Q1 2025 Applied Industrial Technologies Inc Earnings Call
Welcome to the fiscal 'twenty 25 first quarter earnings call for applied Industrial technologies. My name is Angela and I will be your operator for today's call. At this time all participants are in listen only mode. Later, we will conduct a question and answer session.
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Speaker Change: Please note that this conference is being recorded I will now turn the call over to Ryan <unk> director of Investor Relations and Treasury Ryan you may begin.
Ryan: Okay. Thanks, Angela and good morning to everyone on the call. This morning, we issued our earnings release and supplemental investor deck detailing our first quarter results.
Ryan: Both of these documents are available in the Investor Relations section of apply Dot com before.
Ryan: Before we begin just a reminder, we will discuss our business outlook and make forward looking statements.
Ryan: All forward looking statements are based on current expectations subject to certain risks and uncertainties, including those detailed in our S. E C filings.
Ryan: 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.
Ryan: 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.
Speaker Change: I'll turn it over to Neil.
Neil Schrimsher: Thanks, Brian and good morning, everyone. We appreciate you joining us I'll start today with some perspective on our first quarter results current industry conditions, and our expectations going forward.
Neil Schrimsher: Dave will follow with more specific detail on the quarter's performance as well as our updated outlook.
Neil Schrimsher: I'll, then close with some final thoughts.
Neil Schrimsher: So a person a few high level comments on first quarter results. Overall are applied team continues to make significant progress on our strategic initiatives during the quarter as we position the company for above market growth and margin expansion in the future.
Neil Schrimsher: Organic daily sales declined 3% over the prior year, but exceeded our expectations on encouraging September trends were.
Neil Schrimsher: So had a record first quarter of free cash generation that nearly doubled from the prior year.
Neil Schrimsher: As expected margin trends were impacted by comparisons and sales declines early in the quarter as well as adverse mix dynamics and the impact of growth investments.
Neil Schrimsher: Margin guidance for fiscal 2025 remains unchanged and we expect margin trends to improve for the balance of the year.
Netting these factors EBITDA came in largely in line with our expectations during the quarter, while EPS benefited.
Neil Schrimsher: From lower tax rate.
Neil Schrimsher: Interest and other income and reduced share count from recent buybacks. So a good start to the year and that we look to build on going forward.
Neil Schrimsher: Digging more into the sales trends in the quarter broader end market demand remained generally mixed.
Neil Schrimsher: This is consistent with industrial macro data points in recent months.
Neil Schrimsher: And resulted in subdued customer activity early in the quarter.
Neil Schrimsher: That said the quarter finished strong with several encouraging trends.
Neil Schrimsher: Of note organic average daily sales during September were seasonally strong and relatively unchanged compared to the prior year.
Neil Schrimsher: While the improvement in September came from several areas. It was led by stronger shipment and order trends in our engineered solutions segment.
Neil Schrimsher: Sales in our U S Service Center operations also improved in September on stronger break fix activity and ongoing benefits from ourselves process initiatives.
Neil Schrimsher: This was partially offset by sustained weakness in machinery end markets, including across our fluid power mobile OEM customers.
Neil Schrimsher: When looking at our top 30 in markets 13 were positive over the prior year, which is slightly below the 14 reported last quarter.
Neil Schrimsher: Growth was strongest across food and beverage.
Neil Schrimsher: Mary metals transportation aggregates and technology during the quarter.
Neil Schrimsher: This was offset by declines in machinery oil and gas lumber and wood fabricated metals pulp and paper rubber and plastics and utilities.
Neil Schrimsher: So while showing signs of an initial recovery the demand backdrop remains bifurcated and somewhat uneven.
Neil Schrimsher: As reflected in some easing in early fiscal second quarter sales trends following september's outperformance.
Neil Schrimsher: Organic sales through the first 16 business days of October are down by a mid single digit percent over the prior year.
Neil Schrimsher: We estimate this includes some modest disruption from recent hurricanes in the southeast.
Neil Schrimsher: We would also highlight the timing of system and solutions shipments in our engineered solutions segment can vary month to month.
Neil Schrimsher: And with nearly a week left in the month and U S election uncertainty now front and center, we hesitate to extrapolate too much from initial October trends, but remain mindful.
Neil Schrimsher: Mindful of ongoing cross currents.
Neil Schrimsher: Digging more into each of our segments average daily sales in our service Center segment declined one 4% organically over prior year levels on top of the stack growth of 25% the prior two years.
Neil Schrimsher: Consistent with last quarter spending on general MRO and capital maintenance projects was more muted as customers continue to tightly manage operational expenses.
Neil Schrimsher: That said sales trends across our core U S Service Center network held in relatively well with September billing seasonally strong on improved break fix and general MRO activity.
Neil Schrimsher: We saw ongoing health across larger national accounts and fluid power aftermarket sales.
Neil Schrimsher: Our service Center team also continues to benefit from our service capabilities local inventory investments and ongoing sales initiatives as well as greater cross selling opportunities.
Neil Schrimsher: Investments in technology, and predictive analytics are continuing to enhance our business intelligence and salesforce productivity.
Over the past five years.
Neil Schrimsher: Sales per U S Service Center associates have increased over 7% on a compounded annual basis.
Neil Schrimsher: We've also enhanced our local market position through bolt on acquisitions made over the past year, which are augmenting growth in new and Underpenetrated vertical markets, while supplementing our margin mix.
Neil Schrimsher: Overall overall, our service center team is in a strong position moving forward, particularly as end market demand reaccelerate within the short cycle and break fix focused area of our business.
Neil Schrimsher: While hard to measure we believe there is some pent up technical MRO demand across various end markets following subdued activity and deferred capital maintenance over the past year.
This could release following the U S election, and if interest rates continue to moderate.
Neil Schrimsher: In addition, our technical expertise across critical capital equipment and production processes combined with our locally focused distribution network is a powerful value proposition for our suppliers and customers as secular trends around re shoring infrastructure.
Neil Schrimsher: Technical labor shortages and energy efficiency gained further momentum.
Neil Schrimsher: Within our within our engineered solutions segment sales declined 6% organically over the prior year <unk>.
Neil Schrimsher: Consistent with last quarter, and our expectations segment sales continued to be impacted by ongoing destocking headwinds and softer end market demand across fluid power mobile OEM customers.
Neil Schrimsher: Flow control and automation sales were also lower over the prior year, reflecting softer trends early in the quarter.
Neil Schrimsher: On a positive note segment sales and orders strengthened as the quarter progressed, including seasonal strength and component and system sales during September.
Neil Schrimsher: Of note segment orders in the first quarter increased by mid single digit percent organically.
Neil Schrimsher: The prior year.
Neil Schrimsher: With the trend strengthening each month.
Neil Schrimsher: This was led by double digit order growth across automation and technology focus fluid power customers, which combined represent over 20% of our segment sales.
Neil Schrimsher: Sales funnel activity and channel commentary are increasingly positive across these higher growth areas of our business. Following an extended period of reduced activity the past couple of years.
Neil Schrimsher: Flow control orders were also up year over year in the quarter as we continued to see healthy project demand tied to de Carbonization and data center investments.
Neil Schrimsher: Overall, we remain measured with our expectations as one quarter does not create a trend.
Neil Schrimsher: These dynamics taken together are nonetheless, an encouraging sign for our higher margin engineered solutions segment.
Neil Schrimsher: We believe segment momentum could build in the second half of fiscal 2025 as customers Reengage capital spending.
Neil Schrimsher: Interest rates potentially ease further and we continue to leverage growth investments tied to our strategy.
Neil Schrimsher: Overall, we are encouraged by positive signs and potential catalyst developing across both our segments. We are continuing to invest and position teams to be fully prepared to serve our customers and suppliers as the next phase of growth unfolds.
Neil Schrimsher: This includes ongoing investments in engineering talent.
Neil Schrimsher: Digital sales tools and e-commerce capabilities.
Neil Schrimsher: We also have expanded into new facilities and invested in advanced tooling and machining capabilities across our engineered solutions segment.
Neil Schrimsher: We've modernized technology systems across our distribution centers, while also updating conveying systems and logistics equipment.
Neil Schrimsher: Our automation platform and footprint is much larger today than it was entering the prior up cycle. This will supplement our potential in this high growth area of our business as adoption of specialized robotics and machine vision accelerates.
Neil Schrimsher: Demand for aftermarket and service support starts to emerge from these next generation automation technologies.
Neil Schrimsher: Further we've invested in fluid power engineering and system build capabilities to serve growing secular demand tied to the modernization of industrial and mobile equipment.
Neil Schrimsher: We're also beginning to leverage AI through our ongoing investments around sales process.
Neil Schrimsher: And AP automation and recruiting.
Neil Schrimsher: These are just some of the many investments we've made to supplement our growth capacity speed the market and operating leverage going forward.
Neil Schrimsher: And then lastly, nearly $2 billion in balance sheet capacity, including over 500 million of cash on hand, our available capital puts us in a strong end to an advantaged position to accelerate our growth and margin potential moving forward.
Neil Schrimsher: This includes both organic investments and accretive acquisitions that further extend our technical service capabilities enhance our business mix and reinforce our competitive moat.
Neil Schrimsher: The evolution of our portfolio through both Greenfield investments and acquisitions in recent years has been highly intentional and disciplined.
Neil Schrimsher: Been a critical driver of our ability to become a faster growing higher margin and more cash generative business.
Neil Schrimsher: While driving a meaningful increase in our returns on capital.
Neil Schrimsher: We remain committed to this focused and returns based approach that centers on serving our customers most critical industrial assets and processes more completely.
Neil Schrimsher: Our M&A pipeline is active across both segments with our primary focus on bolt on and midsized targets, where we can create significant shareholder value long term.
We also have flexibility to return capital through other avenues. This includes share buybacks, considering our positive long term outlook and the underlying intrinsic value, we see across our company as well as ongoing focus on growing our ordinary dividend moving forward.
Neil Schrimsher: Overall, we're targeting greater capital deployment in fiscal 2025 that aligns with our return requirements and strategy.
At this time I will turn the call over to Dave for additional detail on our financial results and outlook.
Dave Wells: Thanks, Neil just as a reminder, before again as in prior quarters, we have posted a quarterly supplemental investor presentation to our Investor site. This is for your additional reference as we recap our most recent quarter performance.
Dave Wells: Turning now to details of our financial performance in the quarter consolidated sales increased 3% over the prior year quarter.
Dave Wells: Acquisitions contributed 200 basis points, while the one extra selling day year over year in the quarter had a positive 160 basis point impact.
Dave Wells: This was partially offset by a negative 30 basis point impact from foreign currency translation.
Dave Wells: Many of these factors sales decreased 3% on an organic daily basis.
Dave Wells: As it relates to pricing, we estimate the contribution of product pricing on a year over year sales growth was approximately 100 basis points for the quarter and in line with our expectations.
Dave Wells: Turning now to sales performance by segment as highlighted on slide seven and eight of the presentation sales in our service Center segment declined one 4% year over year on an organic daily basis, when excluding a 7% positive impact from acquisitions.
Dave Wells: Positive one 6% impact from the difference in selling days and a negative 50 basis point impact from foreign currency translation.
The organic sales decline in the quarter was primarily driven by softer MRO spending and the deferral of capital maintenance projects early in the quarter, which was concentrated across local accounts.
Dave Wells: Sales outside the U S were also weaker over the prior year, though partially offset by continued growth across national accounts and fluid power MRO sales in the U S.
Dave Wells: From a vertical market standpoint doctor to bandwidth most notable across machinery pulp and paper and oil and gas markets, partially offset by ongoing growth within food and beverage primary metals utilities and transportation.
Dave Wells: Segment, EBITDA decreased 2% over the prior year, while segment EBITDA margin of 13, 2% declined 36 basis points over the prior year.
Dave Wells: Within our engineered solutions segment sales increased 2% over the prior year quarter with acquisitions contributing four seven points of growth.
Dave Wells: On an organic daily basis accounting for the difference in selling days segment sales decreased six 1% year over year.
Dave Wells: Consistent with last quarter the year over year decline was primarily driven by a high single digit percent decline in fluid power sales and to a lesser extent softer automation and flow control sales.
Dave Wells: As mentioned earlier fluid power sales continue to be adversely impacted by lower demand across off highway mobile OEM customers, partially balanced by stable trends across industrial implant applications and solutions as well as improving demand and technology related end markets.
Dave Wells: In addition, while lower year over year for the full quarter, both automation and flow control sales returned to positive organic growth through in September.
Segment EBITDA decreased approximately 2% over the prior year, while segment EBITDA margin of 14, 2% was 37 points below prior year levels.
Dave Wells: Reflecting the expense deleveraging on sales declines and ongoing growth positioning in the quarter.
Speaker Change: Moving to gross margin performance as highlighted on page nine of the deck.
Speaker Change: Margin of 29, 6% decreased 10 basis points compared to the prior year level of 29, 7%.
Speaker Change: During the quarter, we recognized LIFO expense of $2 million compared.
Speaker Change: Compared to $4 $6 million in the prior year quarter.
Speaker Change: This net LIFO tailwind had a favorable 24 basis points year over year impact on gross margins.
Speaker Change: Overall, the underlying trend in the quarter was largely in line with our expectation for some near term gross margin easing into early fiscal 2025.
Speaker Change: This partially reflects tougher comparisons including prior year first quarter rebates favorability in our service Center segment as well as LIFO expense favorability during the fourth quarter of last year.
Speaker Change: In addition mix was unfavorable both year over year and sequentially, primarily reflecting outpaced national account growth and lower engineered solution sales.
Speaker Change: Scrap and freight costs were also slightly higher in the quarter, but are expected to normalize going forward.
Speaker Change: We estimate price cost was relatively neutral to the quarter's performance.
Speaker Change: As it relates to operating cost selling distribution and administrative expenses increased three 7% compared to prior year levels.
Speaker Change: SG&A expense was 19, 3% of sales during the quarter up from 18, 7% during the prior year quarter.
Speaker Change: On an organic constant currency basis, SG&A expense was up 80 basis points over the prior year period.
Speaker Change: This includes an unfavorable 130 basis point impact from higher deferred compensation costs, and one extra payroll day compared to the prior year.
Speaker Change: As a reminder, fluctuations of deferred compensation cost. The SG&A are primarily driven by market values of investments tied to our nonqualified deferred compensation plan.
Speaker Change: There is a corresponding offset to these fluctuations and other income and expense, which we report below net interest expense and income.
Speaker Change: In addition, we had some expense deleveraging as expected given the sales decline in the quarter.
Speaker Change: On an organic basis adjusting for the M&A impact currency fluctuations the extra payroll day and deferred comp accounting impact SG&A expense was down slightly year over year.
Speaker Change: We remain prudent with cost measures have continued to fund in process strategic growth oriented investments in light of firming demand the past couple of months.
Speaker Change: Overall, the organic sales decline in the quarter combined with the aforementioned gross margin and SG&A dynamics resulted in reported EBITDA declining three 3% year over year, while EBITDA margin of 11, 7% decreased 44 basis points lower.
Speaker Change: Our EBITDA was partially balanced by greater interest income on higher cash balances as well as a lower tax rate relative to prior year levels and foreign currency gains.
Speaker Change: Many of these factors, we reported earnings per share of $2, 36%, which was down a modest 1% from prior year levels.
Speaker Change: Moving to our cash flow performance cash generated from operating activities. During the first quarter was $127 7 million, while free cash flow totaled $122 $2 million, representing conversion of 133% relative to net income.
Speaker Change: Compared to the prior year free cash nearly doubled and hit a record first quarter level.
Speaker Change: Our cash flow growth, primarily reflects more modest working capital investment compared to the prior year as well as ongoing progress with internal initiatives and our enhanced margin profile.
Speaker Change: Turning now to our outlook as indicated stays press release and detailed on page 12 of our presentation. We are modestly raising full year fiscal 2025, EPS guidance to reflect updated assumptions for interest and other income following first quarter results.
Speaker Change: We now project EPS in the range of $9 25 to $10 compared to prior guidance of $9 20 to $9 95.
Speaker Change: That said, we are maintaining our sales guidance of down two 5% to up two 5%, including down four to up 1% on an organic daily basis, as well as EBIT margins of $12 one to 12, 3%.
Speaker Change: Our sales outlook takes into consideration October to date sales trends and ongoing near term economic uncertainty.
Speaker Change: We're assuming potentially subdued customer activity through the balance of the calendar year, reflecting general malaise around the upcoming U S election, and entered the seasonally slower fall and winter months.
Speaker Change: Taken together, we currently project fiscal second quarter organic daily sales to decline by a low to mid single digit percent over the prior year quarter.
Speaker Change: We assume end market demand stabilizes into the back half of the year with potential for some modest improvement later in the year.
Speaker Change: Combined with easing comparisons the midpoint of guidance assumes average organic daily sales are relatively unchanged year over year in the second half of our fiscal year, including a return to modest growth in the fourth quarter.
Speaker Change: Overall this underlying quarterly sales trend assumption is directionally consistent with our initial outlook provided in August.
Speaker Change: While our first quarter sales exceeded our expectations. We believe it remains prudent to maintain our initial assumptions at this early point in our fiscal year.
Speaker Change: Lastly, we expect second quarter gross margins to increase slightly on a sequential basis and EBIT margins of 11, 7% to 11, 9%.
Speaker Change: This includes assumptions of potential expense deleveraging on organic sales declines as well as the impact of ongoing growth investments offset by lower LIFO expense compared to the prior year.
Speaker Change: With that I'll now turn the call back over to Neil for some final comments.
Neil Schrimsher: Thanks, Dave so to wrap up and summarize we feel good about the positive demand signals that we're starting to see develop including rising order trends across our higher margin engineered solutions segment.
Neil Schrimsher: We also have many self help growth and margin opportunities that we expect to manifest in coming quarters.
Neil Schrimsher: That said, we expect near term sales to remain choppy as customers slowly reengage production and capital investments ahead of the upcoming U S election, and seasonally slower fall and winter months.
Neil Schrimsher: We also remain cognizant of lingering macro crosscurrents, including geopolitical unrest and some uncertainty around the cadence and extent of interest rate cuts near term.
Neil Schrimsher: As such we believe maintaining our fiscal 2025 sales and EBITDA margin outlook remains prudent at this juncture pending greater clarity on the demand and macro backdrop in coming months.
Neil Schrimsher: Importantly, we remain constructive on the underlying fundamental outlook within our core end markets and the industry focus.
Neil Schrimsher: We're favorably positioned to drive above market growth and margin expansion as demand reaccelerate, reflecting our industry position and the internal initiatives.
Neil Schrimsher: From critical break fix MRO support at a local level.
Neil Schrimsher: To an expanding portfolio of emerging technologies and specialized engineering solutions, we believe our capabilities and strategy are significant.
Neil Schrimsher: To our customers and as customers reconfigure and reinforce supply chains and supported their own growth strategies long term.
Neil Schrimsher: Demand tail wins around re shoring and infrastructure investment in the U S are just beginning to manifest and could accelerate over the next three to five years.
Neil Schrimsher: At the same time U S manufacturing infrastructure has aged and as our customers technical service and support requirements have increased as they manage their own labor constraints.
Neil Schrimsher: We believe this backdrop could present, an extended period of structurally higher break fix MRO activity as well as ongoing investment into refreshing and expanding industrial production infrastructure and capacity across North America.
Neil Schrimsher: This will require strong channel partners with leading technical capabilities next generation solutions and strategic supplier relationships.
Neil Schrimsher: Our strategy and growth initiatives are strongly aligned with these trends and requirements. We believe this creates a compelling growth opportunity into calendar 2025 and longer term and will position positioning our teams and investments accordingly.
Neil Schrimsher: And then lastly, we're well positioned to capitalize on the next iteration of the industrial economy.
Neil Schrimsher: Given our domain knowledge and scale across industrial facilities core capital equipment.
Neil Schrimsher: This includes our expertise around critical motion in power train products in demanding applications.
Neil Schrimsher: Access to premier supplier brands, and non standard components and nationwide local service reliability.
Neil Schrimsher: In addition, we have leading channel position in providing advanced robotics machine vision and high Tech fluid power systems.
Neil Schrimsher: Combined with our network of service shops technicians and engineers, we are playing a critical role in linking legacy industrial production infrastructure and processes with new advanced applications and technologies, both now and into the future.
Neil Schrimsher: Overall I remain excited about our potential and we look forward to showcasing our capabilities in the quarters and years to come.
Once again, we thank you for your continued support and with that we'll open up the lines for your questions.
Neil Schrimsher: Thank you.
Speaker Change: We will now begin the question and answer session, if you'd like to ask a question. Please pickup your handset press star followed by the number one on your telephone keypad.
Speaker Change: Wed like to withdraw your question Press Star one again as a reminder.
Speaker Change: Anytime you need to reach an operator, please press star then zero.
Speaker Change: Pause for just a moment to compile the Q&A roster.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Your first question comes from the line of David Manthey Macquarie. Please go ahead.
Speaker Change: Thank you good morning, guys.
David Manthey: My first question is more out of curiosity when you talk about.
David Manthey: Orders in the Es segment do you have a rough approximation of what percentage of sales are coming via customer capital spending budgets versus expense items, and then related to that you talked about the that orders were better in September and then you talked about.
David Manthey: Delivery sales trends in October being a bit softer, but did orders remained strong in the midst of October as well.
Speaker Change: Yeah, So Dave I'll I'll start I think across our engineered solutions.
Speaker Change: Many of those sales to our customers can be capitalized.
Speaker Change: NR by them, but I would say they are not large significant capital investments for them and they have a very good returns profile and so.
Speaker Change: I, often termite I'd think about it that it can be opex type activities that enhance performance and productivity that obviously, they they will capitalize so theyre not.
Speaker Change: Heavy capital intensive systems on that side.
Speaker Change: We're encouraged by the order trends that we talked about in the in the first quarter and have that.
Speaker Change: Coming across and including the double digit side in technology, which is good to see as well as the automation side and I would say early on while there can be some unevenness month to month.
Speaker Change: We are continued to be encouraged by that activity, especially across automation and the combined engagement with our service center teams our access in position with some of those customers and helping them solve problems that are either presented around labor constraints that theirs.
Speaker Change: Still dealing with our their view of how they can use automation and technology to enhance productivity. So early to call that it's a sustained and the steady uprise from here perfectly, but we are encouraged.
Speaker Change: That's good to hear thanks Neal.
Speaker Change: Next one for partially for Dave too.
So quiet on the acquisition front, a little bit here.
Speaker Change: Your net debt continues to dwindle down I was just wondering if you could talk about the pipeline there are seller expectations too high.
Speaker Change: Finding targets there can grant with your strategy and then when I look at slide 11.
Speaker Change: And I think about share repurchase relative to these other capital allocation priorities. It would seem like based on where youre at today. If you cant find M&A deals to do that share repurchase would leapfrog up to number two on that list and Neal you said something about.
Speaker Change: Allocating more capital in the coming year. So maybe you could just talk a bit about those two items and how you feel about them as we enter.
Speaker Change: The next calendar year here.
Speaker Change: You bet and to your point, Dave We do remain very disciplined in terms of D. <unk>.
Speaker Change: Targets that said very encouraged by the pipeline and where we stand like I said, both in terms of the more traditional bolt on deals and some more mid sized deals. So very active there to our priorities. Once again those are around really focused on the continued build out of engineered solutions, including the automation foot.
Speaker Change: Print that we've continued to expand both organically and through the.
Speaker Change: Bolt on acquisitions as well as certainly around continue to build out the flow control in fluid power. So like the pipeline like what we're seeing there we continue to be more active in recent quarters on share buyback.
Speaker Change: And it may discipline, there as well as thinking about but it would.
Speaker Change: We expect this to see that continue over the next few quarters, just given to your point, where the cash position and leverage is so like I said expect.
Speaker Change: Good things there as we move forward remained very encouraged like I said, just can't always control the timing on some of these acquisitions that are still in the pipeline.
Speaker Change: Yeah, and I would say, Dave you mentioned the slide 11, we think the $1 billion.
Speaker Change: Number of.
Capital returned over the.
Speaker Change: For years is good.
Speaker Change: Last year at a little over $2 50, and we would expect this year to be higher and so we know and we will continue to vet, where there are good organic opportunities for us to invest that have a strong returns profile.
Speaker Change: And doing it with that said, we're not so capital intensive to do that.
Speaker Change: M&A will remain a strong priority, but we're committed we will not just stack cash we think in the set up in this environment, we're going to have multiple opportunities to further build out our differentiation, our technical differentiation and what that will mean to custom.
Speaker Change: And really all of our stakeholders.
Speaker Change: And I do like the fact that we continue to protect some of the SG&A spend.
Speaker Change: Much focus on organic growth with several key projects ongoing there in light of what we see is the pending recovery and the importance of that investment as well for organic growth. So we.
Speaker Change: We continue to work some of the temporary cost actions and.
Speaker Change: In addition to just the natural shock absorbers in the business.
Speaker Change: To protect the bottom line profitability, but continued to still fund some of that SG&A spend that focus on some very critical organic growth projects.
Speaker Change: Yeah.
Speaker Change: It was really good thanks, a lot guys.
Speaker Change: Sure.
Speaker Change: Your next question comes from the line of Christopher Glynn with Oppenheimer. Please go ahead.
Speaker Change: Hey, good morning.
Speaker Change: Just wanted to dive in.
Speaker Change: Some of the areas, where you saw some improvement I think automation and technology.
Christopher Glynn: Particularly the commentary seems a little inflected from recent quarters. So I'm wondering if you can comment.
Further on.
Christopher Glynn: Sticky I think that feels and.
Christopher Glynn: Also particularly some layers on what's going on with technology are you seeing device makers those types of customers starting to actually increase production.
Speaker Change: Yeah, So if I start on the <unk>.
Christopher Glynn: Technology.
Christopher Glynn: It's good to see the increased order rate and.
Christopher Glynn: And the activity that was sales contributor to our engineered solutions segment in the quarter kind of relatively flat when it consolidates up overall, but if you think back over the past seven quarters or so good to see that I think most indicators are in activity that we would see.
Christopher Glynn: The increased activity around the chip manufacturers.
Christopher Glynn: And then I think the forecast that many have 425 on wafer fab equipment being at high percentage numbers, perhaps over 20%.
Christopher Glynn: 426, perhaps still being double digit on top of that.
Christopher Glynn: I think we'd start to see some early indications obviously.
Christopher Glynn: We're involved with customers and have those exchanges into that so perhaps still early but I think as we move into and through calendar 'twenty five that's going to be favorable for us on the technology front.
Christopher Glynn: And then on the automation side continued to be high interest and activity on the robotics side.
Christopher Glynn: The autonomous mobile robots <unk>, the collaborative side as customers look to <unk>.
Christopher Glynn: Enhance our deal with their own labor challenges and doing it has been encouraging so pipeline and activity the amount of application engineering work that we have going on is good but also on the on the vision side as we think about Prada.
Christopher Glynn: Product and process inspection, what that can mean for.
Christopher Glynn: Quality control and enhancements on that side.
Christopher Glynn: We've got good activity on that front until like we say not always not always even when the projects get implemented and oftentimes. There's other parts that have to sequence into that but we are encouraged by the general activity and so a directly to your question. We think there is a stickiness there.
Christopher Glynn: Great.
Christopher Glynn: And then.
Just a little more on the capital.
Speaker Change: The other area on the pipeline, where it sounds like the commentary is.
Speaker Change: And selected too.
More bullish and.
Speaker Change: I don't recall off the mid size references standard-bearer, Virginia press release, but.
Speaker Change: What has really transpired in that pipeline are you seeing.
Speaker Change: Looser postures by sellers, you have been tracking for a long time.
Speaker Change: I'd say any time in the in the environment or cycles.
Speaker Change: Companies become available.
Speaker Change: Our prospect is we know who fits we work very hard to know them to be around we state we can't perfectly control the control of the timing I.
Speaker Change: I think I've always said clearly our focus our priorities are bolt ons in the right areas and mid size as well so I don't know that its.
Speaker Change: Too much to read into that.
Speaker Change: That's in the <unk>.
Speaker Change: The remarks, I think I don't know, perhaps there before it's clearly been in my my verbiage and our focus that we're working on and executing that.
Speaker Change: We look across we think there are many good opportunities and then they based on cycles running and operating those businesses theres challenges and that clearly scale can help in doing it customers are expecting more.
Speaker Change: In the side and Theres, just avenues or areas that we can help and with the frequency and amount of acquisitions that we've had we've got a very good track record.
Speaker Change: Integrating and operating and I think thats attractive to prospective sellers.
Speaker Change: Thanks Neil.
Neil Schrimsher: Thank you.
Speaker Change: Your next question comes from the line of Ken Newman with Keybanc capital markets. Please go ahead.
Ken Newman: Hey, good morning, guys.
Ken Newman: Good morning.
Ken Newman: Morning.
So first question here on the October trends, sorry, if I missed this but is there a way to quantify what you think the the hurricane impacts are so far into the month and then just any color on the monthly comps for November and December.
Ken Newman: And what those look like as we progress through the rest of the <unk> I'm just trying to frame that the new <unk> Adi's guide relative to the to the October trends.
Speaker Change: Yes, I can I can start I think on the hurricane I don't know that Ive got great quantification to it.
Speaker Change: We have.
Speaker Change: We can look at it associates that are still displaced in a few of the areas, we're up and running and operating we do look at AG customers and in some of the most impacted areas and I would say they fall in buckets of maybe easily think about a third a third running.
Speaker Change: Very well third running maybe at some reduced but likely to ramp and then some others that perhaps will be <unk>.
Speaker Change: <unk> for a little bit more extended period.
Speaker Change: It is Oh, hey.
Speaker Change: <unk> great great tragedy.
And we're looking to support all of them I think.
Speaker Change: It's total.
Speaker Change: Economic standpoint, its one tape, we just work through like.
Speaker Change: Other other weather events in in the side and then as I just think about the October side Radio Hey, it's still early on the month to date trends, we do have.
6% to seven days to go and there can be a natural pick up in those in those final days does usually that type of activity and so.
Speaker Change: We could expect some of that to occur as well in October.
Speaker Change: Ken I, just would say as it relates to the year over year comps by month.
Speaker Change: November is somewhat similar to October of the prior year and then we do have an easier comparison coming about in December relative to both October and November.
Speaker Change: Got it that's very helpful.
Speaker Change: And then for the follow up here.
I was.
Speaker Change: Pleasantly surprised by just how good the quarter and David I Am curious if you can just talk a little about whether you think youre gaining incremental share in this weaker demand environment I think one of your largest competitors saw some weaker demand in their industrial business this past quarter versus their expectations. So it does seem like you outperformed here.
Speaker Change: But I'm just curious if you think you are potentially winning customers from your bigger competitors or if this is more so just.
Speaker Change: A mixed dynamic depending on the niches of the end markets that you play in.
Speaker Change: I think we're getting benefits on our focus areas in that as it executes and we've talked about it a little bit of the engineered solutions I mean, obviously the space is large and there's a lot of salute.
Speaker Change: <unk> solutions are product sets that go out in a week compete against.
Speaker Change: Many in that highly fragmented space and I think what you are seeing and we will continue.
Speaker Change: Customers, just look to consolidate spend they're going to look to do business with fewer more capable suppliers into that side and.
Speaker Change: We're just intent on being one of those that can do that but we.
Speaker Change: We've got a clear focus we got a clear strategy on our customers and how we can expand our offering within them and that's going to continue to be a focus area and then we think cross sell while still early innings, we'll we'll continue to gain traction and that's that's valuable to.
Do the customers and our teams continued to do a good job at it.
Very good thanks for the color.
Speaker Change: Yeah.
Speaker Change: Your next question comes from the line of Brett Linzey with Mizuho. Please go ahead.
Brett Linzey: Hi, good morning, all.
Speaker Change: Good morning, good morning.
Brett Linzey: Hey.
Brett Linzey: So my first question is just on the automation engineered platform and thinking in terms of staffing and overhead is it fair to say that the AIP retained a lot of the personnel and the integrator capacity, even when volumes are weak and as we see this recovery you should get fairly.
Brett Linzey: Fairly good utilization and leverage there or are the resources that need to come back as you satisfy some of the return of the order growth here.
Speaker Change: No Brad I would say, we worked hard to stay at staffing levels, we talked about in those periods. We were active we're busy and the amount of customer engagement the application engineering on our projects.
Speaker Change: The pace of those going through maybe in some of those earlier times slower times, there's a few more there's an extra step in.
Speaker Change: Approval process.
Speaker Change: In doing it but no we've maintained and consciously to have capability to have focus for what we see now and for what we believe are for the period ahead.
Speaker Change: Especially around robotics and vision, we think those are going to be too highly attractive areas, especially when we consider our core customer segments. There percentage of automation adoption remains still relatively low so interest is increasing the need is there.
Speaker Change: And we think we can help fulfill a lot of that demand.
Speaker Change: That's great. Thanks for that and then just a follow up on the reassuring dynamic so ait's doubled the addressable markets over the last several years you've expanded the solutions as you think about some of these critical industries that are getting re short into the U S. How is ait's content per project.
Speaker Change: <unk> or the wallet share of that commensurately.
Speaker Change: Improved or increased in line with the Tam is it should we think about kind of.
Speaker Change: Doubling of that as well.
Speaker Change: Alex here on the your content.
Speaker Change: Yeah, I think we're seeing.
Speaker Change: We are benefiting we are well positioned on re showing in the amount of activity just when we look at the.
Speaker Change: The amount of industrial construction projects, obviously, we're involved directly but also indirectly I mean, there is benefit for for metals aggregate cement and those support industries, which are good for us and we have good.
Speaker Change: Participation in content there. So we feel like it is going to only continue.
Speaker Change: As customers or these industries look to derisk supply chains and have more things locally available to fully participate to be determined through the election cycle.
Speaker Change: How the tariff dynamic changes other than I think it looks like they will continue and perhaps at a heightened level just depends on perhaps the outcome at what degree of heightened level. So we think re shoring will continue and for US we've got involvement than with our customers to help them either bring those projects are.
Speaker Change: At work back into their facility and that may be running their equipment more and some light capital requirements or they may be qualifying another supplier, which can play into further capacity build out and theyre looking for our help to work with their supply chain as well. So that's been positive for us and really as I think.
Speaker Change: [noise] about it we're well positioned not only U S, but our business in Mexico, and Canada are getting benefits from that also.
Speaker Change: Great. Thanks for the insight.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Krish <unk> with loop capital markets. Please go ahead.
Speaker Change: Hey, good morning, guys. Thanks for taking the questions.
Yes.
Speaker Change: I guess just to circle back to the organic investment opportunities you were kind of touch on earlier I guess, maybe any update on the Pacific northwest capacity investment any update on some of the technology proliferation opportunities anything worth calling out in terms of things.
Speaker Change: Things are start to kind of ramp into the back half of fiscal 'twenty five.
Speaker Change: Yes, so what I would say in the.
Speaker Change: Northwest complete operational team team fully in and doing it same with the fluid power technology investment in new facility running and operating there as well so well positioned and we think both.
Speaker Change: Capacity moves timing and investment.
Speaker Change: For what could be will be an inflection of greater demand in both of those will serve us very well.
Speaker Change: To make investments as well and tie in some of our.
Speaker Change: Automation businesses together with engineering solutions things like that so we can collaborate and cross sell even amongst deal where they are areas of specialties continue to expand that footprint organically as well.
Speaker Change: As noted area of focus and as well as driving some additional efficiencies in back office. Some additional technology investment there really across the business. Chris So is on many fronts.
Speaker Change: Got it got it thanks for the color there and I guess, maybe one more conceptual question.
Speaker Change: It seems like there's a lot of appetite at the customer level for distributors are able to.
Speaker Change: To play a more system integrator type approach in automation specifically.
Speaker Change: Keith will be kind of in a sweet spot there I guess.
Speaker Change: Do you think that that's a correct assessment and then is there any kind of friction between some of the maybe integrator customers you serve and kind of where you play just maybe some thoughts on that market, particularly as it pertains to automation and the growth Youre seeing there.
Speaker Change: Sure.
Speaker Change: Chris I would say I don't view that there's there's friction and opt.
Speaker Change: Often in channels and markets and especially when there gets to be accelerated growth products and solutions flow.
Speaker Change: Multiple paths.
Speaker Change: Customers, often dictate that and so if they have some internal capability or its a lighter project and that they may be more active themselves. If the project is more complex. There is gonna be integrators involved in that and the way we work is that we.
Speaker Change: We're happy when our solutions flow.
Speaker Change: Either of those ways in doing it.
Speaker Change: We are also working on.
Speaker Change: And have more product ties solutions as we think about in vision.
Speaker Change: And robotics.
Speaker Change: Both collaborative and Palatis ing type applications and others that are more turnkey for customers as it goes in and so that are wider than they are not.
Speaker Change: Hi investments, but they yield good benefit and that they can be replicated across so we'll look at those ways, how we participate more in that but no.
Speaker Change: Hey.
Speaker Change: We're agnostic our focus is how we help customers.
Speaker Change: With their problems with our solutions and integrators are a part of that going to market.
Speaker Change: Got it if I could just kind of follow up on that really briefly.
Speaker Change: <unk> solutions are.
Speaker Change: A really compelling opportunity I guess in the.
Speaker Change: Past I think pelletizing was more mature.
Speaker Change: There were some new markets you guys are kind of exploring are moving further into machine operations CNC operation being one just any update in terms of like the number of markets, you're serving with the prototype solutions today.
Yes, I don't know if I have a number of in markets. We think about those those applications, whether they be can be CNC.
Speaker Change: CNC machine tending warehousing and logistics, which also exists in all of our customers right because as they move products out of production environments in doing it.
Speaker Change: In consumer packaging and quality control and inspection theres more and more of those applications. So in some of those if we can make it easier less integration requirements.
Speaker Change: There's less upfront engineering requirements and that it just accelerates the adoption and then for US we think it opens up even more opportunities around things that may be a little bit more technically challenging to do but still we'll have very significant benefits for the customers. So it's a we like the product type solutions.
Speaker Change: As an entry point.
Speaker Change: It's likely not taking are solving all the customer requirements and their facilities are addressing all of the opportunities. They can but it is opening more and more doors for us.
Speaker Change: Makes sense, thanks, a lot for the color.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of ore on the Reed with Northcoast Research. Please go ahead.
Speaker Change: Hey, good morning, gentlemen.
Speaker Change: Good morning.
Speaker Change: Yeah I was wondering if you could talk a little bit more about any remaining pressure coming from inflation or remaining pockets.
Speaker Change: Seeing that could be issues in the near future is most of that behind you guys.
Speaker Change: We still see general steady inflation, which once again for distributors is good we said price cost.
Speaker Change: Relatively neutral in the quarter price added about 100 basis points. So I think what we're seeing is that slow steady inflationary impact largely coming from labor and other overhead spend from our manufacturers. Once again here, we do partner well with our key suppliers to take you to those price increases and pass them on an orderly fashion, but are you.
Speaker Change: You can see it in the easy LIFO trends and it's more normalized in steady state now so no pockets I look at is our areas of concern and I said. This is good steady slight inflationary impact is good for distribution, because we know how to take it package. It passed on in an orderly fashion drove some incremental to the bottom line during the <unk>.
Speaker Change: Process.
Speaker Change: Okay, Great and then the other part is and you briefly touched on it and we're hearing a lot of it as well too is a lot of this pent up demand from.
Speaker Change: People are waiting for after the election and I'm kind of wondering if you when you hear that if youre thinking that people are saying, we're going to wait till after the election and that's legitimately. The reason or is that some sort of an excuse saying hey, what's after the election, but there might be some other considerations out there that they're taking in on that.
Speaker Change: I know, it's difficult to quantify what that might be and I was wondering if you could speak a little bit more about the potential timing of if there is pent up demand how quickly do you think you would be.
Speaker Change: Seeing revenue being generated off of that.
Yes, so one I think the.
Speaker Change: Election.
Speaker Change: Don't know that it's a real driver, but clearly it has top of mind conversations.
Speaker Change: Many of that I think we have seen general belt tightening and deferral and if that's the entry point there will be more of that release.
Speaker Change: In <unk>.
Speaker Change: Post November timeframe into the December and then going into early.
Speaker Change: Early 2025.
Speaker Change: On that front so we.
Speaker Change: We think that has occurred and so there can be some positives or some pick up for us as we go through then into what would be our Q3 and started the new calendar year.
Speaker Change: Great that makes sense. Thank you.
Your next question comes from the line of Susquehanna Abram Smith Bank of America. Please go ahead.
Speaker Change: Hey, good morning, everyone.
Speaker Change: Good morning.
Speaker Change: I, just ask a little bit about destock.
Speaker Change: From both your and and that customer standpoint, So I guess, a how are you thinking about your own inventory from here and it sounds like you know maybe getting a little market shock on things bottoming.
Speaker Change: So maybe not destocking from here, but just wanted to ask about how youre thinking about your own inventory.
Speaker Change: And then b.
Speaker Change: Are any of your customers still destocking.
Speaker Change: Yes, so ill start with our own.
Speaker Change: Hey, we're working with our core survive a core suppliers very closely.
Speaker Change: And where to make the appropriate inventory investments, we know will want to know what's going on in their business and where they may be at any various projects in production in to the side, but we have not been.
Speaker Change: Reducing or pulling back of inventories we want the right preparation, obviously, we talk to them high velocity types that they make regular we stock, but we're not looking to overstock in those <unk>.
Speaker Change: Things that are slower moving harder.
Hardware to make longer lead times are probably the ones that we're going to look to have the appropriate investments in and that helps customers stay up and running and for our suppliers. It make sure that they continue to fully participate in what is an attractive.
Speaker Change: MRO aftermarket.
Speaker Change: For them so that's our approach.
Speaker Change: For the most part I would say around our technical nature of our products, we do not get the benefit of stocking or therefore, the penalty of destocking in any economic cycles I think the area that we did see some of that and it still would go on a little bit would be in the off highway mobile.
Speaker Change: Portion of our business and fluid power and I think that was driven by when the lead times extended out to over two years.
Speaker Change: 60 months on some of the side those smaller Oems had to make bets our placements on needs and requirements and then as that product comes in and the demand environment.
Speaker Change: <unk> is a little bit they.
Speaker Change: They could have what their needs are requirements from a near term production standpoint would be I think that will improve it will improve as we go through this quarter, perhaps into the early part of 'twenty five if I look at the demand cycles for off highway mobile I do think there is a pick up in in calendar 'twenty.
Speaker Change: <unk>, which will be positive.
Speaker Change: We're taking this time to also work with them on an engineering front as more technology comes in whether that be an electronic controls.
Speaker Change: Into automation.
Speaker Change: Perhaps even in start of some autonomy type projects with them. So we will work that but hopefully that's the right color for inventory stocking destocking.
Speaker Change: Thank you that's super helpful.
And then I just wanted to ask about the EBITDA margins in the quarter I think they came in a little below.
Speaker Change: You guys had guided and obviously maintaining the full year guide, but just wanted to understand what trended differently.
Speaker Change: Some of your expectations.
Speaker Change: And so I would say for us as we think about it right largely largely in line.
Speaker Change: Not always linear as we as we go across our start of year to end the year in that.
Speaker Change: The sales development that we've talked about in the in the first quarter. Some of it did occur late but we were conscious in wanting to maintain appropriate investments into growth areas for what we see is coming in the side and then we really think the gross margin.
Speaker Change: We did the work.
Speaker Change: There was really just some timing on the on the comparisons in that in the front, we were coming off of.
Speaker Change: Higher LIFO and including some layer liquidation in Q4, so we expected some sequential change in that but the year over year comparison, there were some favorability that can occur in the prior first quarter of the year. So we feel like we're in a good position, we're not changing that outlook plans in <unk>.
Speaker Change: Trajectory and I contend we have still good opportunities to continue to help ourselves with all the levers that we have around margins yes.
Speaker Change: Yes, if you look back typically in this business Q1 is our softest gross margin performance quarter, we bucked that trend last year with some anomalies on some vendor rebates and were 29, 7%, even with some higher LIFO expense reading through versus what we saw this year. So a tough comparison, there and he said you really feel good.
Speaker Change: The sales development slightly outpacing our expectations.
Margins like I said.
Speaker Change: We do see a path.
Continue to see those improve as we move across the quarters.
Speaker Change: Lot of what Youre seeing on a year over year basis is that tough comp that we saw last year.
Speaker Change: Thank you so much.
Speaker Change: At this time I am showing we have no further questions I will now turn the call over to Mr. Crim Shah for any closing remarks.
Crim Shah: No at this point I just want to thank everyone for joining us today, and we look forward to talking with you throughout the quarter. Thank you very much.
Speaker Change: Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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