Q3 2025 Applied Industrial Technologies Inc Earnings Call
Welcome to the fifth car got it under five third quarter earnings call for applied industrial technologies.
It'd be silly and I'll be your operator for today's call.
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Speaker Change: If at any time during the conference call you need to reach an operator. Please press star Zero. Please note that this conference is being recorded I would not change the call over to Ryan Cieslak director of Investor Relations and Treasury, Yeah. Yeah, you may begin.
Speaker Change: Okay. Thanks, and good morning to everyone on the call. This morning, we issued our earnings release and supplemental investor deck detailing our third quarter results.
Speaker Change: Both of these documents are available in the Investor relations sections of applied dotcom.
Speaker Change: Before we begin just a reminder, we will discuss our business outlook and make forward looking statements. All forward looking statements are based on current expectations subject to certain risks and uncertainties, including those detailed in our SEC filings.
Speaker Change: Actual results may differ materially from those expressed in the forward looking statements.
Speaker Change: Company undertakes no obligation to update publicly or revise any forward looking statements.
Speaker Change: In addition, the conference call will use non-GAAP financial measures, which are subject to the qualifications referenced in those documents.
Neil Schrimsher: Speakers today include Neil Schrimsher apply its president and Chief Executive Officer, and Dave Wells, Our Chief Financial Officer.
Dave Wells: I'll turn it over to Neil.
Dave Wells: Thanks, Ryan and good morning, everyone. We appreciate you joining us as usual I'll begin with perspective and highlights on our third quarter results, including an update on industry conditions and expectations going forward Dave.
Dave Wells: Dave will follow with more financial detail on the quarter's performance and provide additional color on our outlook and guidance I'll then close with some final thoughts.
Dave Wells: Overall, our applied team performed well in the third quarter against an ongoing muted and evolving end market backdrop.
Dave Wells: We focused on our internal growth and gross margin initiatives as well as cost controls and working capital management.
Dave Wells: As a result gross margins EBITDA margins, EBITDA, and EPS exceeded our expectations and prior year levels.
Dave Wells: In addition, while market demand remained soft there were signs of firming sales trends as the quarter developed.
Dave Wells: Note that 3% organic sales decline in the quarter was stable with last quarter and in line with our guidance, while sales trends improved across our service center segment as the quarter progressed.
Dave Wells: Sales declines in our engineered solutions segment persisted.
Dave Wells: Reflecting softer OEM fluid power markets and more gradual backlog conversion.
Dave Wells: That said this market appears to be bottoming and orders across this segment strengthened further during the quarter.
Dave Wells: As it relates to the quarter's margin performance, both gross margins and EBITDA margins exceeded our expectations, increasing 95 basis points and 59 basis points over the prior year respectively.
Dave Wells: Our performance continues to benefit from solid channel execution, and ongoing margin initiatives across various areas of our business as well as variable expense adjustments and cost management.
Dave Wells: Gross margins also benefited from our initial positive mix contribution from our recent Hydra Dyne acquisition.
When looking at it over a longer period.
Dave Wells: Margins have now expanded year over year in nine of the past 11 quarters.
While EBITDA margins are up 320 basis points over the past five years.
Dave Wells: This performance has helped drive a 12% compounded annual growth for both EBITDA and free cash flow over the past five years.
Dave Wells: Overall, very compelling trends when considering various market headwinds over the past several years, including higher inflation.
Dave Wells: Supply chain disruptions and more recently softer demand trends.
Dave Wells: Overall, our margin expansion highlights the benefits of our strategy and strong market position.
Dave Wells: This includes structural mix tailwind as we continue to expand our engineered solutions segment, both organically and through M&A combined with focused initiatives tied to pricing analytics and processes supplier relationships local account growth and supply chain.
Dave Wells: Optimization.
Dave Wells: In addition, we're on track to achieve another record year of cash generation.
Dave Wells: With free cash flow up 50% year over year in the third quarter and 39% year to date, our cash generation and strong balance sheet provide financial strength and flexibility in the current macro landscape, allowing us to proactively enhance our growth position.
Dave Wells: And shareholder returns to greater capital allocation year to date.
Dave Wells: Of note we've deployed over 440 million in capital through the end of March this partially reflects greater M&A activity, including our recent acquisition of Hydra Dyne.
Dave Wells: We're extremely excited about the growth and operational momentum, we expect to build with Hydra dyne.
Dave Wells: Initial integration is going well with strong collaboration and strategic positioning across operating teams.
Dave Wells: We expect financial contribution to increase into the fourth quarter and fiscal 2026 as initial synergies are achieved and demand strengthened across core and emerging fluid power markets.
Dave Wells: In addition, our M&A pipeline remains active and provides ongoing momentum moving forward as reflected by today's announced definitive agreement to acquire IRS factory automation.
Dave Wells: Iris is a nice bolt on acquisition for our automation team that we believe will be incremental to our growth potential and value proposition long term given they're focused capabilities.
Dave Wells: Of note Iris provides proprietary turnkey product EIS solutions that can be easily deployed in a customer's facility to address common automation needs.
There are solutions utilize advanced vision and robotics and.
Dave Wells: And support processes, such as Pelletizing case backing and quality inspection.
Dave Wells: Expanding our portfolio of product is automation solutions is a key focus area that should accelerate our cross selling potential and addressable market long term.
Dave Wells: Iris, who will add over 30, new associates and is expected to generate annual sales of around $10 million in the first year of ownership. So we believe this acquisition can drive stronger growth synergy long term as we leverage our core suppliers, leading automation technologies.
Dave Wells: And applies access to legacy manufacturing verticals overall.
Dave Wells: Overall, we look forward to welcoming iris to applied and leveraging their capabilities going forward.
Dave Wells: In addition to ongoing M&A activity, we remain proactive with share buybacks, including repurchasing over 330000 shares for approximately $80 million year to date in fiscal 2025.
Dave Wells: Our approach to share buybacks remains consistent with our capital allocation strategy of returning excess cash through opportunistic share buybacks utilizing a disciplined valuation and returns focused framework.
Dave Wells: Long term, we see significant intrinsic value creation potential across applied considering our strategic initiatives industry position.
Dave Wells: Bossier to secular growth tailwind and margin expansion potential.
Dave Wells: When appropriate we will continue to utilize share buybacks to enhance shareholder returns and as indicated in our press release today I am pleased to announce our board has approved a new $1 5 million share repurchase authorization.
Dave Wells: As it relates to the underlying demand environment overall dynamics remained mixed during the third quarter as the evolving tariff and trade policy backdrop combined with higher interest rates continued to weigh on broader industrial activity.
Dave Wells: As expected similar to last quarter customers maintained a gradual approach to production and continue to conservatively manage MRO and capital spending.
Dave Wells: Including delaying new system installs and extending the phasing of capital projects that said, we did see several encouraging trends in the quarter.
Dave Wells: First demand across our service center segment gradually improved following a slow start in January with average daily sales, increasing nearly 4% sequentially versus the second quarter.
Dave Wells: It was slightly ahead of normal seasonal patterns.
Dave Wells: Second trends across our top 30 in markets improved from last quarter with 16 generating positive sales growth year over year compared to 11 last quarter.
Dave Wells: While sales declines continue across several top markets, including machinery metals and utilities, we saw a number of markets turned slightly positive in the quarter, including rubber and plastics and oil and gas.
Dave Wells: As well as several lower tier verticals.
Dave Wells: Growth was strongest in technology, food and beverage pulp and paper aggregates and transportation markets.
Dave Wells: Further while mid single digit organic sales declines persisted across our engineered solutions segment segment orders increased 3% year over year, and 8% sequentially on an organic basis during the quarter.
Dave Wells: This drove this segment's book to Bill above one for the first time in nearly three years strong.
Dave Wells: Stronger order trends were primarily driven in the automation, where orders grew by over 30% year over year and 20% sequentially in the third quarter.
Dave Wells: While some of these orders are longer cycle in nature, and likely won't contribute to sales growth until fiscal 2026, it's a positive trend nonetheless that provide strong support to this scaling area of our business.
Dave Wells: We also saw orders across industrial and mobile OEM fluid power markets turned slightly positive year over year in the quarter.
Dave Wells: This is an encouraging sign following notable sales headwinds in this area of our business over the past year.
During the third quarter reduced sales from industrial and mobile OEM fluid power customers negatively impacted our consolidated organic year over year of sales growth rate by approximately 100 basis points.
Dave Wells: As well as the engineered solutions segment organic growth rate by over 300 basis points.
Dave Wells: Stabilizing orders combined with more normalized OEM inventory levels emerging Hydra dyne synergies and much easier comparisons provide a solid path to see this area of our business potentially reemerge as a growth tailwind into fiscal 2026.
Dave Wells: And beyond.
Dave Wells: So overall, a number of positive takeaways from our third quarter performance that highlight the strength of our industry position and operational caliber as well as underlying growth setup, we have developing.
Dave Wells: That said Needless to say we are now operating in an environment that is more volatile given the dynamic global trading and tariff backdrop.
Dave Wells: The related macro uncertainty that has ensued represents a distinct challenge for our customers' near term operational and capital management planning processes.
Dave Wells: Dave will provide more color and views on our outlook and guidance shortly but we believe the current backdrop could continue to weigh on industrial production and capital spending into the spring and summer months. This was partially evident during April where we estimate average organic daily sales.
Dave Wells: <unk> declined.
Dave Wells: By an approximate 3% over the prior year period.
Dave Wells: That said similar to the sequential improvement we saw during the third quarter, we expect break fix and maintenance activity to potentially pick up as the quarter progresses, considering deferred technical MRO spending over the past year.
Dave Wells: As a reminder, over 70% of our total sales come from technical MRO and aftermarket support on direct production equipment and systems with roughly half of our service centers sales from break fix applications.
Dave Wells: We also remain intensely focused on our internal and self help growth initiatives tied to expanding cross selling opportunities sales force investments and product category penetration.
Dave Wells: In addition, our U S centric customer base and manufacturing domain expertise combined with our scaling automation platform and diverse supplier base puts us in a strong an opportunistic position to play offense as trade policies and supply chains potentially.
Dave Wells: Structurally shift.
Dave Wells: This includes playing a critical role in providing technical maintenance engineering and assembly and process enhancements to U S manufacturing systems and industrial equipment.
Dave Wells: In the near to mid term disposition could benefit if utilization of existing U S production capacity structurally increases, including potential demand shifts towards second and third tier domestic producing Oems, which are key customers to many of our business.
Dave Wells: Ms units.
Dave Wells: In addition, our strategic relationships with a diverse U S supplier base combined with our technical repair rebuild and shop capabilities provide customers component optionality and alternatives as they manage through potential supply chain inflation and disruptions.
Dave Wells: And then on a longer term basis, the potential for greater re shoring activity and new manufacturing investments could represent a meaningful tailwind across many of our essential customer industries from the legacy metals and machinery verticals to advanced technology and life Sciences.
Dave Wells: I'd also like to take a moment to discuss potential tariffs and the impact can have on cost structure and operations.
Dave Wells: First our U S operations direct exposure to procuring products outside the U S is very limited.
Dave Wells: Representing less than 2% of total cogs, including an immaterial amount direct directly from China.
Dave Wells: As a result, we do not have or expect to have any significant exposure to direct tariff cost.
Dave Wells: From an indirect standpoint, we're working closely with our suppliers as they continue to assess the impacts of tariffs and other inflationary pressures on their supply chains.
Dave Wells: We've received varying levels of price increase announcements for many suppliers over the past several months our teams are proactively and effectively managing through this evolving backdrop.
Dave Wells: And overall, we believe we are comparatively well positioned.
Dave Wells: Our track record doing the inflationary period of 2021 to 2023 provides strong evidence of our ability to manage and pass along inflation.
Dave Wells: We have a proven execution playbook that has been enhanced by system investments and analytical tools in recent years.
Dave Wells: We operate from an agile business model in well structured markets tied to critical and technical processes with strategic supplier relationships.
Dave Wells: Combined with structural mix tailwind and various self help gross margin countermeasures inherent to our strategy.
Dave Wells: We are highly confident in our ability to adapt and execute as the tariff and broader inflationary backdrop continues to evolve.
Dave Wells: At this time I'll turn the call over to Dave for additional detail on our financial results and outlook.
Dave Wells: Neil just a reminder, before I begin as in prior quarters, we have posted a quarterly supplemental investor presentation to our investor site for additional reference as we recap our most recent quarter performance and updated guidance.
Dave Wells: Turning now to our financial performance in the quarter consolidated sales increased one 8% over the prior year quarter.
Dave Wells: Acquisitions contributed 660 basis points of growth, which includes the first quarter of contribution from our recent acquisition of Hydra Dyne.
Dave Wells: This was partially offset by a negative 90 basis point impact from foreign currency translation, and a negative 80 basis point impact and the difference in selling days year over year.
Dave Wells: Netting these factors sales decreased three 1% on an organic daily basis.
Dave Wells: As it relates to pricing, we estimate the contribution of product pricing on year over year sales growth was approximately 100 basis points in the quarter.
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 6% year over year on an organic daily basis.
Dave Wells: This excludes 20 basis points of contribution from acquisitions, and a negative 80 basis point impact from the difference in selling days any negative 130 basis point impact from foreign currency translation.
Dave Wells: The organic sales decline was primarily driven by reduced MRO spending and lower capital maintenance projects compared to the prior year.
Dave Wells: On an encouraging note the decline was a slight improvement from last quarter's organic decline of one 9%. Despite a more difficult comparison, including seasonally strong brake fix and capital maintenance activity. We saw in March of last year.
Dave Wells: The segment's two year stack organic year over year sales trend improved sequentially every month in the quarter, including posting positive 4% two year stack growth in the month of March.
Dave Wells: In addition segment EBITDA increased six 4% over the prior year. Despite a three 5% decrease in total sales, while our segment EBITDA margin of 14, 7% expanded 140 basis points.
Dave Wells: The year over year improvement was driven by strong cost management gross margin initiatives reduced LIFO expense as well as favorable accounts receivable provisioning as a result of our internal working capital management initiatives.
These results demonstrate solid performance and additional evidence of our ability to adjust and execute operationally in any demand environment.
Dave Wells: Within our engineered solutions segment sales increased 13, 5% over the prior year quarter with acquisitions, contributing 28% growth, including our recent acquisition of Hydro <unk>.
Dave Wells: On an organic daily basis segment sales decreased six 5% year over year, which was relatively similar to last quarter.
Dave Wells: The segment's organic sales decline continues to primarily reflect ongoing demand weakness across fluid power OEM customers tied to reduce activity across the mobile fluid power market.
Dave Wells: In addition backlog conversion in engineered systems and equipment remains slow as customers continue to take a measured approach to capital deployment and project phasing across our flow control and automation operations.
Dave Wells: This was partially balanced by growth across the technology vertical.
Dave Wells: Segment, EBITDA increased 10, 2% over the prior year, reflecting contribution from hydro <unk> as well as gross margin initiatives cost management and ongoing operational enhancements as we continued to execute our engineered solutions strategy.
Dave Wells: Segment EBITDA margin of 13, 8% was below the prior year level of 2014, 3% and last quarter of 16, 3% largely in line with our expectations considering the initial mix impact from hydro <unk> as well as more normalized organic gross margins trends following the last quarter.
Dave Wells: <unk>.
Dave Wells: As a reminder, we see strong upside potential and hydro <unk> EBIT margins as we complete integration and execute our synergy plan, particularly considering the businesses higher gross margin profile.
Dave Wells: Moving to consolidated gross margin performance as highlighted on page nine of the deck gross margin of 35% increased 95 basis points compared to the prior year level of 29, 5%.
Dave Wells: During the quarter, we recognized LIFO expense of $2 $2 million compared to $4 $8 million in the prior year quarter.
Dave Wells: This net LIFO tailwind had a favorable 22 basis point year over year impact on gross margins.
Dave Wells: Gross margins also benefited from initial positive mix contribution from our recent Hydra Dyne acquisition. However.
Dave Wells: However, when excluding these positive impacts we still generated solid gross margin expansion in the quarter, reflecting strong execution and the benefits of ongoing gross margin initiatives.
Dave Wells: Price cost trends were relatively neutral in the quarter. In addition, while gross margin mix benefited from recent M&A. The business continues to face mixed headwinds from lower sales across local accounts and the engineered solutions segment.
Dave Wells: As it relates to our operating cost selling distribution and administrative expenses increased four 1% compared to prior year levels.
Dave Wells: SG&A expense was 19, 4% of sales during the quarter reflected an increase of 43 basis points from the prior year quarter.
Dave Wells: Excluding depreciation and amortization expense SG&A was 17, 9% of sales during the quarter, an increase of only 10 basis points from the prior year.
Dave Wells: On an organic constant currency basis, SG&A expense was down six 3% year over year.
Dave Wells: During the quarter, we benefited from ongoing efficiency gains and reduced variable expense on lower sales as well as other cost measures as our team continues to effectively navigate through the subdued demand environment.
Dave Wells: We also experienced lower medical expense as well as favorable a provisioning tied to our working capital initiatives with particularly strong collections performance.
Dave Wells: Overall positive gross margin performance, coupled with the benefit of spend initiatives and M&A contribution resulted in reported EBITDA, increasing six 8% year over year, including an approximate 2% organic improvement while EBITDA margin of 12 four per.
Dave Wells: <unk> expanded 59 basis points from the prior level of 11, 8%.
Dave Wells: In addition reported earnings per share of $2 57.
Dave Wells: It was up three 7% from prior year EPS of $2 48.
Dave Wells: This includes an unfavorable impact year over year from interest and other income and a slightly higher tax rate, partially offset by a lower share count.
Dave Wells: Moving to our cash flow performance cash generated from operating activities. During the third quarter was $122 $5 million, while free cash flow totaled $114 $9 million.
Dave Wells: Representing conversion of 115% relative to net income and a 50% increase from the prior year level.
Dave Wells: Year to date, we have generated approximately $327 million of free cash flow, which is up 39% year over year.
Dave Wells: Our cash flow growth. So far this year, 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.
Dave Wells: From a balance sheet perspective, we ended March with approximately $353 million of cash on hand, and net leverage at four times EBITDA, which is above the prior year level of three times, but below last quarter's level of <unk> five times.
Dave Wells: Our balance sheet is in a solid position to support our capital deployment initiatives moving forward as well as enhanced returns for all stakeholders.
Dave Wells: During the third quarter, we repurchased approximately 205000 shares for $50 million, bringing the year to date total on share repurchases to 332000 shares for $80 million.
Dave Wells: Turning now to our outlook as indicated in today's press release and detailed on page 12 of our presentation. We are adjusting full year fiscal 2025 guidance to reflect our third quarter performance and updated fourth quarter expectations.
Dave Wells: Specifically, we now project EPS in the range of $9 85.
Dave Wells: The $10 based on sales growth of flat to up 1%, including eight down 4% to down 3% organic growth assumptions as well as EBITDA margins of 12, three to 12, 4%.
Previously our guidance assumed EPS of $9 65 to $10 five.
Dave Wells: Sales growth of 1% to 3%.
Dave Wells: <unk> organic sales are down 3% to 1% and EBIT margins of 12, two to 12, 4%.
Dave Wells: Our updated guidance, implying a fiscal fourth quarter EPS range of $2 52 to $2.67 on a total sales year over year range of down one to up 3% and EBIT margins of 12, 6% to 12, 8%.
Dave Wells: Our fourth quarter sales guidance assumes average daily sales declined organically by mid to low single digit percent over the prior year.
Dave Wells: Update outlet consider as average daily sales in April declining by an estimated 3% organically year over year as well as near term demand implications from greater economic uncertainty around recent tariff actions and an evolving global trade landscape.
Dave Wells: We believe this backdrop could weigh on seasonal industrial production trends into the summer as customers conservatively manage costs and capital spending any greater clarity on trade and tariff policies.
Dave Wells: From a margin perspective, we expect fourth quarter gross margins to be relatively stable sequentially.
Dave Wells: The outlook assumes limited impact from tariffs on pricing in constant placement in the fourth quarter, given the timing of announced supplier price increases are product procurement exposure and an evolving tariff and trade policy backdrop.
Dave Wells: In addition, we expect LIFO expense to be relatively unchanged sequentially and slightly above $2 million.
Dave Wells: Any significant changes in our inventory levels near term.
Dave Wells: However, this would represent a headwind year over year in the fourth quarter of about 20 basis points on margins, reflecting LIFO favorability in the prior year fourth quarter, which we previously highlighted partially benefited from a layer liquidation benefit.
Dave Wells: Overall, we remain constructive on our side that moving forward considering our industry position.
Dave Wells: Prior year comparisons sustained benefits from our internal initiatives in engineered solutions segment order trends.
Dave Wells: Greater financial contribution from our recent Hydra Dyne acquisition, including initial synergy benefits provides additional support.
Dave Wells: That said, we believe it prudent and it remains prudent to take a balanced approach to our near term outlook in the current uncertain operating environment any more definitive and broader signs of a positive inflection in macro and industry conditions as trade and tariff policies our formula is.
Neil Schrimsher: With that I'll now turn the call back over to Neil for some final comments.
Neil Schrimsher: As we prepare to closeout fiscal 2025, I'm proud of the ongoing progress we are making to strengthen our industry position customer experience and growth potential.
Neil Schrimsher: Near term, we remain focused on executing and managing through a muted end market backdrop.
Neil Schrimsher: We expect customers will continue to conservatively manage operational and capital spending amid ongoing business and economic uncertainty that has been intensified by the evolving tariff and trade backdrop.
That said, we remain focused on internal growth and margin initiatives and believe our U S centric technical industry position provides near term resilience and strong growth catalyst long term.
Neil Schrimsher: Order and backlog trends across our higher margin engineered solutions segment.
Neil Schrimsher: Provides strong underlying growth momentum into fiscal 2026, and we are favorably positioned to manage potential greater inflation, given our technical industry position minimal cross border sourcing structural mix tailwind and various self help countermeasures in.
Neil Schrimsher: To our strategy.
Neil Schrimsher: Combined with our strong balance sheet exposure to long term secular tailwind, including re shoring and easier comparisons moving forward, we remain constructive on our setup into physical 2026 and beyond.
Neil Schrimsher: I want to recognize our entire applied team set the foundation of our performance and evolution their perseverance and operational focus provide a strong position to accelerate our potential moving forward with that we'll open up the lines for your questions.
Neil Schrimsher: Thank you we will now begin the question and answer session.
Speaker Change: To ask a question please press.
Speaker Change: Brett one followed by the number one on your telephone keypad.
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Let's pause for a moment just to go for the Q&A roster.
Speaker Change: Yeah.
Speaker Change: And your first question from the line of Christopher Glynn with Oppenheimer. Please go ahead.
Christopher Glynn: Thanks, Good morning, guys.
Christopher Glynn: So.
Christopher Glynn: Your analytics.
Christopher Glynn: And everything the insights into the margins and the markets are really impressive as always.
Christopher Glynn: That might be a little tough though.
Christopher Glynn: As you look across your broad customer base. How are you thinking about the mix of proportion of that might be particularly levered to some china sourcing and possible major production slowdowns.
Christopher Glynn: Uh huh.
Chris: Chris I don't know that I have.
All of that insight in.
Chris: And going through but I would say I think the trends that we saw in the in the quarter and the improvement in the top 30.
Chris: Positive the move from the 11 to 16, so if I think across it I think technology in the domestic work that will continue to do their announced investments I think those likely continue I think obviously food and beverage will should stay resilient.
Chris: The amount of construction activity and that would be needed as industrial infrastructure builds out would be positive for the aggregates and others into that site and I would expect and we expect a pickup in machinery utilities and metals.
Chris: Potentially more domestic work comes in and that side. So.
Chris: That would be some of my inside or indications that I have right now.
Chris: Like we said I appreciate it I know that did play out very attractive topic.
Chris: In terms of improved daily sales rates as we moved across the quarter in the <unk> segment and of course the the.
Chris: The positive impact of inflow with flex we saw on new order intake in the engineered solutions segment. So those are all encouraging signs.
Chris: Great and then if we could look at some of the piece parts of engineered solutions.
Chris: Relative or specific growth for fluid power flow control and automation and do you think fluid power could pivot in the first half of fiscal 'twenty six or is that probably a little later.
Chris: I think there could be some trends there.
Chris: If I break it apart right automation on the order side was the was the strongest in the quarter the 30% up.
Chris: Year over year.
Chris: Nice improvement sequentially.
Chris: Fluid power on the technology side was double digit plus 10 in that side of it which was positive as well and then the mobile and industrial positive year over year sequentially.
Chris: 6% into that side I think we've talked about previously I think the new inventory has normalized in with some of those Oems as well.
Chris: And some of those sectors.
Chris: As we work through 26, we could start to see some of that pick up it could develop to your point in the first half, but I think it continues to build throughout in fiscal 'twenty six.
Chris: Okay.
Speaker Change: I missed your comment on fluid power Dave.
Chris: David prior to Neil there.
Chris: I mean prior to D I referenced.
Chris: Broader engineered solutions segment order trends as new indicated broke that out a little bit detail.
Chris: We did see the tick up around 10% within fluid power encouraging year over year growth on the mobile off highway piece industrial as well our fluid power and up six 6% sequentially in terms of order intake. So.
Chris: I'll encourage you to in terms of ultimate recovery and that mobile off highway space within fluid power, where we've seen some of that lower demand and did experience some of that hangover come.
Chris: Coming off the <unk> and the supply chain disruption with some excess inventory in the channel. So all encouraging trends there for sure.
Speaker Change: Thanks last one for me just wanted to check if that 30% automation orders growth is an organic number.
Chris: That is.
Speaker Change: Great. Thank you.
Speaker Change: Your next question comes from the line of David Manthey.
Speaker Change: Please go ahead.
David Manthey: Yeah. Thanks, good morning, guys.
David Manthey: As it relates to the guidance some companies are sort of assuming known and expected price increases in the layering that over their growth expectations.
Speaker Change: We just had a company that is not assuming price increases as kind of a hedge for demand destruction in others or in between there's just wondering as you think of your approach to setting guidance. How would you characterize it relative to factoring in any tariff driven price increases and balancing that out with demand destruction.
David Manthey: So I think David as we.
Speaker Change: Go forward, we will be factoring in.
David Manthey: What we believe the price inflationary to look like.
Speaker Change: I think to date and we've talked about it.
Speaker Change: In the remarks, we probably had a 100 basis points.
Speaker Change: The impact in the third quarter or contribution.
Speaker Change: To price in our fourth quarter, we would expect similar amount we are seeing increases from suppliers.
Speaker Change: Many that have an annual increase at the beginning of the year have implemented that.
Speaker Change: There would be some inflationary expectation our input into that so perhaps a slightly larger increase theres. Another group of suppliers that would be more midyear.
Speaker Change: That has look to accelerate those.
Speaker Change: But if I look forward at our fourth quarter I think many of those increases will start to layer in somewhat the middle part of the fourth quarter and that's why we think.
Speaker Change: Price contribution is probably is still similar to in that 100 basis points category in the fourth quarter and then as we look forward I think <unk> still to be determined.
Speaker Change: We're working with suppliers many of formulating strategies about what might be a reciprocal tariffs and that impact.
Speaker Change: I think it has the potential to be several hundred basis points potentially in that but there's still things to work through in that time period. So we're going to work very hard to have the understanding and execute on what material what price inflation will be and also what in market activities would be.
Speaker Change: And perhaps there will be some that get lesson through this area, but I also contend theyre going to be some that are going to strengthen and go forward with investments and have more regionalized demand be it in the U S are including in North America.
Speaker Change: Okay. So it sounds like you are just taking a logical approach to the tariff driven price increases you are seeing in layer that onto your demand forecast.
Speaker Change: That's what's guiding you okay. That's that's helpful. Yes, given there.
Speaker Change: Alright, given there were guiding one quarter David it's.
Speaker Change: A lot of what we're seeing in terms of those price increases as new indicated it is more general inflation related.
Speaker Change: Seems to be taking a wait and see attitude in terms of that 90 day now 60 day window in terms of.
Speaker Change: Better clarity in terms of what tariffs do to us so given that timing very little impact for us in Q4 purely tariff driven.
Speaker Change: Yeah, great idea to be on a June fiscal year this year for sure that round.
Speaker Change: Yeah.
Speaker Change: No.
Speaker Change: Well I guess, there's kind of a thesis out there that there is a differential in demand destruction or growth rates across whether it's MRO related products parts and components that are feeding production lines and then third.
Speaker Change: Sort of capital expenditure driven.
Speaker Change: <unk>.
Speaker Change: It doesn't sound like you're seeing sort of a.
Speaker Change: An increasing level of demand destruction there given your automation organic growth you just talked about so can you just talk about those three things MRO and then production.
Speaker Change: Sort of driven products versus capital expenditure driven sales.
Speaker Change: Is there a general trend in any of those or is it kind of depends on the end market more.
Speaker Change: Yes, I think for US David overall, when we think about our service centers and and given half their demand often will occur at a break fix time.
Speaker Change: That's really resilient in that we have seen in the broader MRO or some planned projects, perhaps some deferrals or some kick out a little bit of that as customers work through or think through planning and look for a little bit more certainty.
Speaker Change: In the backdrop.
Speaker Change: MRO, we feel given that that 70% of the overall company mix stays.
Speaker Change: Stays pretty resilient throughout and then where we are involved in projects and capital projects to really not.
Speaker Change: <unk> large capital intensive investments there are enabling customers to be more productive more efficient into the side. They have good paybacks and returns and so we have seen some deferral or some delays in that some of that is related to how they in the project.
Speaker Change: Part of that part of the project interacts with a total part of the investment or the project.
Speaker Change: But we take encouraging signs.
Speaker Change: The engineered solutions order rate that we would have had in the quarter. The building backlog that we're seeing including in flow control and automation in the side and then the very early signs even in off highway mobile, perhaps it is bottoming and firming into the side while the.
Speaker Change: <unk> a.
Speaker Change: That has been a headwind if we look back over perhaps 18 to 24 months back is starting to be a contributor again.
Paul: That's great color Neal Thanks, Paul.
Speaker Change: And your next question comes from the line of Sabrina.
Sabrina: With Bank of America. Please go ahead.
Sabrina: Hey, good morning, everyone.
Sabrina: Good morning.
Sabrina: Hmm.
Sabrina: I just wanted to talk I guess, a little bit about that.
Speaker Change: What youre seeing in the macro and I think generally your trends seem positive.
Speaker Change: Like sequentially clearly, there's great extent of uncertainty, but the Q4 guide suggest decelerating trends from Q3, and you know I guess you haven't started may and June got worse, and I guess, how much of that has to do with what you are currently seeing maybe if you could clarify whether April actually slowed from March February.
Speaker Change: Or if there was something with Easter going on but from a demand if APRA Hush loud and I guess, how much of things accelerating in the guide has to do with what you've already seen versus just assuming that things are going to get more negative from here and then how do we sort of square the order trends and engineer solutions, which I think has been positive for two quarters now.
Speaker Change: With the implied deceleration.
Speaker Change: Out of a quarter.
Speaker Change: Yeah, So I'll, perhaps work backwards I'll start with the engineered solutions orders and so.
Speaker Change: Depending on the amount of engineering.
And the work to go into those projects, which can vary.
Speaker Change: The conversion time can be 120 days, maybe a 180 days on some of those so encouraging on the build that I think many of those start to contribute into our fiscal 'twenty six.
Speaker Change: On that side and then if I think about the overall guide as we said.
Speaker Change: We want to be prudent in this environment and as we work through these 90 day periods and what some of the tariffs and part two.
Speaker Change: Potential reciprocal tariffs may turn out to be into that site.
Speaker Change: So very focused on how we are executing the business and helping the customers and so I think that it has.
Speaker Change: You know the appropriately prudent in that area to your point April did have an influence of a of a good Friday Easter.
Speaker Change: Holiday timing into that.
Speaker Change: <unk> that was a 100 basis points into that side.
Speaker Change: Influence.
Speaker Change: And then as we think about you know March is it built up.
Speaker Change: Probably on a on a two year stack basis would've been down 1% March more.
Speaker Change: 4% into that period so.
Speaker Change: As we think about April given some of that order activity with.
Speaker Change: We just want to be conscious of some of that either cross current or uncertainties that could exist.
Speaker Change: I would add as you move across the months Jude is a little bit tougher comp for us.
Speaker Change: April did see that impact from what we call a half day.
Speaker Change: In terms of good Friday holiday, so could factor accordingly for that but I would just add.
Speaker Change: At the low end of the guidance assumes an average daily sales is roughly 500 basis points below the normal sequential trends in the quarter at the high end, though where we say down low single digits assumes average daily sales is roughly 100 basis points below the normal step up we would see going into our Q4. So.
Speaker Change: That compares at 100 basis points compares to a 230 basis point kind of below normal seasonality level, we've been running year to date. So just given all the uncertainty thought it prudent to position it accordingly.
Speaker Change: Got it no. Thank.
Speaker Change: Thank you that's helpful.
Speaker Change: And then just on the EBITDA margins.
Speaker Change: You've had good performance year to date and I guess, if you look at what's implied by the guide.
Speaker Change: You have may be similar year over year sales growth and Keith maybe slightly worse in Q4 to Q3.
Speaker Change: On a total basis and then you have a much larger step up in SG&A.
Yeah. So the implication is something like I don't know, it's like 7% year over year increase in SG&A on a 1% of sales growth.
Speaker Change: And just wanted to understand sort of what it's implied by the midpoint of your guide I just want to understand what would be driving so much.
Speaker Change: Leveraging our quarter over quarter or does it have something to do with yes, because this and there's somebody there was inflation.
Speaker Change: Later, there will be helpful.
Speaker Change: Yes, very proud of the businesses.
Speaker Change: Cost controls and productivity in terms of SG&A spend and our most recent quarter.
Speaker Change: Hydra Dyne comes in at a favorable gross margin mix up benefit, but still higher SG&A rates that youre seeing that read through we're starting to get great traction on some of the synergy initiatives, but not not a great deal of that reading through yet even in the in the fourth quarter. So that is an influence and I'd say you know if they get back to the growth.
Speaker Change: Margin performance, we said LIFO would be at a similar level of sequentially. What we saw in Q3, but just to remind you that in Q4 of last year as we comp this quarter.
Speaker Change: We did have a layer liquidation benefit in the prior year, so that alone drives about a 20 basis point.
Speaker Change: Adverse impact on both gross and EBITDA margins, so you're seeing all those combinations read through to some deleveraging as a result, just looking absolute numbers year over year.
Speaker Change: I'll follow up offline. Thank you.
Speaker Change: Right.
Speaker Change: Your next question comes from the line of Ken <unk>.
Speaker Change: Please go ahead.
Speaker Change: Yeah.
Speaker Change: Hey, good morning, guys.
Speaker Change: Again.
Speaker Change: But I think you typically think about incremental margins through the cycle of kind of being in that mid to high teen range.
Speaker Change: If demand does start to normalize next year, whether it's in <unk>.
And service Center do you think that that's that type of incremental that you could drive or does that become a little bit tougher depending on maybe some higher LIFO expense for potential price increases how do you think about.
Speaker Change: Just maybe the moving pieces in operating leverage.
Ken: Yeah, Ken I would think.
Ken: End of the year and longer term, we still believe.
Ken: And our ability to have incrementals in that mid to high teens range in to the side.
Ken: As we think about it.
Ken: To your point.
Ken: A little early on.
Ken: And we will be working through our planning, we're going through our long range strategy sessions and game theory had the service centers.
Ken: And game theory with the board this past time engineered solutions in coming up and we're working.
Ken: The planning cycles right now but.
Ken: Perhaps as a starter.
Ken: Do we think about or look at 'twenty six perhaps it has the fourth quarter guidance that would in and if you apply normal seasonality looking ahead.
Ken: That results in something Thats flat.
Ken: Then if you think about there would be will be price contribution and that perhaps that's a.
Ken: Several hundred basis points into it.
Ken: Perhaps with some of the uncertainty in environment that degrades that that volume a little side, a little bit, but we also contend we can have engineered solutions with backlog conversion into that side, which could potentially contribute so.
Ken: Perhaps 26, it looks like a low single digit environment overall.
Ken: Perhaps it could be better as we work through and then just as a reminder on LIFO.
Ken: There is more.
Ken: Expanse may obviously I would start with it does provide our life overall is a significant cash benefit to us in inflationary times and then fade to look back at 17 through 19 with LIFO, We did a very nice job managing through that and we grew gross margins.
Ken: Into that period.
Ken: 60 basis points or so so team has a good playbook, we have that muscle memory, we will be focused on.
Ken: Really any operating environment. That's ahead of how we execute and perform.
Ken: Does that Ken coming out of the inflationary kind of the COVID-19 and some of that demand rebound.
Ken: Higher engineered solutions contribution and once again, just thinking about the way the business levers on some of that SG&A base.
Ken: So the deal once you get past that first 1% to 2% of growth would expect I think.
Ken: Like I said those mid to high teens Incrementals for sure.
Ken: Yes, that's really helpful.
Speaker Change: Maybe for the second question here, just talk a little bit about capital deployment, obviously, you've got the new bolt on deal for IRS. Note. This morning, you also I think announced a new share repurchase program as well just how do you think about priority priority priorities between the two.
Speaker Change: Is this a good level our good share price level as you think about and acting on that.
Speaker Change: That share repurchase program.
Speaker Change: And what's the capacity.
Speaker Change: To act on M&A.
Speaker Change: Even here in the fourth quarter and into 'twenty six.
Speaker Change: Yeah. So.
Speaker Change: Can start so can our overall our capital allocation our priority is going to remain growth.
Speaker Change: We know that organic investments, we make have high returns and while we're not so capital intensive we will be going through.
Speaker Change: That planning and executing on those.
Speaker Change: We know also M&A can be a strong contributor to that that will remain a priority.
Speaker Change: The pipeline is active we're busy into that front, so that will contribute into the side and then from a share repurchase standpoint, I'm pleased that the authorization was.
Speaker Change: Renewed in coming out we will maintain a disciplined approach a returns driven approach at that.
Speaker Change: But I would expect that we will be active in the fourth quarter.
Speaker Change: To say it yeah, so coming off of hydro died in the incremental share repurchase activity in the most recent quarter is still at four times leverage plenty of dry powder to handle all of those capital deployment opportunities.
Speaker Change: Very helpful. Thanks.
Speaker Change: And your last question comes from the line of Brett Simpson with Mizuho. Please go ahead.
Speaker Change: Hey, Good morning, guys. This is peter costs on for Brett.
Speaker Change: Could you just add some color on what youre seeing from reassuring investments specifically whats the pulse out there just as we laid out this policy uncertainty anything youre hearing around customer tone would be helpful. Thanks.
Speaker Change: So I think overall the activity or discussions.
Speaker Change: <unk> around re shoring.
Speaker Change: <unk>, if I think about the investments in facilities and we're seeing that from.
Speaker Change: Kind of the manufacturing nonresident construction rates being up I know, there's been a positive impact for a number of years in manufacturing employment, whether that's.
Speaker Change: 141, 5% into the side that continues many discussions with customers as they think about upcoming environments. What are they moving inside of their facilities or how theyre looking to qualify other suppliers and so many of those are next.
Speaker Change: To your second and third tier Oems or customers of ours today, and so there will be capital and operating investments that could be continuing on that and then we all see and read about large companies, making extended the investments and and so as those projects start we've got.
Speaker Change: Great indirect participation with our service centers as we think about metals.
Speaker Change: Metals mining aggregate as things get built informed and then as the facilities run and operate they give us a strong aftermarket MRO and then for some of these including in fluid power and technology products, depending on the industry, where on that equipment going in which.
Speaker Change: Can create some pull for us as well so.
Speaker Change: Think re shoring.
Speaker Change: Continues.
Speaker Change: To be an input and perhaps can be even a greater input as we look out at our fiscal 'twenty six and beyond.
Speaker Change: Yeah.
Speaker Change: Thank you and then maybe how do you think about the willingness of the channel to take on more price.
Speaker Change: Any early pushback there as you kind of start to have the conversations with your suppliers and then with your channel.
Speaker Change: And is there kind of just a willingness for suppliers to work through on any contract timing mismatches anything that.
Speaker Change: Sorry, what was the last part of that question about suppliers.
Speaker Change: Just any willingness.
Speaker Change: On the supplier side to work through contract timing mismatches, maybe with larger national accounts or anything like that.
Speaker Change: Yeah, So I would say overall I mean theres clear awareness.
Speaker Change: Tariffs inflationary impacts and inputs.
Speaker Change: Throughout any environment and we're firm believers that we as consumers.
Speaker Change: We will pay more for items going forward and that's going to be the same in the industrial environment and so many of our customers are looking at how they have clarity of what those inputs are going to be and how they form those pricing inputs and policies as they take them forward.
Speaker Change: And going and going out as it relates to suppliers they will be coming.
Speaker Change: With the phase <unk>.
Speaker Change: They will provide the documentation that that it will go through.
Speaker Change: And we work closely with them to have the right implementation schedule across the producing our customer landscape in that and so if I look back it's been a productive and in our operating history and cadence and I expect the same as we go forward.
Speaker Change: Yes.
Speaker Change: At this time I am showing we have no further question.
Speaker Change: In the call over to Mr. King for any closing remarks.
King: I just want to thank everyone for joining us today, and we look forward to talking with many of you throughout the quarter. Thank you.
Speaker Change: Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Speaker Change: [music].