APPLIED INDUSTRIAL TECHNOLOGIES INC Q1 FY2025 earnings call

• First quarter results: Organic daily sales declined 3% but exceeded expectations in September. Record first quarter free cash generation. Margin trends impacted by comparisons and sales declines, but margin guidance for fiscal 2025 unchanged. • Segment trends: Service Center segment sales held in relatively well with September billings strong. Engineered Solutions segment showed encouraging order trends. • Investments: Ongoing investments in engineering talent, digital sales tools, e-commerce, facilities, tooling, technology systems, and logistics. Leveraging AI in sales process, AR, and AP automation. • M&A: Active pipeline across both segments, focusing on bolt-on and midsized targets to create shareholder value.

Service Center segment: Organic average daily sales declined 1.4% year-over-year, with top-of-stack growth of 25% in the prior two years. Spending on general MRO and capital maintenance projects was muted. Engineered Solutions segment: Sales declined 6% organically year-over-year, but orders strengthened in September, particularly in automation and technology. Fluid power sales were impacted by lower demand, but automation and flow control sales turned positive in September. Revenue contribution percentages were not explicitly stated in absolute terms but discussed by segment performance.

• Modestly raised full-year fiscal 2025 EPS guidance to $9.25 to $10 (previously $9.20 to $9.95). • Maintained sales guidance of down 2.5% to up 2.5% including down 4% to up 1% on an organic daily basis. • Maintained EBITDA margins of 12.1% to 12.3%. • Expect second quarter gross margins to increase slightly on a sequential basis and EBITDA margins of 11.7% to 11.9%.

• Macro cross currents, including geopolitical unrest. • Uncertainty around the cadence and extent of interest rate cuts. • Lingering macroeconomic challenges impacting customer activity.

Q: When you talk about orders in the ES segment, do you have a rough approximation of what percentage of ES sales are coming via customer capital spending budgets versus expense items? And related to that, did orders remain strong in October?

A: Neil Schrimsher said many ES sales are capitalizable and have good returns profile, not heavy capital-intensive. Encouraged by order trends, especially in automation and technology, but early to call sustained rise.

Q: Still quiet on the acquisition front, and net debt continues to dwindle. Are seller expectations too high? And thoughts on share repurchase?

A: David Wells said active pipeline for bolt-on and midsized deals. Neil Schrimsher said committed to capital allocation, M&A remains strong priority but share repurchase also considered.

Q: Dive into automation and technology improvement, how sticky is it?

A: Neil Schrimsher said good order rate and activity in technology, especially around chip manufacturers, and automation has high interest in robotics and vision.

Q: On October trends and gaining incremental share?

A: Neil Schrimsher said getting benefits in focus areas, customers consolidating spend, intent on being one of capable suppliers.

Q: On automation engineered platform staffing and overhead?

A: Neil Schrimsher said maintained staffing levels, consciously positioned for robotics and vision growth.

Q: On organic investment opportunities, Pacific Northwest capacity and technology proliferation?

A: Neil Schrimsher said operations fully in, fluid power technology investment in new facility running. David Wells said focus on automation and engineering collaboration.

Q: On automation and system integrator approach, friction?

A: Neil Schrimsher said no friction, solutions flow to multiple paths, working on productized solutions.

Q: On inflation and pent-up demand?

A: David Wells said steady inflationary impact good for distribution, pent-up demand likely to release post-November.

Q: On inventories and destock?

A: Neil Schrimsher said working with suppliers on inventory, not reducing inventories; fluid power off-highway mobile had destocking, expected to improve.

Q: On EBITDA margins in the quarter?

A: Neil Schrimsher said largely in line, some timing on comparisons, still good opportunities to improve margins.