Q2 2024 Applied Industrial Technologies Inc Earnings Call
Okay.
Welcome to the fiscal 2024 second quarter earnings call for applied Industrial technologies. My name is Rob 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 <unk>.
Rob: One on your telephone keypad.
Rob: You're asking a question lift your handset to ensure the best audio quality if at any time during the conference call you need to reach an operator, Please press star zero.
Rob: Note that this conference is being recorded I will now turn the call over to Ryan Cieslak director of Investor Relations.
Ryan Cieslak: And Treasury Ryan you may begin.
Ryan Cieslak: Okay. Thanks, Rob and good morning to everyone on the call. This morning, we issued our earnings release and supplemental investor deck detailing our second quarter results.
Ryan Cieslak: 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.
Ryan Cieslak: All forward looking statements are based on current expectations subject to certain risks and uncertainties, including those detailed in our S E SEC filings actual.
Ryan Cieslak: Actual results may differ materially from those expressed in the forward looking statements.
Ryan Cieslak: 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.
Speaker Change: Our speakers today include Neil Schrimsher applies President and Chief Executive Officer, and Dave Wells, Our Chief Financial Officer.
Neil A. Schrimsher: That I will turn it over to Neil.
Neil A. Schrimsher: Thanks, Ryan and good morning, everyone. We appreciate you joining us as usual I'll begin with some perspective and highlights on the key drivers of our results, including an update on industry conditions as well as expectations going forward, Dave will follow with more detail on the quarter's financials and.
David K. Wells: Provide additional color on our outlook and guidance and then I'll close with some final thoughts.
David K. Wells: Overall, our team continues to execute at a high level, which was apparent in the second quarter, considering ongoing normalization in industrial activity industry wide.
Dave: Of note sales exceeded our expectations and held relatively firm over the prior year on an organic basis, despite facing our most difficult quarterly growth comparison of the year.
This was with continuing muted demand within the technology sector as we highlighted last quarter.
Dave: Nonetheless, we sustained margin expansion and earnings growth against this backdrop.
Dave: Part of this performance reflects normalizing LIFO expense that is providing a clear view of our underlying margin progress and earnings profile as well as sustained operational execution and lower interest expense.
Dave: Results include some temporary mix headwinds, which Dave will discuss in more detail in a moment as well as ongoing investments supporting our growth potential moving forward.
Dave: In addition, we generated solid cash flow during the quarter that puts us on track for a record cash generation year.
Dave: This is inclusive of ongoing investment in working capital year to date as we continue to support our growth opportunities.
Dave: While strong cash flow has always been a hallmark of our business. We believe our cash generation potential has been enhanced by our expanding margin profile ongoing efficiency gains and working capital initiatives.
Dave: This positive trend, that's augmenting our growth capacity and capital deployment opportunities moving forward.
Ryan Cieslak: This was demonstrated in the second quarter, we started to buy back some of our shares.
Ryan Cieslak: We also announced a 6% increase in our dividend this morning.
Ryan Cieslak: And we have ongoing scope for additional buybacks for the remainder of fiscal 2024 based on our current cash position and the intrinsic value across our company long term.
Ryan Cieslak: In addition, our M&A pipeline and related due diligence activity continues to increase.
Ryan Cieslak: We remain disciplined and tailored with our approach, but see a productive backdrop that should accelerate M&A activity in the coming quarters.
Ryan Cieslak: As it relates to the underlying operating environment, we continue to see normalization in customer activity across areas of our business is in markets recalibrate around stabilizing supply chains and higher interest rates.
Ryan Cieslak: This has presented a more muted growth environment near term, which is consistent with broader macro indicators, including year over year contraction in U S. Industrial production during the second quarter as well as sub 50 P. M. I readings the past 14 months.
Ryan Cieslak: Combined with difficult prior year comparisons, we saw slightly more mixed trends out of our top 30 in markets. During the quarter were 18 generated positive sales growth year over year compared to <unk> 22 last quarter.
Growth was most favorable across food and beverage.
Ryan Cieslak: Mining refining pulp and paper and transportation verticals during the quarter offset by declines in areas, such as machinery energy and rubber and plastics.
Ryan Cieslak: In addition, we continue to face a headwind from reduced activity across the technology sector, which we estimate negatively impacted year over year organic growth by over 100 basis points in the quarter, including over 400 basis points within our engineered solutions segment.
Ryan Cieslak: Similar to last quarter.
Ryan Cieslak: The technology sector has adversely impacted our year over year sales performance the past four consecutive quarters at this point.
Ryan Cieslak: That said sales tied to this key end market have stabilized and related orders were up over 10% sequentially in the second quarter.
Ryan Cieslak: Prior year comparisons also ease moving forward and so while uncertainty remains these dynamics make us increasingly constructive on this key growth vertical including the positive impact it can have on our underlying year over year sales performance as we progress through.
Ryan Cieslak: The second half of fiscal 2024 and into fiscal 2025.
We also continue to see positive momentum across many areas of our business in the U S. This includes sustained growth across our service center and our flow control operations as well as core industrial and mobile fluid power business.
Ryan Cieslak: During the quarter related sales across these areas on a combined basis were up by a low single digit percent over the prior year during the quarter and up over 25% on a two year stack basis.
Ryan Cieslak: Within our service Center segment, we saw strong growth across larger national accounts and fluid power aftermarket sales during the quarter.
Ryan Cieslak: Our sales initiatives continue to drive new growth opportunities as we leverage technology investments to streamline our sales processes.
And enhance our use of analytics within our service Center network.
Ryan Cieslak: Utilization of our proprietary sales management tools continues to increase which is driving greater account penetration market intelligence and speed to market around new growth opportunities.
Ryan Cieslak: In addition, our service center segment is exposed to more secular and company specific tailwind today than in prior cycles.
Ryan Cieslak: Providing a greater level of sales support in the current muted industrial environment as well as representing a powerful growth multiplier as underlying industrial activity Reaccelerate.
Ryan Cieslak: Within our engineered solutions segment, our mobile and industrial fluid power OEM and engineered solutions sales continue to benefit from a healthy backlog with related sales up by a mid single digit percent over the prior year during the quarter.
Ryan Cieslak: Underlying demand in this area of our business remains relatively firm with related orders up sequentially from the first quarter.
Ryan Cieslak: Technical and engineering capabilities are in greater demand for mid tier Oems as they faced rapid innovation and accelerate integration of advanced features into their equipment.
Ryan Cieslak: In addition were integral to our customers' sustainability initiatives from enhancing the overall efficiency and lifecycle of hydraulic systems and power units to.
Ryan Cieslak: Helping design and integrate new electrification features within fluid power systems.
Ryan Cieslak: Further capital spending on process infrastructure remains firm across our flow control operations.
Ryan Cieslak: New business tied to our customers' de carbonization and the energy transition efforts remains high with related orders on a strong trajectory heading into the second half of our year.
Ryan Cieslak: As the largest distributor of process flow control solutions in the U S. We are uniquely positioned to support our customers de carbonization initiatives.
Ryan Cieslak: This includes providing technical support for the configuration Assembly and testing our process systems for carbon capture and storage as well as producing alternative fuel sources.
We did see some modest slowing in everyday MRO activity across our flow control operations late in the quarter.
Ryan Cieslak: So we believe this was primarily related to temporary and seasonal factors.
Ryan Cieslak: Further we remain positive on our underlying fundamentals and strategic growth initiatives across our automation business.
Ryan Cieslak: While automation sales declined over the prior year during the quarter as expected.
Ryan Cieslak: Part of this reflects a very tough comparison from a record second quarter of system shipments last year.
Ryan Cieslak: That said sales were up by mid teen percent on a sequential basis order trends are improving and comparisons get easier in the second half.
Ryan Cieslak: Supply chain headwinds in this area of our business are improving as well potentially augmenting system shipment activity moving forward.
Ryan Cieslak: In addition customer interest in our advanced automation solutions remains positive with our sales funnel and pre sales engineering activity remaining active including greater cross selling opportunities developing at some of our top National Service Center customers.
Ryan Cieslak: We're also making progress expanding our automation footprint and growth capacity moving forward. This includes ongoing progress with our greenfield initiatives.
Ryan Cieslak: A facility expansion in the Pacific Northwest.
Ryan Cieslak: And an active M&A pipeline focused on targets across North America.
Ryan Cieslak: Overall, we've worked extensively over the past five years to establish our automation platform with leading engineering and application expertise.
<unk> next generation technologies that have a significant and growing addressable market.
Ryan Cieslak: We've developed strategic supplier relationships and brought together top engineering talent and leadership that have solidified our market position as a preeminent value added distributor and solutions provider.
This advanced area of industrial technology.
Ryan Cieslak: We look forward to seeing this business scale further over the next couple of years and become increasingly accretive to our consolidated organic growth and margin profile.
Ryan Cieslak: Overall the business overall, the progress we continue to make across our core operations and emerging solutions remains encouraging.
Ryan Cieslak: Particularly when considering ongoing inflationary pressures.
Ryan Cieslak: We believe part of this reflects structurally higher inflation across the industrial sector as the industry faces technical labor constraints required technology investments and sustainability initiatives.
Ryan Cieslak: Re shoring activity in required infrastructure investments will also remain key considerations for inflation moving forward.
Ryan Cieslak: These dynamics are apparent in the ongoing supplier price increases we continue to manage through.
Ryan Cieslak: While having moderated from heightened levels seen the last two years, the overall number and magnitude of supplier price updates year to date remains elevated compared to historical levels.
Ryan Cieslak: As always we remain strategic with our approach as we recognize the important role we play in the critical areas of the industrial supply chain. This includes helping our customers mitigate inflationary pressures by delivering value added solutions and reducing their owning and operating.
Ryan Cieslak: Expenses.
Ryan Cieslak: As well as by leveraging our scale and leading technical capabilities to help drive and monetize their growth potential.
Ryan Cieslak: Within an increasingly technical and labor constrained industrial complex, our value proposition is more relevant than ever across the industrial channel and our applied team continues to stand out with their top tier execution and service.
Dave: At this time I'll turn the call over to Dave for additional detail on our financial results and outlook.
Dave: Thanks, Neil just as a reminder, consistent with prior quarters, we have posted a quarterly supplemental investor presentation to our Investor site, where you just don't reference as we recap our most recent quarter performance.
Dave: Turning now to details of our financial performance in the quarter consolidated sales increased one 6% over the prior year quarter.
Dave: Acquisitions contributed 140 basis points and foreign currency translation had a positive 30 basis point impact.
Dave: The number of selling days in the quarter was consistent year over year.
Ryan Cieslak: Netting these factors sales declined a modest <unk>, 1% on an organic basis.
As it relates to pricing, we estimate the contribution of product pricing on a year over year sales growth was in the low single digits for the quarter and slightly below last quarter.
Ryan Cieslak: Turning now to sales performance by segment as highlighted on slides seven and eight of the presentation sales in our service Center segment increased 1.4% year over year on an organic basis.
Ryan Cieslak: Excluding a one 6% positive impact from acquisitions, and a 4% positive impact from foreign currency translation.
Ryan Cieslak: Growth was strongest across our U S Service Center network and M. S. S consumables business, partially offset by more muted sales trends across our international operations.
Ryan Cieslak: Segment operating income increased 6% over the prior year, while segment operating margin of 12, 5% was up 28 basis points year over year.
Ryan Cieslak: Within our engineered solutions segment sales decreased 2% over the prior year quarter. This includes a positive one point of growth from acquisitions.
Ryan Cieslak: The organic basis segment sales decreased 3% year over year, which was largely in line with our expectations.
Ryan Cieslak: As mentioned earlier and highlighted last quarter segment growth continues to be adversely impacted by current technology end market demand, which negatively impacted the year over year change in segment sales by approximately 400 basis points in the quarter consistent with the last quarter's impact.
In addition sales within our automation operations declined over the prior year on an organic basis the.
Ryan Cieslak: The decline was in line with our expectations and partially reflects more normalized sales of engineered solutions. This year.
Ryan Cieslak: Louise outside shipment activity last December.
That said automation sales were up sequentially during the quarter and we're seeing encourage you to order trends out of the strategic growth area.
Ryan Cieslak: Reduced sales across the technology sector, and our automation operations were partially offset by sustained growth across our industrial and off highway mobile fluid power solutions and our process flow control operations.
Ryan Cieslak: Segment operating income declined approximately 1% over the prior year, while segment operating margin of 14, 7% was up 16 basis points from prior year levels.
Ryan Cieslak: Yeah.
Ryan Cieslak: Moving to gross margin performance as highlighted on page nine of the deck gross margin of 29, 4% increased 34 basis points compared to the prior year level of 29, 1%.
Ryan Cieslak: During the quarter, we recognized LIFO expense of $3 $4 million compared to $8.9 million in the prior year quarter.
Ryan Cieslak: This net LIFO tailwind had a favorable 51 basis point year over year impact on gross margins during the quarter.
Ryan Cieslak: Normalizing LIFO expense is directionally in line with our expectation Hollywood abnormally high levels over the past several years driven by the broader inflationary backdrop.
Ryan Cieslak: In addition, we estimate gross margins in the second quarter include 20 to 30 basis points of unfavorable mix impact compared to prior year levels.
Ryan Cieslak: This primarily reflects lower engineered solution segment sales as well as strong national account sales growth and a lower mix of automation and engineered solutions compared to the prior year.
Ryan Cieslak: Overall, we continue to manage broader inflationary dynamics well through our ongoing focus on various gross margin countermeasures and initiatives, including enhanced analytics, great expense management and channel execution.
Ryan Cieslak: As it relates to operating cost selling distribution and administrative expenses increased three 5% compared to prior year levels.
Ryan Cieslak: SG&A expense was 18, 8% of sales during the quarter up from 18, 4% during the prior year quarter.
Ryan Cieslak: On an organic constant currency basis, SG&A expense was up approximately 1% over the prior year period.
Ryan Cieslak: We had some modest deleveraging in the quarter as expected given the beauty sales growth, we saw though we contingent age costs well as we balance expense controls against our growth initiatives and constructive outlook as well as face ongoing inflationary pressures.
Ryan Cieslak: SG&A expense. This quarter also includes higher deferred compensation cost as a reminder, fluctuations of deferred compensation cost in SG&A are primarily driven by market values of investments tied to our nonqualified deferred compensation plan.
There was a corresponding offset to these fluctuations in the other income and expense, which we report below operating income.
Ryan Cieslak: This offset in the quarter was a $2 $9 million gain reported in other income.
Ryan Cieslak: So overall factory for these dynamics, we are holding underlying operating costs relatively flat highlighting a solid performance and execution.
Ryan Cieslak: Combined with gross margin management, and lower LIFO expense reported EBITDA increased four 2% over prior year levels during the quarter, while EBITDA margin of 12, 1% increased 31 basis points year over year.
Ryan Cieslak: We also continue to benefit from lower net interest expense, which was down over $4 million from the prior year and primarily reflects reduced debt levels and greater interest income from higher cash balances and investment yields.
Ryan Cieslak: Taken together adjusted earnings per share of $2.24 was up over 9% from prior year levels.
Ryan Cieslak: As highlighted in our press release adjusted EPS in the quarter excludes a tax benefit of $3 million or <unk> <unk> per share, resulting from the release of deferred tax valuation allowance within our Mexico operations.
Moving to our cash flow performance cash generated from operating activities. During the second quarter was $101.8 million, while free cash flow totaled $96 $2 million or 109% of adjusted net income.
Ryan Cieslak: Compared to the prior year free cash was up over 73% and it had a record second quarter level, reflecting higher earnings stabilizing working capital investment and ongoing working capital initiatives.
Ryan Cieslak: From a balance sheet perspective, we ended December with approximately $413 million of cash on hand, and net leverage at three times EBITDA, which is below the prior year level of 1.0 times.
Ryan Cieslak: Our balance sheet is in a strong position to support our capital deployment initiatives moving forward as well as enhanced returns for all stakeholders.
Ryan Cieslak: Our capital deployment priorities remain consistent with organic growth and acquisitions, our primary focus areas.
Ryan Cieslak: In addition, our strong cash generation is allowing us to deploy capital in other areas including share repurchases.
Ryan Cieslak: During the second quarter, we repurchased 63000 shares for approximately $11 million.
Ryan Cieslak: Turning now to outlook as indicated in today's press release and detailed on page 11 of our presentation. We are updating full year fiscal 2024 guidance to reflect second quarter earnings performance and our current second half outlook.
Ryan Cieslak: We also expect lower net interest expense, partially offset by higher depreciation and amortization expense assumptions.
Ryan Cieslak: Specifically, we now project adjusted EPS in the range of $9 35 to $9 70 per share based on sales growth up 123%, including the zero to 2% organic growth assumption is.
Ryan Cieslak: As well as EBITDA margins of 12.1 to 12, 3%.
Ryan Cieslak: Previously our guidance assumed EPS of $9 25 to $9.80 sales growth of 1% to 4% and EBIT margins of 12 to 12, 3%.
Ryan Cieslak: Our sales outlook continues to take into consideration economic uncertainty and assumes underlying industrial activity continues to gradually moderate near term.
Ryan Cieslak: In addition, based on sales trends in January we couldn't predict fiscal third quarter organic sales to be flat to down by a low single digit percent over the prior year quarter.
Ryan Cieslak: Our updated guidance assumes that year over year technology vertical headwinds persist for the balance of the year.
Ryan Cieslak: Sales growth in our automation operations remains relatively muted near term considering ongoing uncertainty around the cadence of shipment timing.
Ryan Cieslak: Overall, while we remain constructive on our setup moving forward considering the easier prior year comparisons and sustained benefits from our internal initiatives. We believe it remains prudent to take a balanced approach to our near term outlook. They need more definitive signs of a positive inflection in macro conditions and underlying industrial.
Ryan Cieslak: Pro activity.
Ryan Cieslak: Lastly from a margin perspective, we expect third quarter gross margins to increase slightly sequentially and third quarter EBITDA margins to be flat to up slightly over the prior year.
Ryan Cieslak: These assumptions take into account the potential expense deleveraging near term on modest organic sales declines as well as ongoing inflationary headwinds and growth investments and our annual Merit increase which was effective January one.
Ryan Cieslak: <unk> by lower LIFO expense compared to the prior year.
Ryan Cieslak: We are also assuming mix headwinds persist to some degree in the third quarter, but start to subside into the fourth quarter.
Ryan Cieslak: With that I will now turn the call back over to Neil for some final comments.
Neil: Thanks, Dave so to wrap up I'm proud of the applied team and our performance through the first half of fiscal 2024.
Neil: We're delivering on our commitments and making strong progress towards that towards our interim financial objectives of $5 5 billion of revenue and 13% EBITDA margins.
Neil: Near term, we expect the underlying demand environment to remain muted as customers settle into the new year and operate at a steady pace pending a more defined direction on the economy.
Neil: This is partially reflected in January sales trending down an estimated low single digit percent on an organic basis over the prior year.
Ryan Cieslak: I would note this is against an over 20% prior year comparison, as we experienced higher than normal scheduled maintenance activity and capital spending from our service center customers last January.
Ryan Cieslak: And weather is also having a negative year over year impact on January to date sales.
Ryan Cieslak: That said I remain constructive on our set up moving forward given the potential for Reaccelerate sales and earnings growth as the second half of fiscal 2024 plays out and into fiscal 2025.
Ryan Cieslak: This considers several positive dynamics, including prior year comparisons, becoming less difficult particular across our operations tied to the technology vertical we.
Ryan Cieslak: We also believe break fix activity could reaccelerate across our service center network into the spring and summer as production schedules ramp back up following the recent operational reset and some deferred maintenance activity over the past several quarters.
Ryan Cieslak: Incremental infrastructure spending and related stimulus should further support our sales momentum with many of our top 30 in markets tied either directly or indirectly to this mega trend.
Ryan Cieslak: In addition, we expect technical MRO and capital spending requirements to remain heightened as customers modernize equipment and expand production facilities to meet a multiyear secular growth cycle across North America. That's just beginning we see many powerful forces influencing this.
Ryan Cieslak: Trend, including greater evidence of reassuring to North America over the past year.
Ryan Cieslak: Aged inventory industrial infrastructure and strategic actions to reduce energy consumption across industrial capacity.
Ryan Cieslak: Our technical domain expertise and access to core industrial equipment puts us in a leading position to help customers manage through these operational requirements.
Ryan Cieslak: We also continue to invest to support our long term growth.
Ryan Cieslak: This includes expanding facilities in our engineered solutions segment to position for meaningful growth potential we see across the technology sector and are scaling automation operations.
Ryan Cieslak: In addition, we're making investments in advanced machining.
Ryan Cieslak: Oh T offerings and engineering talent in our fluid power operations.
Ryan Cieslak: Other examples include investments in underlying business intelligence systems, which are driving faster and more streamlined access to data and more robust business capabilities that align with our suppliers and customers growing service expectations.
Ryan Cieslak: Lastly, we continue to augment our local technical market approach with investments in digital and E Commerce channel capabilities, including targeted that dates to apply dot com that will go live in the coming months.
Ryan Cieslak: Overall these are just some of the examples of the ongoing investments, we're pursuing to strengthen our industry position and extend our ability to generate outsized organic growth and continue to enhance our returns on capital long term, we look forward to showcasing this potential in the quarters and years to come.
Ryan Cieslak: As always we thank you for your continued support and with that we'll open up the lines for your questions.
Ryan Cieslak: Thank you we will now begin the question and answer session. If you would like to ask a question. Please pickup your handset press star followed by the number one on your telephone keypad. If you would like to withdraw your question again prestige Star one as a reminder, if at any time you need to reach an operator. Please press star zero, we'll pause for just a moment to compile.
Ryan Cieslak: The Q&A roster.
Ryan Cieslak: Okay.
Ryan Cieslak: And your first question comes from the line of David Manthey from Baird. Your line is open.
Ryan Cieslak: Thank you good morning, guys good morning.
Ryan Cieslak: Thanks.
Ryan Cieslak: So typical execution in a tough environment.
Should we assume that the upside versus the downside of your guidance range is mostly based on timing.
Ryan Cieslak: Timing and the magnitude of MACRA outcomes here because they view you mentioned in your outlook that you were assuming the industrial market continues to moderate.
Ryan Cieslak: In the near term and you cited weakness in January which is consistent with what we're hearing from others, but.
<unk> Wen does your guidance assume that the macro bottoms out and starts to improve here.
Ryan Cieslak: So we'd say you know Q3 here again, you essentially down low single digits to flat.
Ryan Cieslak: And that does assume that that that continued moderation I think we've got some things we think about secular tailwind in some of the other drivers as well as some some opportunities in terms of shipment timing that are still somewhat unclear on the automation side I'd say, we'd start to see you know kind of assume a bit of a recovery in Q4.
Ryan Cieslak: But obviously continue to be very optimistic for our position the secular tailwind benefit us and the opportunities in front of us as we move into our fiscal 'twenty five.
Mhm.
Ryan Cieslak: Okay.
Ryan Cieslak: And.
Ryan Cieslak: Could you tell us what the revenues of our bearing distributors in Canberra were in the second quarter and.
Ryan Cieslak: Were those about as expected for you.
Ryan Cieslak: Those were about as expected you know that added about 140 basis points of growth to the service Center segment as we had indicated in the script.
Ryan Cieslak: Yep Yep Yep, Okay, and then.
Ryan Cieslak: David following up on the.
David: Can you just talk about the source of other income that $2 9 million and how we should think about modeling it had.
David: Yeah sure here again, that's really the offset that you're seeing to the the hit we would've taken an S. DNA in terms of that that deferred comp.
David: The impact of fluctuations in the investments related to our deferred comp plan. So a net neutral from the overall P&L standpoint.
Ryan Cieslak: But a good guy in other income a hit to SG&A. So you see here again, you start to normalize that SG&A spend for the year.
Ryan Cieslak: Organic view of the World and then strip out some of that noise, which is are you not.
Ryan Cieslak: Not operational spend essentially flat so youre getting that's all driven by you know changes in investment returns on that deferred comp plan.
Ryan Cieslak: And that should happen next quarter.
Ryan Cieslak: It Yeah, I can't say that obviously it depends on what happens to the market largely market driven in terms of the impact there plus or down it can go either way, obviously, but once again, a net neutral to the P&L.
Ryan Cieslak: Got it okay I'll get back into queue. Thanks, guys.
Ryan Cieslak: Thanks, Dave.
Ryan Cieslak: Your next question comes from the line of Chris Dankert from Loop capital. Your line is open.
Chris Dankert: Hey morning, guys. Thanks for taking the question.
Chris Dankert: I guess first off you know as we're looking into a back half of the fiscal year here are you expecting.
Chris Dankert: Sales growth to be fairly similar to kind of service center sales growth.
Chris Dankert: And then the back half and I assume that's part of why that mix headwind improves sequentially into the third quarter here.
Chris Dankert: Yeah, we would expect the gap to close in the second half and be more similar though we could see the service centers be above, but perhaps the rate of improvement in the engineered solutions to be higher in the back half.
Chris Dankert: Got it got it that's helpful.
Chris Dankert: And then I think the implicit guide you guys have given on the third quarter is a little bit softer than at least I was expecting particularly with seasonality in your favor is it really that that technology piece is still driving some of the caution or is it broader than just technology here.
Chris Dankert: But I think one we wanted to take a prudent approach as we come into it right, where we're mindful of.
Chris Dankert: January but its early still in the month on that side and just our view on market assumptions for the second half as earlier would be kind of the low single digits.
Chris Dankert: From a market conditions down.
Ryan Cieslak: With that improving as we get into the.
Ryan Cieslak: The fourth quarter in the side, so really it's a it's a prudent approach as we go through obviously, we're gonna be working initiatives.
Ryan Cieslak: To be better.
Ryan Cieslak: Got it makes it makes sense makes sense.
Ryan Cieslak: And then maybe just last for me.
Ryan Cieslak: You cited some of the internal sales initiatives and growth opportunities, obviously, and we're aware of automation and some of the advanced technology piece or anything else you'd call out as kind of the.
Ryan Cieslak: Sometimes that's exciting you in terms of those internal sales initiatives and kind of what you're looking at internally to kind of juice growth little bit here.
Ryan Cieslak: I think they really go across the across the business I think the work in the.
Ryan Cieslak: In the service center on sales process use of data the execution of that side.
Ryan Cieslak: It is very positive.
Ryan Cieslak: They're bringing the cross selling potential of the engineered solutions really in fluid power and flow control and know that ramping opportunity that we have in automation is positive for the service centers for our customers and engineered solutions and then some of the things we've touched on.
Ryan Cieslak: In fluid power not the biggest impact in the next quarter, but we will see more advanced solutions, we will see more electrification, we're making those investments in engineering capabilities and facilities that can help with technology throughput that's going to be positive and then the war.
Ryan Cieslak: That we have a new expanded facility in the Pacific northwest around automation and some of that build out of the capabilities will play well for us we believe.
Ryan Cieslak: As we conclude this fiscal year, but really into the set up for fiscal 'twenty five and beyond.
Ryan Cieslak: Understood. Thanks, a lot for the color there really appreciate it.
Chris Dankert: Alrighty, Chris to the January comps difficult, one where about 20% prior year January so as you think about the context of that.
Chris: Low single digit year to date or January projection.
Chris Dankert: Got it no appreciate that for sure well. Thank you I'll jump back in line here.
Chris Dankert: Your next question comes from the line of Ken Newman from Keybanc. Your line is open.
Chris Dankert: Hey, good morning, guys.
Chris Dankert: Okay.
Chris Dankert:
Speaker Change: On the back of that last question from Chris Here on January I'm, just curious any color on just how the cadence of monthly sales comps from last year kind of progresses through the quarter and 20% plus share in January do we see a pretty substantial step down in that monthly comps starting in February or is that a marsh.
Speaker Change: I have a number.
Ed: Yeah Ed.
Ed: Say directionally I think it would go up roughly February.
15% type of mid teens type increase last year in March still double digit.
Ed: And in that side, so, but that would be the kind of the step down of that cadence.
Ed: And can I just.
Ed: And then into the fourth quarter is where you really start to see the comps.
Become.
Ed: It becomes even more easy.
Ed: Yep.
Chris Dankert: Right that makes sense.
Chris Dankert: No.
Chris Dankert: Our next question here is I guess I'm trying to make.
Ryan Cieslak: The commentary on technology versus the guide for <unk> right, because if I remember correctly, Neil you can imagine.
Ryan Cieslak: Sales in <unk> are up mid teens sequentially. It sounds like the orders they are stabilizing here.
Ryan Cieslak: More stabilizing and into Q, but do you still expect that to be a headwind here, maybe help me square that.
Neil: Comment a little bit and then maybe also some color. If you could just on where in technology are you seeing that biggest improvement in the semiconductor side in that data center consumer electronics any help there would be would be great.
Neil: Sure. So so we think about it right we've talked about.
Ryan Cieslak: The magnitude of the headwind total business, the 100 basis points or in the engineered solutions segment, which is where.
Ryan Cieslak: A predominant amount of the activity would be the 400 basis points in that side just as we look ahead at the cycle of some of those projects or activity in release, we think that trend can continue could continue in the current quarter. This third quarter as we go along if we look back.
Ryan Cieslak: At past cycles.
Ryan Cieslak: They typically are for to maybe five quarters in that site. So we take that as a positive. So it can we think there's a a P.
Ryan Cieslak: Positive influence some relief coming obviously, the comparisons will get a little easier in that as well to help in the second half as I look at it today, probably more start to be fourth quarter impact and then as we go into 'twenty five and so on.
Chris Dankert: Is that we are playing one would be to support our wafer fab equipment and some of those producers providers. Obviously, we can be a little bit ahead of that activity, but I think most are projecting that our reacceleration to occur late in this.
Ryan Cieslak: Calendar year or or into 'twenty, five and so we could get a little earlier there and then we've been active from a data warehouse and cooling systems in a material movement in some of those projects, we would expect that to continue.
Ryan Cieslak: Think that the pace of some of that implementation has been a little uneven and we probably see more of that coming.
Ryan Cieslak: Either potentially in our fourth quarter of this fiscal year or as we get into our 'twenty five.
Ryan Cieslak: And as we said in Canada, we were encouraged though in the quarter regarding the sequential increases that we saw both in order rates and shipments on the automation side of the business.
Ryan Cieslak: It's a very difficult comparison that mass some of that from the prior year. So onto your stack basis still up low double digits organically in that business in the most recent quarter.
Ryan Cieslak: Right no that makes sense.
Hey, one more for me obviously the balance sheet is essentially unlevered.
Ryan Cieslak: And it sounds like you guys are still open for business as it relates to M&A here.
Chris Dankert: Maybe any color on the pipeline and what's your take on potentially tapping the balance sheet or the share repurchases, even more of those deals get delayed.
Chris Dankert: So we are active in from an M&A standpoint to our priorities that we're consistent on and in.
Chris Dankert: In the engineered solutions, so across fluid power and flow control and automation much.
Much like we did in the last quarter.
Chris Dankert: The nice bolt on to the service center. So we'll continue.
Chris Dankert: To look and be active there as well.
I would expect more M&A activity.
Chris Dankert: Fiscal year and as we go into 25 on the side.
Chris Dankert: We were active in share repurchase.
Chris Dankert: We would expect that to continue this fiscal year. The the dividend increase that are that we just announced and then some of the things that we will make while there.
Chris Dankert: Not outsized in the amount, but we have more grew.
Chris Dankert: Growth investments and that can support our organic that we think will be favorable as we go into 'twenty five and beyond and so we will look to continue. So we're we're we're knowledgeable over where we're aware of where we're at we'll continue to work the growth opportunities that we have acquisitions and organic.
Ryan Cieslak: Growth into that side and then.
Chris Dankert: Returned money to the shareholders via the share repurchase and dividend.
Chris Dankert: Excellent thanks for the color.
Okay.
Speaker Change: Your next question comes from the line of David Manthey from Baird. Your line is open.
Speaker Change: Yes, thanks for taking a few more questions here.
David John Manthey: What our MFS revenues today and of those sales what percentage is delivered via vending technology.
David John Manthey: We have not disclosed discretely, Dave the you know kind of the relative contribution of MSS.
Dave: Yeah. There is a component of that business you know that.
Chris Dankert: It does it does the <unk>.
The vending machine.
The equation.
Chris Dankert: Certainly a profitable business for us one that's.
Chris Dankert: Accretive from the mix standpoint, and a nice complement to the position you've got the one stop shopping we provide across the the other industrial solutions. So we can be able to you know to customers. So, but nonetheless piece of the business. We like just do not talk separately and that got disclose what the revenue contribution.
Ryan Cieslak: <unk> is there.
Okay.
Chris Dankert: Fair enough.
Chris Dankert: What percentage of that.
Speaker Change: <unk> sales would you say are capital investments versus expense items from your customers I know that is.
Speaker Change: A number of different verticals within EES and there is probably different.
Speaker Change: Expense capital dynamics there.
Ryan Cieslak: Yeah, that's probably another one just for pure capex.
Ryan Cieslak: We've.
Ryan Cieslak: Talked about individually I would say that it is going to be lower and our service Center segment, and then I think the places that it would show up for us would be around flow control and some of those projects and then perhaps around the automation systems.
Ryan Cieslak: Les and fluid power given some of that work is supporting.
Ryan Cieslak: Oems and their equipment that they are taking forward to the marketplace and that so those are the places I'd say overall.
Dave: Overall, Dave My view is that.
Dave: There is not such a capital project reliance or input into the business that that impacts it through.
Dave: On the service centers are really heavily across the.
Dave: Engineered solutions side of the business.
Dave: Okay. Thanks for that and then last question.
Dave: On inflationary pressures and I hope this is understandable, but when you think about the ratio between your Cogs inflation and the sort of potential.
Dave: Benefits there and then the DNA inflation that you are experiencing in the negatives there is there any.
Dave: Significant difference in that what I would call a spread between those two things are the inflationary pressures that you are experiencing as a company.
Dave: More intense less intense or the same as they were relative to the inflationary pressures that you're enjoying I guess on the topline.
Dave: Yeah, Let me see if I can answer it.
Well a couple of ways.
Dave: A few areas of the consideration I think overall in the quarter I think we touched on right from a price cost standpoint, I'm pleased right slightly slightly positive in that side I think across our business and the operating teams were very mindful on the inflationary inputs to our operating side.
Dave: Of the business.
Dave: And how we help ourselves in use of technology and other tools and shared services and such that can help us and the investments that we talk about are really going to be in engineering talent and forward facing resources that can help.
Chris Dankert: With customers and the customer solutions into that side. So I think overall, we're doing an effective job at the price pricing to value and recognizing the importance of our solutions, especially yet either.
Chris Dankert: Either an engineered solution or at the break fix time.
Chris Dankert: And with that we're also as you.
Chris Dankert: Shared on our SG&A results doing a nice job of cost containment, it's showing up in some different areas of that.
Chris Dankert: Kind of cost stack, but I'd say all in all we're mindful of that we see it coming and are working on the appropriate offsets.
Chris Dankert: I I'd, just remind you too Dave the times, we don't see a bit of a lag in terms of when you see that read through is price realization, specifically, especially as it pertains to some of the activity with some of our larger national accounts, where where there are those contractual arrangements, we've got vendor agreements because they want to participate with us in that business you know too.
Chris Dankert: Absorb and Theres other mechanisms. So that you were still able to grow margins during those inflationary periods.
Chris Dankert: Even during the time, where we're not able to pass on price increases so theres other mechanisms not coming through as price.
Ryan Cieslak: One, but where you would see that offset.
Ryan Cieslak: Before you know, we're able to pass those price increases on so may not be a one for one in terms of when its topline read through versus the impact on Cogs and SG&A.
Ryan Cieslak: Got it alright, thanks, guys.
Ryan Cieslak: 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.
Ryan Cieslak: I just want to thank everyone for joining us today, and we look forward to talking with you throughout the quarter.
Ryan Cieslak: Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Ryan Cieslak: [music].