Applied Industrial Technologies, Inc. Q4 FY2025 earnings call

Management Statement and Operational Highlights

• Fiscal 2025 Results: Achieved new records for sales, EBITDA, and EPS. Full-year EPS growth 4% exceeded initial guidance. Gross margins expanded nearly 50 basis points to over 30% for the first time. Delivered record cash generation, deploying over $560 million in fiscal 2025, including acquisitions like Hydradyne.
• Fourth Quarter Sales: Sales exceeded high end of guidance, returned to modest positive organic growth. Engineered Solutions segment saw first organic daily sales growth in 7 quarters, with double-digit organic growth in technology vertical and mid-single-digit in automation. Service Center segment returned to positive organic growth.
• End Market Trends: Mixed trends with some positive signs. Top 30 end markets had 15 generating positive sales growth. Declines continued in certain markets, but technology vertical showed solid demand.
• M&A Activity: M&A sales contribution was encouraging, with progress at Hydradyne and initial contribution from IRIS Factory Automation.
• Cash Generation: Generated over $465 million of free cash in fiscal 2025, up 34% to a record. Deployed capital through M&A, share buybacks, and dividend increases.

Segment Performance

• Service Center segment: Sales decreased 0.4% year-over-year on an organic daily basis, improving from the prior quarter's 1.6% decline. Sequentially, segment sales per day increased 1.5% from the third quarter, above normal seasonal patterns. Segment EBITDA decreased 8.3% year-over-year, with a margin of 13.6% down 100 basis points. Full-year performance included solid margin and cost control with operating expense per day down 1% organically and EBITDA margins up modestly against low single-digit sales decline.
• Engineered Solutions segment: Sales increased 20.7% year-over-year, with acquisitions contributing 19.7 points. On an organic daily basis, segment sales increased 1.8% year-over-year. Segment EBITDA increased 13.5% year-over-year, with a margin of 14.8% down ~90 basis points. Impacted by Hydradyne's lower initial margin and LIFO, but showed improvement in automation growth and order strength.

Guidance

• Fiscal 2026: EPS in range of $10 to $10.75. Total sales expected to increase 4% to 7%, including 1% to 4% organic growth. EBITDA margins 12.2% to 12.5%.
• First Quarter: Projected fiscal first quarter organic daily sales to increase low single-digit percent year-over-year. EBITDA margins between 11.9% to 12.1%.
• Acquisitions: Inorganic growth from completed acquisitions expected to contribute ~300 basis points to sales growth in fiscal 2026, including ~600 basis points in the first half from Hydradyne.
• LIFO and Expenses: Expect $14 million to $18 million of LIFO expense. Free cash generation strong but potentially lower year-over-year due to greater working capital investment.

Risks

• Tariff Backdrop: Dynamic tariff environment impacting supply chains and supplier price increases.
• Macroeconomic Uncertainty: Trade policy, interest rate, and broader macro conditions creating end market visibility challenges.
• Inflation: Ongoing inflationary pressures affecting costs and pricing.
• End Market Volatility: Mixed end market trends with continued declines in some key sectors.

Question and Answer

• Q: On Hydradyne, dimensionalize 12% sequential sales growth and 30% EBITDA increase. A: David K. Wells said it's a combination of similar integration costs and leverage on SD&A falling through to EBITDA, with stronger margin performance and ahead-of-anticipated synergy realization. Neil A. Schrimsher added they were pleased with synergies, with 80% from cost/margin and 20% sales opportunity.
• Q: Break-fix MRO and pent-up demand. A: Neil A. Schrimsher noted local accounts were positive in the last month, indicating potential firming of demand.
• Q: Pricing and its impact on guidance. A: Neil A. Schrimsher said first quarter pricing similar to prior quarter, expecting ramp in 2026 to 150-200 basis points, potentially higher with strong demand.
• Q: LIFO and margin guide. A: David K. Wells said LIFO expense pegged at $14M-$18M, and margins expected to normalize as synergy benefits from Hydradyne are realized.