 47%, respectively, which compares favorably relative to <unk>.

Quarters.

Growth was strongest in many of our top industry verticals and across our larger national account base, we saw particular strength across food and beverage pulp and paper.

Energy utilities lumber and wood and mining verticals during the quarter.

Ongoing backlog conversion across our engineered solutions segment provided further support.

In addition, we believe we're capturing incremental growth opportunities from our industry position and service capabilities as well as building momentum from our cross selling initiatives.

Of note growth contribution from cross selling actions continued to build during fiscal 2023 with related sales growth accelerating at a notable level compared to the prior year.

While still in the early innings, we see solid potential from cross selling going forward with business unit alignment and sales effectiveness, gaining traction across our legacy service center customer base.

From fluid power and process systems to advanced automation solutions and indirect consumable support the breadth of our solutions and application expertise provides our customers coverage across all areas of their operations a compelling value proposition that is driving a.

Strong funnel of new business opportunities entering fiscal 2024.

It's great to see the sustained growth momentum within our business, particularly when considering broader macro market activity.

<unk> to normalize as we expected.

Of note, we saw some incremental softening within metals technology and chemical end markets during the quarter.

As well as delayed capital spending across certain pockets of our customer base.

Into early fiscal 2024 organic sales were up by a low single digit percent.

While early trends in the quarter are always difficult to gauge given typical seasonality in the summer and some normalization. Following our year end close we remain mindful of ongoing macro headwinds and easing customer production activity that is presenting a more mall.

Modest near term end market backdrop.

That said, we have yet to see any meaningful signs of a broad material slowing to date and customer feedback remains generally optimistic.

Additionally, we believe emerging reassuring activity and investments in U S industrial infrastructure.

Creating incremental demand layers for our technical MRO and engineered solutions, both directly and indirectly.

All of these considerations suggests to us that current market easing is more reflective of a modest cooling and customer activity rather than a retrenchment or contraction in our core end markets, but we're keeping a close eye on the environment and will adjust if required.

Digging a little more into each of our segments sales growth within our service Center network remains encouraging with service centers segment sales up over 9% organically over prior your prior year levels during the fourth quarter.

And on top of 21% growth last year.

Into early fiscal 2024, we're seeing relatively firm sales trends across our U S Service Center network, which is an encouraging sign for general demand as well as the ongoing outgrowth, we see in this core area of applied.

In particular growth remained solid during the fourth quarter across larger national accounts and fluid power aftermarket sales.

Transactions through our digital channels, including E D I and applied Dot Com are also growing nicely with related sales up over 30% during fiscal 2023.

Our digital channels are benefiting from systems and process tool investments in recent years, which are helping drive new customer growth and.

In addition, we see greater sales force effectiveness as we continue to deploy and utilize prescriptive analytics to drive more robust benchmarking wallet share gains.

Product penetration and geographic coverage.

Bind with ongoing talent initiatives and our local service capabilities, we are capturing new growth opportunities across both legacy and emerging and markets.

Within our engineered solutions segment, which includes fluid power flow control and automation offerings, we saw underlying growth moderate slightly from prior quarters.

Those sales were still up by a high single digit percent over the prior year.

Component delays in supply bottlenecks remain hurdles within this system build and assembly focused area of our business, albeit at a lesser degree compared to prior quarters.

Within fluid power, we saw strong backlog conversion as the quarter progressed and solid growth within our core off highway mobile and industrial verticals, where sales were up in the low teens year over year and orders continue to grow during the quarter.

This helped to offset softer demand we continue to see across technology related end markets are fluid power backlog exited physical 2023 is still well above normalized levels and we expect a re acceleration in orders across the technology related.

Vertical.

<unk> 2024 plays out.

Given structural growth tailwind underpinning this market and our channel position.

In addition, our design engineering and software coding expertise are in greater demand as customers focus on reducing power consumption and C. O two emissions navigate a tight labor market and integrate more autonomous features into their equipment.

Demand also remains positive for our higher margin process flow control products and solutions.

During the quarter MRO activity and capital spending on process infrastructure remains solid and core end markets, such as chemicals food and beverage utilities energy.

In pulp and paper as.

As noted in prior quarters, our flow control solutions are increasingly used in applications tied to our customers' de carbonization efforts and other required infrastructure investments is in markets transition around new energy requirements.

This includes providing technical support for the configuration assembly and testing of process systems.

We see further momentum building into physical 2024, as we execute on this meaningful opportunity.

As it relates to our expanding automation platform focused on next generation Robotics machine vision and digital solutions, we continue to see positive demand backdrop year over year organic sales growth improved to 9% in the quarter against ongoing supply chain constraints.

<unk> and slightly longer sales cycles across certain verticals.

Demand remains strong across biotech life Sciences, Datacenters and consumer packaging.

Partially offset by slower trends across semiconductor and electronic markets.

Importantly, customer interest in new business opportunities remain elevated with our sales funnel and pre sales engineering activity at record highs.

We also have more than 100 open projects tied to our joint cross selling efforts, which is up meaningfully from prior year and represents a notable sales contribution opportunity heading into fiscal 2024.

So overall underlying growth momentum remains resilient and promising as we continue to navigate an uncertain macro environment.

And then lastly, we ended fiscal 2023 with a healthy balance sheet and over 300 million cash on hand.

Net leverage below one time and over $1 5 billion in balance sheet capacity, we deployed over $180 million in fiscal 2023 on capital allocation actions, including two automation acquisitions, a greater level of Capex investment supporting organic growth initiatives.

Ongoing debt reduction and growth in our dividend.

Looking ahead, we expect favorable cash generation to sustain as our working capital requirements moderate following heavy investment in recent years.

This provides significant firepower to drive ongoing organic investment as well as potentially accelerate M&A.

On top our top M&A priorities remain focused on automation fluid power and flow control markets.

Also continue to evaluate select M&A opportunities across our service Center network aimed at optimizing our market coverage talent and service capabilities as we look to fully leverage and capture the significant growth potential continuing to develop and our core service center business.

This includes tailwind tied to re shoring customer capex investments and technical supply chain requirements.

In addition, we remain flexible to return capital to our.

Through other avenues if necessary.

<unk>, a potentially more active approach to share buybacks, given our long term earnings potential and the intrinsic value we see across the company.

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

Thanks, You know another reminder, before I begin as in prior quarters, we have posted a supplemental corridor recap deck to our investor side three additional reference.

Turning now to the details of our financial performance in the quarter consolidated sales increased nine 1% over the prior year quarter.

Acquisitions contributed 70 basis points of growth, which was partially offset by a 20 basis point headwind from foreign currency translation.

A number of selling days in the quarter was consistent year over year.

Many of these factors sales increased eight 6% on an organic basis.

Average daily sales rates increased over 3% sequentially versus the prior quarter and were largely in line with normal seasonal patterns.

As it relates to pricing, we estimate the contribution of product pricing on year over year sales growth was in the low single digits in the quarter moderating as expected for mid single digits in prior quarters.

Turning now to sales performance by segment as highlighted on slides seven and eight of the presentation sales in our service Center segment increased nine 1% year over year on an organic basis, when excluding the impact of foreign currency.

Growth was strongest across our U S Service Center network as well as within NSS or maintenance supplies and solutions, our indirect consumables business focus on vendor managed inventory in vending solutions.

This was partially offset by more modest growth across our international operations on.

On a full year basis segment operating income increased a solid 24% in fiscal 2023, while segment operating margin of 12, 6% was up 80 basis points.

Within our engineered solutions segment sales increased nine 7% over the prior year quarter with acquisitions contributing 220 basis points of growth.

On an organic basis segment sales increased seven 5% year over year.

Growth in this segment continues to be supported by strong performance and backlog conversion tie to our industrial and off highway mobile fluid power solutions as well as sustained customer MRO and capex spending into process flow infrastructure.

Organic sales growth within our automation operations was also ahead of the segment average at over 9%.

This was partially offset by slower activity within fluid power technology verticals and ongoing inbound component delays impacting the timing of some system shipments.

On a full year basis engineered solutions segment operating income increased a strong 30% in fiscal 2023, while segment operating margin of 14, 1% was up approximately 150 basis points from the prior year as well as over 300 basis points from fiscal 2019.

Levels.

Moving now to our consolidated gross margin performance and page nine of the deck gross margin of 29, 2% increased 35 basis points as compared to the prior year level of 28, 9%.

During the quarter, we recognized LIFO expense of $8 $1 billion compared to $10 $8 million in the prior year quarter.

This net LIFO tailwind how do your favorable 24 basis point year over year impact on gross margins during the quarter.

This is the first quarter two years, where LIFO expense was lower year over year, which is directionally in line with our expectation of easing LIFO expense near term as broader inflation normalizes and we take a more balanced approach to inventory growth.

Our underlying gross margin performance continues to showcase strong execution and our margin expansion potential.

During fiscal 2023, we expanded gross margins 12 basis points to 22, 29, 2% inclusive of an 18 basis point headwind from higher LIFO expense.

In addition, gross margins were up more than 80 basis points over the past two years when excluding LIFO expense.

Our team continues to manage broader inflationary dynamics well delivering on our gross margin initiatives, including the application of enhanced analytics, great recovery in channel execution.

As it relates to our operating cost selling distribution and administrative expenses increased seven 3% compared to prior year levels.

SG&A expense was 18, 3% of sales during the quarter down from 18, 6% during the prior year quarter.

Prior year SG&A benefited from slight durability tied to our self insurance performance as well as lower deferred compensation expense.

When excluding these favorable prior year items SG&A expense was up approximately 4% over the prior year period.

We continue to leverage labor costs, well, a reflection of talent and systems investments as well as benefits from shared services deployment and operational excellence initiatives.

For full year fiscal 2023, SG&A expense as a percent of sales was 18, 4%, representing a 130 basis point improvement over the prior year and a 290 basis point improvement from fiscal 2019 levels.

These results are evidence of our team's operational rigor and the structural improvements we have realized in recent years.

Ongoing evolution and business enhancements.

Our solid sales growth gross margin management and cost leverage combined to drive a 16, 7% increase in EBITDA over prior levels during the quarter, while EBITDA margin of 12, 1% increased 79 basis points compared to prior year levels.

This includes a favorable favorable 24 basis point year bigger impact due to lower LIFO expense.

<unk> reduced interest expense and a slightly higher tax rate relative to prior year levels reported earnings per share of $2 35.

Was up over 16% from prior year earnings per share levels.

Moving now to our cash flow performance cash generated from operating activities. During the fourth quarter was $179 $9 million, while free cash flow totaled $174 $3 million, representing strong conversion at 189% of net income.

For the full year, we generated free cash of $317 million, which was up 87% from the prior year and a record high despite greater working capital investment and Capex over the past year.

We ended June with approximately $344 million of cash on hand, and net leverage at two five times EBITDA, which is below the prior level of one two times EBITDA.

Our leverage remains below our normalized target range up to two and a half times, partially reflecting the significant EBITDA growth we have experienced in recent years.

We also remained disciplined with our M&A approach focus on targets and valuations supporting our return requirements and strategic priorities.

Turning now to our outlook, which is detailed on page 11 of our presentation. We are establishing full year fiscal 2024 guidance, including EPS in the range of $8 82.

Two $9 55 per share based on sales of flat to up 4% year over year and EBITDA margins of 11 nine to 12, 1%.

Our outlet takes into consideration sales trends through early August ongoing economic uncertainty strategic growth investments and easing price contribution as the year plays out.

We also are assuming additional moderation in broader market activity near term as customers continued to normalized production levels and manage through a higher interest rate environment.

While we have not seen any meaningful signs of a broad material slowdown to date and we make an attractive on a company specific growth opportunities. We believe it is prudent to take a balanced approach to our initial outlook.

The midpoint of our guidance assumes slower year over year sales growth trends in the first half of the year relative to the second half, partially reflecting more difficult comparisons earlier in the year.

In addition, based on quarter to date sales trends through early August . We currently project fiscal first quarter or getting sales to grow by a low single digit percent over the prior year quarter.

From a margin and cost perspective, we assume ongoing inflationary pressures, albeit at a more modest level than in fiscal 2023, partially offset by slightly lower LIFO expense year over year.

As usual the year will include the impact of our annual Merit pay increase January one.

Combined with slower top line growth and lingering supply chain constraints guidance assumes more modest operating leverage relative to fiscal 2023 pending further transparency on broader economic conditions, and our near term growth trajectory.

Lastly from a cash generation perspective, we expect another solid year of free cash flow performance, given easing working capital investment into the front half of the year as well as some benefit from the release of work in process and additional progress on our working capital initiatives.

In addition, we expect ongoing organic investment supporting our growth strategy and value proposition as well as further investments in technology and supply chain with capital expenditures targeted in $27 million to $29 million range for fiscal 2024.

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

Thanks, Dave so to wrap up our performance in fiscal 2023 provides strong evidence of our favorable industry position and the operational execution potential of the applied team.

This is partially the result of strategic investments and initiatives that have positioned applied for stronger growth relative to our legacy trends and improve returns on capital.

From our financial results to the feedback we received from customers suppliers and other stakeholders our value proposition and evolution is resonating at a high level across our core marketplace.

Similar to a year ago. When we began fiscal 2023. The current macro backdrop is driving uncertainty as how industrial activity will track into fiscal 2024.

Higher capital costs tighter credit conditions, and ongoing labor and supply chain constraints will likely remain drags on in market spending and customer budgets in the near term.

Combined with difficult comparisons following significant growth in recent years, our initial outlook for fiscal 2024 incorporates moderating sales growth into the first half of the year, which we believe is prudent in the current environment.

That said, we remain constructive that our industry position and self help opportunities can sustain above market performance and continue to drive our robust business funnel that presents many new and diverse growth catalyst, both near and long term.

In addition, regardless of the trajectory of cycle dynamics, we are focused on continuing to enhance our underlying operational strength and scaling our business as we progress towards our next strategic objectives are.

Our team in alignment are as strong as.

As the underlying flywheel effect embedded in our strategy is building momentum, which at its core is centered around optimizing and leveraging our legacy service center operations as secular tailwind gain speed.

While expanding across higher margin engineered solutions tied to advanced automation industrial power and process technologies.

Our multifaceted strategy of presenting many new growth catalysts within our service Center network, we are expanding into new vertical markets tied to electric vehicle production semiconductors renewable energy life science logistics and wastewater.

We're also engaging supplier partners in developing solutions for the adoption of Iot and smart systems.

Our domain expertise and technical sales knowledge are invaluable assets in the channel as these emerging business opportunities accelerate.

At fluid power operations, we're leading the way in developing and integrating solutions supporting the acceleration of digital control technologies, as well as autonomous and electrified equipment or.

Our engineering capabilities set us in a strong competitive position to secure this fluid power growth tailwind.

We're also adding capacity in region supporting the technology end market, including further strengthening our fluid power systems growth potential across the semiconductor sector for years to come.

We also see notable growth potential and expanding our solutions tied to sustainable initiatives.

The energy transition of note our flow control business is engaging strategic suppliers and identifying opportunities around biogas and carbon capture as well as hydrogen and lithium production.

Our broad flow control product portfolio combined with our engineering capabilities are integral to the ongoing build out of various flow systems and processes utilized in these emerging green market opportunities.

And lastly, we remain excited about the ongoing expansion of our next generation automation platform.

Now representing close to 15% of our engineered solutions segment sales, we expect greater organic growth contribution from this advanced area of our business in fiscal 2024, particularly as we accelerate our cross selling efforts.

We're making traction with our greenfield expansion initiatives and continue to develop new approaches to best serve our embedded customer base and further enhance our market position <unk>.

Including through proprietary turnkey solutions and leading application expertise.

We see significant potential to further scale this platform into fiscal 2024 and beyond.

With both M&A and organic initiatives.

Given these dynamics and the strong performance in fiscal 2023, we're increasing our intermediate financial targets with our sales objective now over five 5 billion and EBITDA margins over 13%.

We believe these objectives are well within the company's capability and can be achieved within the next five years or sooner depending on broader macro conditions, the cadence of M&A and other factors.

Overall, our team is engaged and ready to execute on these next milestones, which we believe provide the framework for significant value creation for all stakeholders.

Once 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. If you would like to ask a question. Please pickup your handset press one followed by the four on your telephone keypad. If you would like to withdraw your question from the queue. Please press the one followed by the three.

As a reminder, if at anytime you need to reach an operator, Please press star zero.

We'll pause for just a moment to compile the Q&A roster.

Okay.

Our first question comes from David <unk> with Baird. Please proceed.

Thank you good morning, guys.

Good morning.

First question is related to.

Capital allocation. So I believe you still have one 5 million shares available under the current authorization.

Maybe more broadly could you talk philosophically about share repurchase just given the state of the economy or leverage ratios in the state of your acquisition pipeline.

Sure.

In terms of rank order, we've talked about it before you know certainly our first priority is going to be organic investment you saw more significant organic investment in the business in the past year in fiscal 'twenty three anticipated that in 24, as well really focused around continuing to build out capabilities in the engineered solutions side of the business.

So an active M&A pipeline.

Could you see us drive significant shareholder value with the bolt on acquisitions.

Very much.

In line of sight for fiscal 'twenty, four but as we make reference in the.

The earnings release and in the script.

In addition to kind of continue to be a dividend payer with the tracker.

Track record of 14 years of increases we would expect to be a bit more active in terms of share buyback just given cash position low leverage levels and you can bet that near term view on the cash generation characteristics of the business and you were well set up to drive continued significant cash flow as you think.

About you know moving through 'twenty four bleeding off some of these still slightly elevated work in process inventory levels and continue to see the improvement in the profitability of the business. So expect us to be a bit more active there in terms of share buyback as we move through 'twenty four.

Yeah. It seems like a big opportunity your your debt levels are down, but almost a turn and a half over the past two years and it really hasnt constrained as it relates to acquisitions it seems like with.

A billion and a half as availability muscle shuffle, a couple of hundred million dollars.

Towards repurchase in addition to everything else you're doing but.

Is it am I.

Right in assuming that your guidance currently I think you said it does not include any.

Unannounced acquisitions, but are we also right to assume it doesn't include any other form of capital redeployment outside of just investments in operations and Capex. That's correct. The other guys would be normal course of business for the existing operations. So would exclude the incremental M&A that would be upside opportunity.

Nor anything unusual in terms of capital allocation.

Yeah Okay.

And then second.

Maybe you could give us an update on customer receptivity towards your discrete automation applications.

More specifically.

Maybe you can give us some examples of some of the top sort of replicable solutions that you are seeing success with today.

Yesterday I can start.

I think from the numbers in the quarter, we were pleased.

Teams are active.

Our sales engineers and application specialists.

Specialist engaging with customers and our real focus is understanding their operations and how we help solve.

Although there are problems.

And then think about applications that can be replicated we would see interest in projects and conversion around collaborative robots and machine tending, which can help customers with labor.

We would see applications in use of vision systems, where customers would apply them for quality control enhancements or perhaps also address some labor challenges of constraints when those previously were perhaps.

Manual inspection versus using technology.

We can see trends in consumer packaging right Theres high standards on consumer packaging on accuracy and labeling and of course bar coding as those go through more retail environments and so there's a high requirement there and so we see a vision systems that can get applied into that.

So they they continue to grow we look at how we can set up some of these product tie solutions, which we think helps our service center teams identify those opportunities and then connect with our application resources to increase that that conversion rate and you know we've made reference.

Two there's more projects in the pipeline there, but I'm also encouraged by our automation team continuing to grow and there are targeted to vertical segments and with our current customers as well as prospects and targets they have.

And also I was really good thanks Neal.

Thank you.

Okay.

Our next question comes from Ken Newman with Keybanc capital markets. Please proceed.

Hey, good morning, guys.

Alright.

Curious if you could just talk a little bit more about the.

And then the organic sales guide, particularly for the back half.

I know, obviously, we've heard a bit more about customer destocking across a lot of industrial distributors. This quarter. The supply chain has normalized but obviously you are a bit more break fix.

Relative to a lot of your peers.

Any way you can kind of quantify what you've seen from a destock perspective, this quarter and how do you expect that plays out in the back half of 'twenty four.

So again, we've talked about it I think.

At times, I think given the technical nature of our products the random break fix demand oftentimes many of those.

A little more customized solutions, we do not get a favorable lift from stocking.

And then therefore.

I think we get some natural resistance to Destocking trends are our customers are really counting on us given those break fix requirements around those products and solutions. So I won't say, it's no zero as it goes but it's much lower than other forms of products and consumables in that front.

So you.

As we think about the environment and the guide right. Our focus is pay will be prudent to.

To some of the cross currents or the trends or publications, but we also have a strong focus on our customers and those opportunities in our our sales effectiveness that we can operate to continue to perform in any environment.

Right.

Thanks.

And then in the past.

I think you've talked a little bit more about your macro assumptions that underlie the full year outlook.

Curious if you can.

Sure what youre assuming.

For industrial production or capacity utilization at the midpoint of the guide for this year.

Yeah. So that's starting to say right, we're not perfect economist as we as we think we'd like to say, we're a we're more focused on I hope to be better operators that that then economists, but if I think about guiding.

Guidance I would say to your question then around the midpoint.

We would assume a kind of a low single digit year over year.

Declines in the first half.

And then perhaps in the second half more muted or just a slight contraction.

The market in the in the second half.

Understood.

I can just squeeze one more in.

I wanted to talk about the low end of the guide you know obviously it assumes it assumes higher margin and an ETF with flat sales.

Maybe just talk a little bit more about marketing the various drivers of that margin expansion in that scenario.

How much of that is going to be from a mix shift versus cost out initiatives any any help there would be.

We appreciate it.

So as we think about it and we've touched on we believe we continue to have.

Gross margin opportunities and the multiple initiatives or focus areas that we have there and so we'll continue.

To appropriate actions are in focus around an execution point of sale as we think about customer mix.

That in a slowing environment could be perhaps a little bit of headwind right. We will continue to work and serve local accounts, but they may be the ones that are impacted or feel that softness a little bit more than more large national accounts, we will continue to sell.

Technical solutions, which helped positive on the mix side and then we will work the other other level levers as well on the gross margins I think we've demonstrated.

Ongoing cost accountability in the business, there's some natural shock absorbers.

That would would go in if there is softness that go into play and so those would help our benefit and then as I think about the business overall.

And LIFO.

Do we think about perhaps LIFO in the first half but.

<unk> that could get to at or slightly below 8 million a quarter at least for the first half for the second half, we will see to be determined but that could be a slight contributor as well.

Very helpful. Thanks, guys.

Ladies and gentlemen, as a reminder to register a question. Please press the one followed by the four on your telephone keypad.

Our next question comes from Chris Dankert with loop capital. Please proceed.

Hey, good morning, guys. Thanks for taking the question.

Good morning, I guess thinking about the guide for fiscal 'twenty. Four here are we assuming kind of a turn to a much more typical pricing dynamic where it's modest so maybe like a 1% contributor or something in that ballpark.

Yes.

Yeah, we saw some of that subside that mid single digit go too low.

Low double or low single digit here in the most recent quarter. So yes, I mean, especially as we've worked through the year against some of the comps you know I'd expect that to be you know very low single digit.

Modest inflationary assumptions continuing across the year that we would react to in the form of price as well as other you know kind of our margin expansion initiatives. So not a big contributor at least is.

On a year over year basis compared to what we saw in 'twenty three.

Yeah, no that's good to kind of see kind of a return to something more more normal I guess.

And then maybe just on the backlog side of things how should we be thinking about the impact of.

Backlog growth in the near term are we assuming that you know of engineered solutions benefits from that in 24 kind of outgrows. The service center business kind of what we're looking at the guide overall.

Yeah, I would say that the start we would think about in the first half that the service center business will continue to do well our U S Service Center business, having strong performance right now.

I think some of the overall a little bit of a slower start and perhaps Canada, and Mexico and that could blend they over an overall number down a little bit, but I would say in the two and you know what.

Have expectations for performance, but our service centers could be a little stronger as I think about the backlog that's predominantly in our fluid power segment within that engineered solutions and while flow control and automation have and we did see a little bit of growth in that in the quarter.

Biggest area that we care.

Backlog is around fluid power, a nice conversion in the quarter and we're still operating at good levels on backlog I would say really at two <unk> normalized levels. So we view that as positive and can provide us some underlying strength as we go forward and really the <unk>.

First half of this fiscal year.

Got it thanks, so much for the color and best of luck in the new year guys.

Thanks, Chris.

At this time I'm showing we have no further questions I will now turn the call back to Mr. Cruncher for any closing remarks.

I just want to thank everyone for joining us today, and we look forward to talking with many of you throughout the quarter.

<unk>.

Ladies and gentlemen, this does conclude today's conference you may now disconnect your lines have a great.

Have a great day everyone.

Yeah.

Okay.

Okay.

Okay.

Okay.

Yes.

Yes.

Uh huh.

Yes.

[music].

Okay.

Okay.

Okay.

Uh huh.

Okay.

Uh huh.

Uh huh.

Uh huh.

Okay.

Sure.

Yes.

Uh huh.

Okay.