Applied Industrial Technologies, Inc. Q2 FY2026 earnings call

• Industry Conditions: Mixed end-market backdrop with seasonally weak sales in December but early fiscal third-quarter trends showing positive momentum. - Sales Trends: Reported year-over-year organic growth of 2.2% was modestly below prior quarter, but underlying sales growth strengthened as the quarter progressed. Booking rates showed positive momentum, especially in engineered solutions. - Operational Performance: Delivered solid performance balancing softer sales, higher LIFO expense, and difficult prior year margin comparison. Excluding LIFO, gross margins and EBITDA margins held firm. - Capital Deployment: Announced an 11% increase in quarterly dividend, active with share buybacks, and evaluating M&A opportunities across segments. - Segment-Specific Highlights: Engineered solutions orders up over 10% year-over-year; service center US sales up over 4% year-over-year; technology vertical seeing positive demand signals from semiconductor customers; automation orders up 20% year-over-year; flow control orders up high single-digit percent year-over-year; Hydrodyne acquisition contributing positively to EBITDA and margin performance.

Service Center Segment: Organic sales increased 2.9% year-over-year. US operations saw sales increase over 4% year-over-year, driven by growth in national and local accounts. Segment EBITDA increased 2.2% year-over-year inclusive of a 340 basis point LIFO headwind. Engineered Solutions Segment: Sales increased 19.1% year-over-year, with acquisitions contributing 18.6 points. Organic sales increased 0.5% year-over-year. Automation orders were up 20% year-over-year. Flow control orders were up a high single-digit percent year-over-year. Hydrodyne acquisition: Generated over $30 million of EBITDA in the first twelve months of ownership, with EBITDA margins exceeding 13% in the second quarter and being modestly accretive to consolidated EBITDA margin.

• Adjusted full year fiscal 2026 EPS guidance to $10.45 to $10.75, with sales growth above 5.5% to 7% and EBITDA margins 12.2% to 12.4%. - LIFO expense expected to be 24 to $26 million compared to prior guidance of $14 million to $18 million. - Pricing contribution revised to 200-230 basis points year-over-year from prior 150-200 basis points. - Organic sales expected to increase 2.5% to 4% for the full year, with third quarter organic sales expected to increase by low single-digit to mid-single-digit percent over prior year. - Inorganic M&A with sales and foreign currency tailwinds expected to contribute approximately 50 basis points of year-over-year growth in the second half. - Third quarter gross margins expected to decline sequentially to low 30% range, with EBITDA margins within 12.2% to 12.4%.

• Macro and policy uncertainty influencing customer spending behavior and shipment activity, leading to ongoing variability in monthly sales growth. - Impact of LIFO accounting timing on gross margins and earnings, as the timing of recognizing product inflation can fluctuate.

Q: Please clarify the organic basis of engineered solutions orders up over 10% and book to bill.

A: Engineered solutions orders up over 10% is on an organic basis, and book to bill was above one during the quarter, with three of the last four quarters showing positive book to bill in that segment.

Q: Dissect fluid power comparisons considering destock.

A: Stock/destock has been worked through, with encouraging performance in mobile off-highway Fluid Power and opportunities from industrial activity and technical MRO requirements for aging installed equipment. Fluid power side also benefits from technology aspects like semi wafer fab equipment and data center participation.

Q: Thoughts on SD and A organic constant currency growth less than organic revenue growth.

A: Organic constant currency SD and A growth was less than organic revenue growth. SD and A growth in prior periods was impacted by factors like benefit cost variability and AR provisioning. In the future, SD and A growth is expected to be less than sales growth rate, with a focus on balancing organic growth investment, M&A, dividend increase, and share repurchase. There is about 700,000 shares left on the current share repurchase authorization.

Q: Automation orders up 20% - relation to pent up needs vs new projects.

A: Automation orders up 20% is driven by both pent up needs (projects in flight) and new opportunities from reshoring, focus on efficiency/productivity, safety/quality, and connectivity products. Factors like tax policy and outlook may further accelerate these opportunities.

Q: Pricing contribution of 250 bps in the quarter and outlook for second half.

A: Pricing contribution was 250 bps in the quarter. For the second half, third quarter is expected to have similar 250 bps impact, and fourth quarter may moderate to a couple 100 basis points impact due to aging or overlapping of prior increases. Suppliers are orderly in price negotiations, and much of the annual increases are in place.

Q: Guidance - impact of LIFO, interest expense, share count, acquisition.

A: Guidance is impacted by higher LIFO expense, some interest expense increase, slight benefit from lower share count, and modest impact from acquisitions. The core guide has seen a modest increase due to strong margin performance, with the guide tightening at the upper end of the previous guide. The midpoint of guidance assumes higher organic growth in the back half relative to prior guidance, tied to raised pricing assumption and some volume assumptions.

Q: Margin guidance - moving pieces.

A: Margin guidance considers factors like LIFO expense, mixed benefit from engineered solutions, local account growth, M&A performance (Hydrodyne), price actions, and margin initiatives. Excluding LIFO, there are mixed benefits from flow control sales, acquisition mix, and stronger engineered solution shipments. The team is focused on managing through inflationary environment with countermeasures. The mid teen incremental EBITDA margin target on mid single digit growth is achievable with leverage and various initiatives, with potential for pricing and other initiatives to be neutral or accretive.

Q: Third quarter guide - below seasonal growth.

A: The 5% midpoint organic sales growth assumption for Q3 is in line with normal seasonality transition from Q2, considering factors like December holiday timing impact and ES orders/snake metal pricing.

Q: Mechanics of LIFO - lead time dynamics and supplier negotiations.

A: Suppliers are orderly in price negotiations, with most annual increases in place. LIFO expense fluctuates based on inventory decisions and demand backdrop. The decision to bring in inventory to support firming demand drove some of the LIFO increase relative to expectations.