Applied Industrial Technologies (NYSE: AIT) reported mixed results in its Q1 FY2025 earnings call, with a 3% organic daily sales decline year-over-year and a record free cash flow. The company raised its EPS guidance for FY2025 and maintained sales guidance, signaling optimism for market conditions in the latter half of the fiscal year. Despite some segment declines and margin pressures, AIT is focusing on strategic investments and acquisitions to drive future growth.
Key Takeaways
- AIT's Q1 FY2025 organic daily sales declined by 3%, with a strong finish in September.
- Record free cash flow was achieved, nearly doubling from the previous year.
- 13 out of the top 30 markets showed growth, with notable strength in food and beverage, primary metals, and transportation.
- The Service Center segment saw a 1.4% organic sales decline, while the Engineered Solutions segment had a 6% organic sales decline but improved orders by the quarter's end.
- EPS guidance for fiscal 2025 was raised to $9.25-$10, with sales expected to stabilize later in the year.
- Investments in technology, engineering talent, and facility upgrades continue, with a focus on shareholder value through organic growth and acquisitions.
- Optimism for increased customer capital spending in automation and technology sectors despite economic uncertainties.
Company Outlook
- EPS guidance for fiscal 2025 raised to the range of $9.25-$10.
- Sales guidance maintained between a 2.5% decline and a 2.5% increase.
- Anticipation of increased customer capital spending in the latter half of FY2025, especially in automation and technology sectors.
Bearish Highlights
- Organic sales in the Engineered Solutions segment fell by 6.1% due to lower demand and destocking.
- Gross margin decreased slightly to 29.6%, influenced by LIFO expenses and unfavorable sales mix.
- EBITDA margins dipped reflecting expense deleveraging amid sales declines.
Bullish Highlights
- Record free cash flow was generated, nearly doubling from the previous year.
- Positive momentum in technology and automation sectors, with double-digit growth.
- Strong pipeline for acquisitions and increased share repurchases due to a favorable cash position.
Misses
- Earnings per share decreased to $2.36, a slight decline from the previous year.
- Service Center segment's organic sales declined by 1.4% year-over-year.
- EBITDA margins came in slightly below guidance due to timing and prior year comparisons.
Q&A Highlights
- AIT is not reducing inventory but investing in readiness for customer demands.
- Expectation of demand recovery in early 2025, particularly in the off-highway mobile sector.
- Q1 typically shows the weakest gross margins, but leadership is confident in the sales development and margin outlook for the rest of the year.
Applied Industrial Technologies continues to navigate mixed market conditions with a strategic focus on growth through technology and automation investments. The company's robust free cash flow and raised EPS guidance reflect confidence in its operational strategy and market position. Despite some segmental headwinds, AIT's management remains committed to capitalizing on market opportunities and enhancing shareholder value as FY2025 progresses.
InvestingPro Insights
Applied Industrial Technologies (NYSE: AIT) continues to demonstrate financial resilience and strategic growth despite mixed market conditions. According to InvestingPro data, the company boasts a market capitalization of $8.88 billion, reflecting its substantial presence in the industrial distribution sector.
One of the most notable InvestingPro Tips is that AIT has raised its dividend for 15 consecutive years, underscoring the company's commitment to returning value to shareholders. This aligns with the company's strong cash flow performance mentioned in the earnings report. Additionally, AIT has maintained dividend payments for an impressive 54 consecutive years, highlighting its long-term financial stability.
The company's P/E ratio of 23.29 suggests that investors are willing to pay a premium for AIT's shares, possibly due to its consistent performance and growth prospects. This is further supported by another InvestingPro Tip indicating that AIT has shown a high return over the last year, with a 1-year price total return of 53.59% as of the latest data.
AIT's focus on strategic investments and acquisitions is reflected in its solid financial position. The InvestingPro data shows that the company operates with a moderate level of debt and its liquid assets exceed short-term obligations, providing financial flexibility for future growth initiatives.
The company's raised EPS guidance for fiscal 2025 is consistent with the InvestingPro Tip that analysts predict the company will be profitable this year. With a revenue of $4.48 billion in the last twelve months and an EBITDA of $540.97 million, AIT demonstrates its ability to generate substantial earnings, supporting its optimistic outlook for the latter half of the fiscal year.
For investors seeking a more comprehensive analysis, InvestingPro offers 12 additional tips for AIT, providing deeper insights into the company's financial health and market position.
Full transcript - Applied Industrial Technologies (AIT) Q1 2025:
Operator: Welcome to the Fiscal 2025 First Quarter Earnings Call for Applied Industrial Technologies. My name is Angela, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Ryan Cieslak, Director of Investor Relations and Treasury. Ryan, you may begin.
Ryan Cieslak: Okay. Thanks, Angela, and good morning to everyone on the call. This morning, we issued our earnings release and supplemental investor deck detailing our first quarter results. Both of these documents are available in the Investor Relations section of applied.com. Before we begin, just a reminder, we'll 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. Actual results may differ materially from those expressed in the forward-looking statements. The company undertakes no obligation to update publicly or revise any forward-looking statement. In addition, the conference call will use non-GAAP financial measures which are subject to the qualifications referenced in those documents. Our speakers today include Neil Schrimsher, Applied's President and Chief Executive Officer; and Dave Wells, our Chief Financial Officer. With that, I'll turn it over to Neil.
Neil Schrimsher: Thanks, Ryan, and good morning, everyone. We appreciate you joining us. I'll start today with some perspective on our first quarter results, current industry conditions and our expectations going forward. Dave will follow with more specific detail on the quarter's financials as well as our updated outlook, and I'll then close with some final thoughts. So first, a few high-level comments on first quarter results. Overall, our Applied team continued to make significant progress on our strategic initiatives during the quarter as we position the company for above-market growth and margin expansion in the future. Organic daily sales declined 3% over the prior year but exceeded our expectations on encouraging September trends. We also had a record first quarter of free cash generation that nearly doubled from the prior year. As expected, margin trends were impacted by comparisons and sales declines early in the quarter as well as adverse mix dynamics and the impact of growth investments. Our margin guidance for fiscal 2025 remains unchanged, and we expect margin trends to improve for the balance of the year. Netting these factors, EBITDA came in large line with our expectations during the quarter, while EPS benefited from lower tax rate, interest and other income and reduced share count from recent buybacks. So a good start to the year that we look to build on going forward. Digging more into the sales trends in the quarter, broader end market demand remained generally mixed. This is consistent with industrial macro data points in recent months and resulted in subdued customer activity early in the quarter. As I said, the quarter finished strong with several encouraging trends. Of note, organic average daily sales during September were seasonally strong and relatively unchanged compared to the prior year. While the improvement in September came from several areas, it was led by stronger shipment and order trends in our Engineered Solutions segment. Sales in our U.S. Service Center operations also improved in September on stronger brake-fix activity and ongoing benefits from our sales process initiatives. This was partially offset by sustained weakness in machinery end markets, including across our fluid power mobile OEM customers. When looking at our top 30 end markets, 13 were positive over the prior year, which is slightly below the 14 reported last quarter. Growth was strongest across food and beverage, primary metals, transportation, aggregates and technology during the quarter. This was offset by declines in machinery, oil & gas, lumber & wood, fabricated metals, pulp & paper, rubber & plastics and utilities. While showing signs of an initial recovery, the demand backdrop remains bifurcated and somewhat uneven. This is reflected in some easing and early fiscal second quarter sales trends following September's outperformance. Organic sales through the first 16 business days of October are down by a mid-single-digit percent over the prior year. We estimate this includes some modest disruption from recent hurricanes in the Southeast. We would also highlight the timing of system and solution shipments in our Engineered Solutions segment and vary month-to-month. And with nearly a week left in the month in U.S. election uncertainty now front and center, we hesitate to extrapolate too much from initial October trends but remain mindful of ongoing crosscurrents. Digging more into each of our segments. Average daily sales in our Service Center segment declined 1.4% organically over prior year levels on top of stack growth of 25% the prior two years. Consistent with last quarter, spending on general MRO and capital maintenance projects was more muted as customers continue to tightly manage operational expenses. That said, sales trends across our core U.S. Service Center network held in relatively well with September billings seasonally strong on improved brake-fix and general MRO activity. We saw ongoing health across larger national accounts and fluid power aftermarket sales. Our Service Center team also continues to benefit from our service capabilities, local inventory investments and ongoing sales initiatives as well as greater cross-selling opportunities. Investments in technology and predictive analytics are continuing to enhance our business intelligence and sales force productivity. Over the past five years, sales per U.S. service center associate have increased over 7% on a compounded annual basis. We've also enhanced our local market position through bolt-on acquisitions made over the past year which are augmenting growth in new and underpenetrated vertical markets, while supplementing our margin mix. Overall, our Service Center team is in a strong position moving forward, particularly as end-market demand reaccelerates within the short cycle and brake-fix focused area of our business. While hard to measure, we believe there's some pent-up technical MRO demand across various end markets following subdued activity and deferred capital maintenance over the past year. This could release following the U.S. election and if interest rates continue to moderate. In addition, our technical expertise across critical capital equipment and production processes, combined with our locally focused distribution network is a powerful value proposition for our suppliers and customers as secular trends around reshoring, infrastructure, technical labor shortages and energy efficiency gain further momentum. Within our Engineered Solutions segment, sales declined 6% organically over the prior year, consistent with last quarter and our expectations -- segment sales continue to be impacted by ongoing destocking headwinds and softer end market demand across fluid power mobile OEM customers. Flow control and automation sales were also lower over the prior year, reflecting softer trends early in the quarter. On a positive note, segment sales and orders strengthened as the quarter progressed, including seasonal strength in component and system sales during September. Of note, segment orders in the first quarter increased by mid-single-digit percent organically over the prior year with the trend strengthening each month. This was led by double-digit order growth across automation and technology-focused fluid power customers, which combined represent over 20% of our segment sales. Sales funnel activity and channel commentary are increasingly positive across these higher growth areas of our business following an extended period of reduced activity over the past couple of years. Flow control orders were also up year-over-year in the quarter as we continue to see healthy project demand tied to decarbonization and data center investments. Overall, we remain measured with our expectations as one quarter does not create a trend. These dynamics taken together are nonetheless an encouraging sign for our higher-margin Engineered Solutions segment. We believe segment momentum could build in the second half of fiscal 2025 as customers reengage capital spending, interest rates potentially ease further, and we continue to leverage growth investments tied to our strategy. Overall, we're encouraged by positive signs and potential catalysts developing across both our segments. We are continuing to invest and position teams to be fully prepared to serve our customers and suppliers as the next phase of growth unfolds. This includes ongoing investments in engineering talent, digital sales tools and e-commerce capabilities. We also have expanded into new facilities and invested in advanced tooling and machining capabilities across our Engineered Solutions segment. We've modernized technology systems across our distribution centers while also updating conveying systems and logistics equipment. Our automation platform and footprint is much larger today than it was entering the prior upcycle. This will supplement our potential in this high-growth area of our business as adoption of specialized robotics and machine vision accelerates while demand for aftermarket and service support starts to emerge from these next-generation automation technologies. Further, we've invested in fluid power engineering and system build capabilities to serve growing secular demand tied to the modernization of industrial and mobile equipment. We're also beginning to leverage AI through our ongoing investments around sales process, AR and AP automation and recruiting. These are just some of the many investments we've made to supplement our growth capacity, speed to market and operating leverage going forward. And then lastly, nearly $2 billion in balance sheet capacity, including over $500 million of cash on hand, our available capital puts us in a strong and advantaged position to accelerate our growth and margin potential moving forward. This includes both organic investments and accretive acquisitions that further extend our technical service capabilities, enhance our business mix and reinforce our competitive moat. The evolution of our portfolio through both greenfield investments and acquisitions in recent years has been highly intentional and disciplined. It's been a critical driver of our ability to become a faster-growing, higher-margin and more cash-generative business while driving a meaningful increase in our returns on capital. We remain committed to this focused and returns-based approach that centers on serving our customers' most critical industrial assets and processes more completely. Our M&A pipeline is active across both segments with our primary focus on bolt-on and midsized targets where we can create significant shareholder value long term. We also have flexibility to return capital through other avenues. This includes share buybacks considering our positive long-term outlook and the underlying intrinsic value we see across our company, as well as ongoing focus on growing our ordinary dividend moving forward. Overall, we're targeting greater capital deployment in fiscal 2025 that aligns with our return requirements and strategy. At this time, I'll turn the call over to Dave for additional detail on our financial results and outlook.
David Wells: Thanks, Neil. Just as a reminder, FYI (ph) again and in prior quarters, we have posted a quarterly supplemental investor presentation to our investor site. This is for your additional reference as we recap our most recent quarter performance. Turning now to details of our financial performance in the quarter. Consolidated sales increased 0.3% over the prior year quarter. Acquisitions contributed 200 basis points while the one extra selling day year-over-year in the quarter had a positive 160 basis point impact. This was partially offset by a negative 30 basis point impact from foreign currency translation. Netting these factors, sales decreased 3% on an organic daily basis. As it relates to pricing, we estimate the contribution of product pricing on year-over-year sales growth was approximately 100 basis points for the quarter and in line with our expectations. Turning now to sales performance by segment. As highlighted on Slide 7 and 8 of the presentation, sales in our Service Center segment declined 1.4% year-over-year on an organic daily basis, when excluding a 0.7% positive impact from acquisitions, the positive 1.6% impact from the difference in selling days and a negative 50 basis point impact from foreign currency translation. The organic sales decline in the quarter was primarily driven by softer MRO spending and the deferral of capital maintenance projects early in the quarter, which was concentrated across local accounts. Sales outside the U.S. were also weaker over the prior year, though partially offset by continued growth across national accounts and fluid power MRO sales in the U.S. From a vertical market standpoint, softer demand was most notable across machinery, pulp and paper, and oil and gas markets, partially offset by ongoing growth within food and beverage, primary metals, utilities and transportation. Segment EBITDA decreased 2% over the prior year, our segment EBITDA margin of 13.2% declined 36 basis points over the prior year. Within our Engineered Solutions segment, sales increased 0.2% over the prior year quarter, with acquisitions contributing 4.7 points of growth. On an organic daily basis, accounting for the difference in selling days, segment sales decreased 6.1% year-over-year. Consistent with last quarter, the year-over-year decline was primarily driven by a high-single digit percent decline in fluid power sales, and to a lesser extent, softer automation and flow control sales. As mentioned earlier, fluid power sales continue to be adversely impacted by lower demand across off-highway mobile OEM customers partially balanced by stable trends across industrial in-plant applications and solutions as well as improving demand in technology-related end markets. In addition, while lower year-over-year for the full quarter, both automation and flow control sales returned to positive organic growth during September. Segment EBITDA decreased approximately 2% over the prior year while segment EBITDA margin of 14.2% was 37 points below prior year levels, largely reflecting expense deleveraging on sales declines and ongoing growth positioning in the quarter. Moving to gross margin performance. As highlighted on Page 9 of the deck, gross margin of 29.6% decreased 10 basis points compared to the prior year level of 29.7%. During the quarter, we recognized LIFO expense of $2 million compared to $4.6 million in the prior year quarter. This net LIFO tailwind had a favorable 24 basis point year-over-year impact on gross margins. Overall, the underlying trend in the quarter was largely in line with our expectation for some near-term gross margin easing into early fiscal 2025. This partially reflects tougher comparisons, including prior year first quarter rebates favorability in our Service Center segment as well as LIFO expense favorability during the fourth quarter of last year. In addition, mix was unfavorable, both year-over-year and sequentially, primarily reflecting outpaced national account growth and lower Engineered Solutions sales. Scrapping freight costs were also slightly higher in the quarter but are expected to normalize going forward. We estimate price cost was relatively neutral to the quarter's performance. As it relates to operating costs, selling, distribution and administrative expenses increased 3.7% compared to prior year levels. SG&A expense was 19.3% of sales during the quarter, up from 18.7% during the prior year quarter. On an organic constant currency basis, SG&A expense was up 80 basis points over the prior year period. This includes an unfavorable 150 basis point impact from higher deferred compensation costs and one extra payroll day compared to the prior year. As a reminder, fluctuations of deferred compensation costs in SG&A are primarily driven by market values of investments tied to our nonqualified deferred compensation plan, there's a corresponding offset to these fluctuations in other income and expense, which we report below net interest expense and income. In addition, we had some expense deleveraging as expected given the sales decline in the quarter. On an organic basis, adjusting for the M&A impact, currency fluctuations, the extra payroll day and deferred comp accounting impact, SG&A expense was down slightly year-over-year. We remain prudent with cost measures and have continued to fund in-process strategic growth-oriented investments in light of firming demand the past couple of months. Overall, the organic sales decline in the quarter, combined with the aforementioned gross margin and SG&A dynamics resulted in reported EBITDA declining 3.3% year-over-year, while EBITDA margin of 11.7% decreased 44 basis points though EBITDA was partially balanced by greater interest income on higher cash balances as well as a lower tax rate relative to prior year levels and foreign currency gains. Netting of these factors, we reported earnings per share of $2.36, which was down a modest 1% from prior year levels. Moving to our cash flow performance. Cash generated from operating activities during the first quarter was $127.7 million, while free cash flow totaled $122.2 million representing conversion of 133% relative to net income. Compared to the prior year, free cash nearly doubled and hit a record first quarter level. Our cash flow growth primarily reflects more modest working capital investment compared to the prior year as well as ongoing progress with the internal initiatives and our enhanced margin profile. Turning now to our outlook. As indicated in today's press release and detailed on Page 12 of our presentation, we are modestly raising full year fiscal 2025 EPS guidance to reflect updated assumptions for interest and other income following first quarter results. We now project EPS in the range of $9.25 to $10 compared to prior guidance of $9.20 to $9.95. That said, we are maintaining our sales guidance of down 2.5% to up 2.5% including down 4% to up 1% on an organic daily basis as well as EBITDA margins of 12.1% to 12.3%. Our sales outlook takes into consideration October-to-date sales trends and ongoing near-term economic uncertainty. We're assuming potentially subdued customer activity through the balance of the calendar year, reflecting general malaise around the upcoming U.S. election and into the seasonally slower fall and winter months. Taken together, we currently project fiscal second quarter organic daily sales to decline by a low to mid-single digit percent over the prior year quarter. We assume end market demand stabilizes into the back half of the year with potential for some modest improvement later in the year. Combined with easing comparisons, the midpoint of guidance assumes average organic daily sales are relatively unchanged year-over-year in the second half of our fiscal year, including a return to modest growth in the fourth quarter. Overall, this underlying quarterly sales trend assumption is directionally consistent with our initial outlook provided in August. And while our first quarter sales exceeded our expectations, we believe it remains prudent to maintain our initial assumptions at this early point in our fiscal year. Lastly, we expect second quarter gross margins to increase slightly on a sequential basis and EBITDA margins of 11.7% to 11.9%. This includes assumptions of potential expense deleveraging on organic sales declines as well as the impact of our growth investments offset by lower LIFO expense compared to the prior year. With that, I'll now turn the call back over to Neil for some final comments.
Neil Schrimsher: Thanks, Dave. So to wrap up and summarize, we feel good about the positive demand signals that we're starting to see develop, including rising order trends across our higher-margin Engineered Solutions segment. We also had many self-help growth and margin opportunities that we expect to manifest in coming quarters. That said, we expect near-term sales to remain choppy as customers slowly reengage production and capital investments ahead of the upcoming U.S. election and seasonally slower fall and winter months. We also remain cognizant of lingering macro cross currents, including geopolitical unrest and some uncertainty around the cadence and extent of interest rate cuts near term. As such, we believe maintaining our fiscal 2025 sales and EBITDA margin outlook remains prudent at this juncture, pending greater clarity on the demand and macro backdrop in coming months. Importantly, we remain constructive on the underlying fundamental outlook within our core end markets and industry focus. We're favorably positioned to drive above-market growth and margin expansion as demand reaccelerates, reflecting our industry position and internal initiatives. From critical break-fix MRO support at a local level to an expanding portfolio of emerging technologies and specialized engineering solutions, we believe our capabilities and strategy are significant to our customers and as customers reconfigure and reinforce supply chains in support of their own growth strategies long term. Demand tailwinds around reshoring and infrastructure investment in the U.S. are just beginning to manifest and could accelerate over the next three to five years. At the same time, U.S. manufacturing infrastructure is aged and as our customers' technical service and support requirements have increased as they manage their own labor constraints. We believe this backdrop could present an extended period of structurally higher break-fix MRO activity as well as ongoing investment into refreshing and expanding industrial production infrastructure and capacity across North America. This will require strong channel partners with leading technical capabilities, next-generation solutions and strategic supplier relationships. Our strategy and growth initiatives are strongly aligned with these trends and requirements. We believe this creates a compelling growth opportunity into calendar 2025 and longer term and we're positioning our teams and investments accordingly. And then lastly, we're well positioned to capitalize on the next iteration of the industrial economy given our domain knowledge and scale across industrial facilities core capital equipment. This includes our expertise around critical motion and power, trained products in demanding applications, access to premier supplier brands and nonstandard components and nationwide local service reliability. In addition, we have leading channel position in providing advanced robotics, machine vision and high-tech fluid power systems. Combined with our network of service shops, technicians and engineers, we're playing a critical role in linking legacy industrial production infrastructure and processes with new advanced applications and technologies, both now and into the future. Overall, I remain excited about our potential, and we look forward to showcasing our capabilities in the quarters and years to come. Once again, we thank you for your continued support. And with that, we'll open up the lines for your questions.
Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from the line of David Manthey with Baird. Please go ahead.
David Manthey: Thank you. Good morning, guys. My first question is more out of curiosity. 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 then related to that, you talked about that orders were better in September and then you talked about, I guess, delivery sales trends in October being a bit softer, but did orders remain strong in the midst of October as well?
Neil Schrimsher: Yes. So Dave, I'll start. I think across our Engineered Solutions, many of those sales to our customers can be capitalized and are by them. But I would say, they are not large significant capital investments for them, and they have a very good returns profile. And so I often term it as -- think about it that today can be OpEx type activities that enhance performance and productivity that obviously they will capitalize. So they're not heavy capital-intensive systems on that side. We were encouraged by the order trends that we talked about in the first quarter and have that coming across including the double-digit side in technology, which is good to see as well as the automation side. And I'd say early on, while there can be some evenness month-to-month, we are continuing to be encouraged by that activity, especially across automation and the combined engagement with our Service Center teams, our access and position with some of those customers and helping them solve problems that are either presented around labor constraints that they're still dealing with or their view of how they can use automation and technology to enhance productivity. So it's like early to call that it's sustained and the steady uprise from here perfectly, but we are encouraged.
David Manthey: That's good to hear. Thanks, Neil. Next one for -- partially for Dave to -- still quiet on the acquisition front a little bit here and your net debt continues to dwindle down. Just wondering if you talk about the pipeline there, are seller expectations too high? Are you not finding targets that are congruent with your strategy? And then when I look at Slide 11, and I think about share repurchase relative to these other capital allocation priorities, it would seem like based on where you're at today, if you can't find M&A deals to do, that share repurchase would leapfrog up to number two on that list. And Neil, you said something about allocating more capital in the coming years. So maybe you could just talk a bit about those two items and how you feel about them as we enter the next calendar year here?
David Wells: You bet. I mean to your point, Dave, we do remain very disciplined in terms of the targets. That said, very encouraged by the pipeline and where we stand, like I said, both in terms of the more traditional bolt-on deals and some more midsized deals. So very active there to our priorities. Once again, those are around -- really focused on the continued build-out of Engineered Solutions, including the automation footprint that we've continued to expand both organically and through the bolt-on acquisitions, as well as certainly around continuing to build out the flow control and fluid power. So like the pipeline, like what we're seeing there, we continue to be more active in recent quarters on share buyback. We may discipline there as well, just thinking about. But would we expect to see that continue over the next few quarters just given to your point where the cash position and leverage is. So like I said, expect good things there as we move forward, I remain very encouraged. Like I said, I just can't always control the timing on some of these acquisitions that are still in the pipeline.
Neil Schrimsher: Yeah. And I'd say, Dave, you mentioned Slide 11. We think the $1 billion number of capital returned over the four years is good. Last year at little over $250 million, and we would expect this year to be higher. And so we know and we'll continue to vet where there are good organic opportunities for us to invest that have a strong return profile in doing it. With that said, we're not so capital intensive to do that. M&A will remain a strong priority. But we're committed. We will not just stack cash. We think in the setup in this environment, we're going to have multiple opportunities to further build out our differentiation, our technical differentiation and what that will mean to customers and really all our stakeholders.
David Wells: And I do like the fact that we continue to protect some of the SG&A spend that’s very much focused on organic growth with several key projects ongoing there in light of what we see is pending recovery and the importance of that investment as well for organic growth. So we continue to work some of the temporary cost actions in addition to just the natural shock absorbers in the business to protect the bottom line profitability, but continue to still fund some of that SG&A spend that’s focused on some very critical organic growth projects.
David Manthey: Yeah. That all sounds really good. Thanks a lot guys.
David Wells: Thank you.
Operator: Your next question comes from the line of Christopher Glynn with Oppenheimer. Please go ahead.
Christopher Glynn: Hey, good morning. Just wanted to dive into some of the areas where you saw some improvement, I think, automation and technology where -- particularly the commentary seems a little inflected from recent quarters. So wondering if you can comment further on how sticky you think that feels? And also particularly some layers on what's going on with technology? Are you seeing device makers, those types of customers starting to actually increase production?
Neil Schrimsher: Yeah. So if I start on technology, it's good to see the increased order rate and activity that was a sales contributor to our Engineered Solutions segment in the quarter kind of relatively flat for the past seven quarters or so, good to see that. I think most indicators are an activity that we would see, increased activity around the chip manufacturers. And then, I think the forecast that many have for '25 on wafer fab equipment being at high percentage numbers perhaps over 20% for '26, perhaps still being double digit on top of that, I think we'd start to see some early indications. Obviously, we're involved with customers and have those exchanges into that. So perhaps still early. But I think as we move into and through calendar '25, that's going to be favorable for us on the technology front. And then on the automation side, continue to be high interest and activity on the robotics side, the autonomous mobile robots, AMRs, the collaborative side as customers look to enhance or deal with their own labor challenges and doing it has been encouraging. So pipeline and activity, the amount of application engineering work that we have going on is good. But also on the vision side, as we think about product and process inspection, what that can mean for quality control and enhancements on that side, we've got good activity on that front. And so like we say, not always even when the projects get implemented. And oftentimes, there's other parts that have to sequence into that but we are encouraged by the general activity. And so directly to your question, I think there's stickiness there.
Christopher Glynn: Great. And then just a little more on the capital. That's the other area on the pipeline where it sounds like the commentary has inflected to more bullish. And I don't recall the midsized reference, standard [indiscernible] press release, but what has really transpired in that pipeline? Are you seeing looser postures by sellers that you've been tracking for a long time?
Neil Schrimsher: I'd say, you need time in the environment or cycles -- companies become available. I mean, our prospect is we know who fits for all the timing. I think I've always said clearly our focus, our priorities are bolt-ons in the right areas and midsize as well. So I don't know that too much to read into the -- in the remarks. I think, I don't know, perhaps there before, it's clearly been good in my verbiage and our focus that we're working on and executing that. We look across and we think there are many good opportunities. And then they -- based on cycles running and operating those businesses, there's challenges. And clearly, scale can help in doing it. Customers are expecting more in the side. And there's just avenues or areas that we can help. And with the frequency and the amount of acquisitions that we've had, we've got a very good track record of integrating and operating. And I think that's attractive to prospective sellers.
Christopher Glynn: Thanks, Neil.
Neil Schrimsher: Thank you.
Operator: Your next question comes from the line of Ken Newman with KeyBanc Capital Markets. Please go ahead.
Ken Newman: Hey. Good morning, guys.
Neil Schrimsher: Good morning, Ken.
Ken Newman: Good morning. So first question here on the October trends. Sorry if I missed this, but is there a way to quantify what you think the hurricane impacts are so far into the month? And then just any color on the monthly comps for November and December, and what those look like as we progress through the record? I'm just trying to frame the new 2Q AIT guide relative to the October trends.
Neil Schrimsher: Yeah, I can start. I think on the hurricane, I don't know that I've got a great quantification to it. We can look at associate that are still displaced in a few of the areas. We're up and running and operating. We do look at customers in some of the most impacted areas. And I'd say, they fall in buckets of maybe easily think about it, a third running very well, a third running maybe at some reduced but likely to ramp and then some others that perhaps will be down for a little bit more extended period. But it is one great tragedy and we're looking to support all of them. I think in its total, from an economic standpoint, it's one, hey, we just work through like other weather events in the side. And then as I just think about the October side rate, it's still early on the month-to-date trends. We do have six to seven days to go, and there can be natural pickup in those final days. There's usually that type of activity. And so we could expect some of that to occur as well in October.
Ryan Cieslak: Ken, I just would say, as it relates to the year-over-year comps by month, I'd say, November is somewhat similar to October in the prior year. And then we do have an easier comparison coming about in December relative to both October and November.
Ken Newman: Got it. That's very helpful. And then a follow-up here, I was pleasantly surprised by just how good the quarter ended. I'm curious if you could just talk a little bit about whether you think you're gaining incremental share in this weaker demand environment? I think one of your largest competitors saw some weaker demand in their industrial business this past quarter versus their expectations. And so it does seem like you outperformed here, but I'm just curious if you think you are potentially winning customers from your bigger competitors or if this is more so just a mix dynamic depending on the niches of the end markets that you play in?
Neil Schrimsher: I think we’re getting benefits on our focus areas in that as it executes and we talked about a little bit of the Engineered Solutions. I mean, obviously, the space is large, and there’s a lot of solutions and product sets that go out and we compete against many in that highly fragmented space, I think what you are seeing and will continue. Customers just look to consolidate spend. They’re going to look to do business with fewer, more capable suppliers into that side. And we’re just intent on being one of those that can do that. But we’ve got a clear focus, we’ve got a clear strategy on our customers and how we can expand our offering within them, and that’s going to continue to be a focus area. And then we think cross-sell, while still early innings, we’ll continue to gain traction, and that’s valuable to the customers and our teams continue to do a good job at it.
Ken Newman: Very good. Thanks for the color.
Operator: Your next question comes from the line of Brett Linzey with Mizuho. Please go ahead.
Brett Linzey: All right. Good morning, all.
Neil Schrimsher: Good morning.
Brett Linzey: Hey. My first question is just on the automation engineered platform. And thinking in terms of staffing and overhead, is it fair to say that the AIT retained a lot of the personnel and the integrator capacity even when volumes were weak? And as we see this recovery, you should get fairly good utilization and leverage there or are the resources that need to come back as you satisfy some of the return of the order growth here?
Neil Schrimsher: No, Brett, we worked hard to stay at staffing levels we talked about in those periods. We were active, we were busy in the amount of customer engagement, the application engineering on the projects. The pace of those going through, maybe in some of those earlier times, slower times, there's a few more, there's an extra step in the approval process in doing it. But no, we've maintained consciously to have capability to have focus for what we see now and for what we believe for the period ahead, especially around robotics and vision. We think there'll be two highly attractive areas. Especially when we consider our core customer segments, their percentage of automation adoption remains still relatively low. So interest is increasing. The need is there, and we think we can help fulfill a lot of that demand.
Brett Linzey: That's great. Thanks for that. And then just a follow-up on the reassuring dynamic. So AIT has doubled the addressable markets over the last several years. You've expanded the solutions. As you think about some of these critical industries that are getting reshored into the U.S., how is AIT's content per project or the wallet share of that commensurately improved or increased in line with the TAM? Should we think about kind of doubling of that as well? Any thoughts there on your content?
Neil Schrimsher: Yes, I think we're seeing -- we are benefiting. We're well positioned on reshoring and the amount of activity. Just when we look at the amount of industrial construction projects, obviously, we're involved directly, but also indirectly. I mean, there's benefit for metals, aggregates, cement and those support industries, which are good for us. and we have good participation in content there. So we feel like it is going to only continue as customers or these industries look to derisk supply chains and have more things locally available to fully participate to be determined through the election cycle how the tariff dynamic changes other than, I think it looks like they will continue and perhaps at a heightened level, just depends on perhaps the outcome at what degree of heightened level. So we think reshoring will continue. And for us, we've got involvement then with our customers to help them either bring those projects or that work back into their facility. And that may be running their equipment more and some light capital requirements or they may be qualifying another supplier, which can play into further capacity build out. And they’re looking for our help to work with their supply chain as well. So that’s been positive for us. And really, as I think about it, we’re well positioned, not only in U.S., but our business in Mexico and Canada are getting benefits from that also.
Brett Linzey: Great. Thanks for the insight.
Neil Schrimsher: Thank you.
Operator: Your next question comes from the line of Chris Dankert with Loop Capital Markets. Please go ahead.
Christopher Dankert: Hey. Good morning. Thanks for taking the questions. I guess to circle back to the organic investment opportunities you were kind of touching on earlier, I guess, maybe any update on the Pacific Northwest capacity investments? And update on some of the technology proliferation opportunities, anything worth kind of calling out in terms of things that start to kind of ramp into the back half of fiscal '25?
Neil Schrimsher: Yeah. So what I would say, in the Northwest complete operational team fully in, in doing it, same with the fluid power technology investment in new facility running and operating there as well. So well positioned, and we think both capacity moves, timing and investment for what it could be, will be an inflection of greater demand and both of those will serve us very well.
David Wells: To make investments as well and times to move our automation businesses together with Engineering Solutions, things like that. So they can collaborate and cross-sell even amongst where they have areas of specialties and continue to expand that footprint organically as well. So that's another area of focus, as well as driving some additional efficiencies and back office, some additional technology investment there really across the business, Chris. So it's on many fronts.
Christopher Dankert: Got it. Thanks for the color there. And I guess maybe one more conceptual question. It seems like there's a lot of appetite at the customer level for distributors that are able to play a more system integrator type approach in automation specifically. AIT seems to be kind of in a sweet spot there, I guess. Do you think that's a correct assessment? And then, is there any kind of friction between some of the maybe integrated customers you serve and kind of where you play? Just maybe some thoughts on that market, particularly as it pertains to automation and the growth you're seeing there?
Neil Schrimsher: Sure. So Chris, I'd say I don't view that there's friction and often in channels and markets and especially when they're going to be accelerated growth, products and solutions flow to multiple paths and customers often dictate that. And so if they have some internal capability or it's a lighter project in that, they may be more active themselves. If the project is more complex, there's going to be integrators involved in that. And the way we work is that we're happy when our solutions flow in either of those ways in doing it. We are also working and have more productized solutions as we think about in vision, in robotics, both collaborative and palletizing type applications and others that are more turnkey for customers as it goes in. And so that are lighter, they're not high investments, but they yield good benefit and that they can be replicated across. So we'll look at those ways how we participate more in that. But no, hey, we're agnostic. Our focus is how we help customers with their problems with our solutions and integrators are a part of that going to market.
Christopher Dankert: Got it. If I could just kind of follow up on that really briefly, the productized solutions are a really compelling opportunity. I guess, in the past, I think palletizing was more mature. And I think there were some new markets you guys were kind of exploring or moving further into, machine operation and CMC operation being one. Just any update in terms of like the number of markets you're serving with the productized solutions today?
Neil Schrimsher: Yeah, I don't know if I have a number of end markets. We think about those applications, whether they can be CMC, machine tending, warehousing and logistics, which also exist in all of our customers, right? Because as they move product out of the production environments and doing it in consumer packaging and quality control and inspection, there's more and more of those applications. So in some of those, if we can make it easier, less integration requirements, less upfront engineering requirements in that, it just accelerates adoption. And then for us, we think it opens up even more opportunities around things that may be a little bit more technically challenging to do but still we’ll have very significant benefits for the customer. So we like the productized solutions as an entry point. It’s likely not taking or solving all the customer requirements in their facilities or addressing all the opportunities they can, but it is opening more and more doors for us.
Christopher Dankert: Makes sense. Thanks so much for the color.
Neil Schrimsher: Thank you.
Operator: Your next question comes from the line of Aaron Reed with Northcoast Research. Please go ahead.
Aaron Reed: Hey. Good morning, gentlemen.
Neil Schrimsher: Good morning.
Aaron Reed: I was wondering if you could talk a little bit more about any remaining pressure coming from inflation or are there any remaining pockets that you're seeing that could be issues in the near future or is most of that behind you guys?
David Wells: We still see general steady inflation, which, once again, for distributors is good. We said price cost relatively neutral in the quarter, price at about 100 basis points. So I think what we're seeing is that slow, steady inflationary impact largely coming from labor and other overhead spend from our manufacturers. Once again, we do partner well with our key suppliers to take those price increases and pass them on in orderly fashion. But you can see it in the easing LIFO trends, and it's more normalized and steady state now. So no pockets I look at as areas of concern. And like I said, this good, steady, slight inflationary impact is good for distribution because we know how to take it, package it, pass it on in orderly fashion and drop some incremental to the bottom line during the process.
Aaron Reed: Okay. Great. And then the other part is, and you briefly touched on it, and we're hearing a lot of it as well, too, is a lot of just pent-up demand from people who are waiting for after the election. And I'm kind of wondering if you -- when you hear that, if you're thinking that people are saying, we're going to wait until after the election and that's legitimately the reason or is that some sort of an excuse saying, hey, after the election, but there might be some other considerations out there that they're taking in? And on that, I know it's difficult to quantify what that might be. I was wondering if you could speak a little bit more about the potential timing of if there is pent-up demand, how quickly do you think you would be seeing revenue being generated off of that?
Ryan Cieslak: Yeah. So one, I think the election, I don’t know that it’s a real driver, but clearly, it has top of mind conversations for many of that. I think we have seen general belt tightening and deferral. And if that’s the entry point, there will be more of that release in post-November time frame into December and then going into early 2025 on that front. So we think that has occurred, and so there can be some positives or some pickup for us as we go through then into what would be our Q3 and the start of the new calendar year.
Aaron Reed: Great. That makes sense. Thank you.
Operator: Your next question comes from the line of Sabrina Abrams with Bank of America (NYSE:BAC). Please go ahead.
Sabrina Abrams: Hey. Good morning, everyone.
David Wells: Good morning.
Sabrina Abrams: I just want to ask a little bit about destock from both your end and the customer standpoint. So I guess, a, how are you thinking about your own inventories from here? And it sounds like maybe getting a little more constructive on things bottoming. So maybe not destocking from here, but I just want to ask about how do think your own inventories? And then, b, are any of your customers still destocking?
Neil Schrimsher: Yeah. So I can start with our own. And hey, we're working with our core suppliers very closely and where to make the appropriate inventory investments. We want to know what's going on in their business and where they may be at any various projects and production into the side, but we have not been reducing or pulling back of inventories. We want the right preparation. Obviously, we talk to them on high-velocity types that they make regular restock, but we're not looking to overstock in those. Things that are slower moving, harder to make, longer lead times are probably the ones that we're going to look to have the appropriate investments in. And that helps customers stay up and running. And for our suppliers it makes sure that they continue to fully participate in what is an attractive MRO aftermarket of them. So that's our approach. For the most part, I'd say, around our technical nature of the products, we do not get the benefit of stocking, therefore, the penalty of destocking in any economic cycles. I think the area that we did see some of that, and it still would go on a little bit would be in the off-highway mobile portion of our business in fluid power. And I think that was driven by when lead times extended out to over two years, 16 months on some of the side, those smaller OEMs had to make bets or placements on needs and requirements. And then as that product comes in and the demand environment softens a little bit, they could have what their needs or requirements from a near-term production standpoint would be. I think that will improve. It will improve as we go through this quarter, perhaps into the early part of '25. If I look at the demand cycles for off-highway mobile, I do think there's a pickup in calendar '25, which will be positive. And I know we're taking this time to also work with them on an engineering front as more technology comes in, whether that be in electronic controls, into automation, perhaps even in start of some autonomy type projects with them. So we'll work that. But hopefully, that's the right color for inventory stocking, destocking.
Sabrina Abrams: Thank you. That's super helpful. And then I just wanted to ask about the EBITDA margins in the quarter. I think they came in a little below what you guys had guided and obviously maintained the full year guide, but I just want to understand what trended differently from your expectations?
Neil Schrimsher: Yeah. And so I would say for us, as we think about it, right, largely in line, it's not always linear as we go across start of year to end the year in that. The sales development that we talked about in the first quarter, some of it did occur late, but we were conscious in wanting to maintain appropriate investments into growth areas for what we see is coming in the side. And then we really think the gross margin as we did the walk, there was really just some timing on the comparisons in that -- in the front. We were coming off of higher LIFO including some layer liquidation in Q4. So we expected some sequential change in that. But the year-over-year comparison, there were some favorability that can occur in the prior first quarter of the year. So we feel like we're in a good position, we're not changing that outlook plans and trajectory, and I contend we have still good opportunities to continue to help ourselves with all the levers that we have around margins.
David Wells: Yeah. I think if you look back typically in this business, Q1 is our softest gross margin performance quarter. We bucked that trend last year with some anomalies on some vendor rebates and we’re 29.7% even with some higher LIFO expense reading through versus what we saw this year. So a tough comparison there. And I said, we really felt good about the sales development, slightly outpacing our expectations. The gross margins, like I said, do see a path and continue to see those improve as we move across the quarters and a lot of what you’re seeing on a year-over-year basis is that tough comp that we saw last year.
Sabrina Abrams: Thank you so much.
Operator: At this time, I am showing we have no further questions. I will now turn the call over to Mr. Schrimsher for any closing remarks.
Neil Schrimsher: At this point, I just want to thank everyone for joining us today, and we look forward to talking with you throughout the quarter. Thank you very much.
Operator: Thank you. Ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.
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