Applied Industrial Technologies(AIT) - 2025 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported a consolidated sales increase of 1.8% year over year, with acquisitions contributing 0.66% to growth, while organic sales declined by 3.1% on a daily basis [24][25] - Gross margins improved to 30.5%, up 95 basis points from 29.5% in the prior year, driven by strong channel execution and ongoing margin initiatives [29][30] - EBITDA increased by 6.8% year over year, with an EBITDA margin expansion of 59 basis points to 12.4% [33] Business Line Data and Key Metrics Changes - The Service Center segment saw a 1.6% decline in organic sales year over year, but EBITDA increased by 6.4%, with EBITDA margin expanding by 140 basis points to 14.7% [26][27] - The Engineered Solutions segment experienced a 13.5% increase in sales year over year, with acquisitions contributing 20.8% growth; however, organic sales decreased by 6.5% [28] - Orders in the Engineered Solutions segment increased by 3% year over year and 8% sequentially, with automation orders growing over 30% year over year [14][28] Market Data and Key Metrics Changes - Demand across the Service Center segment improved, with average daily sales increasing nearly 4% sequentially compared to the second quarter [13] - The company noted that 16 out of its top 30 end markets generated positive sales growth year over year, an improvement from 11 in the previous quarter [13] - Growth was strongest in technology, food and beverage, pulp and paper, aggregates, and transportation markets [14] Company Strategy and Development Direction - The company is focused on internal growth initiatives, margin expansion, and cost management, with a strong emphasis on M&A activity, including the recent acquisition of Hydrodyne and a definitive agreement to acquire Iris Factory Automation [10][11][12] - The company aims to leverage its strong balance sheet and cash generation capabilities to enhance growth and shareholder returns through capital allocation [9][10] - The strategic focus includes expanding the engineered solutions segment and enhancing cross-selling opportunities [11][20] Management's Comments on Operating Environment and Future Outlook - Management acknowledged a mixed demand environment, with ongoing macroeconomic uncertainties impacting industrial production and capital spending [12][17] - The company expects continued conservative management of operational and capital spending by customers amid evolving trade policies and inflationary pressures [38][39] - Management remains optimistic about the long-term growth potential, particularly in the Engineered Solutions segment, as order trends show signs of improvement [40] Other Important Information - The company has repurchased over 330,000 shares for approximately $80 million year to date, with a new share repurchase authorization of 1.5 million shares approved by the Board [12][34] - Free cash flow increased by 50% year over year in the third quarter, reflecting strong cash generation and working capital management [9][34] Q&A Session Summary Question: How is the company thinking about the mix of customers that might be levered to China sourcing and production slowdowns? - Management noted positive trends in the top 30 customers, particularly in technology and food and beverage sectors, which are expected to remain resilient [42][43] Question: Can Fluid Power pivot in the first half of fiscal 2026? - Management indicated that there could be positive trends in Fluid Power, with automation orders showing strong growth and inventory levels normalizing [46][48] Question: How does the company approach setting guidance in relation to tariff-driven price increases? - Management stated that they are factoring in expected price inflation and have seen a contribution of approximately 100 basis points from pricing in the third quarter [56][61] Question: What is the company's view on the resilience of MRO demand? - Management expressed confidence in the resilience of MRO demand, noting that it constitutes 70% of total sales and remains stable despite some deferrals in planned projects [62][63] Question: What is the outlook on reshoring investments? - Management reported ongoing discussions around reshoring, with expectations for increased capital and operating investments as companies consider moving production closer to home [100][101]