APPLIED INDUSTRIAL TECHNOLOGIES INC Q3 FY2025 earnings call

• Applied team performed well in Q3 against muted end markets, with gross margins and EBITDA margins exceeding expectations.
• Service Center sales trends improved as the quarter progressed, while Engineered Solutions segment orders strengthened, with automation orders up over 30% year-over-year.
• Hydradyne acquisition integration going well, and announcement of acquiring IRIS Factory Automation, which is expected to generate annual sales of around $10 million in the first year.
• Continued share buybacks, with $80 million spent year-to-date in fiscal 2025, and Board approved a new $1.5 million share repurchase authorization.
• Industry dynamics include mixed demand, with reshoring discussions ongoing and focus on internal growth and margin initiatives.

Service Center segment: Organic daily sales declined 1.6% year-over-year. Excluding acquisitions, selling days, and foreign currency translation impacts, the organic sales decline was primarily due to reduced MRO spending and lower capital maintenance projects. Segment EBITDA increased 6.4% over the prior year, with a segment EBITDA margin of 14.7% expanding 140 basis points. Engineered Solutions segment: Sales increased 13.5% over the prior year quarter with acquisitions contributing 20.8% growth. On an organic daily basis, segment sales decreased 6.5% year-over-year, reflecting ongoing demand weakness across fluid power OEM customers. Segment EBITDA increased 10.2% over the prior year, reflecting contribution from Hydradyne and gross margin initiatives.

• Adjusted full-year fiscal 2025 EPS to range $9.85 to $10, sales flat to up 1% (including down 4% to down 3% organic growth), and EBITDA margins 12.3% to 12.4%.
• Fourth quarter fiscal 2025 EPS range $2.52 to $2.67, total sales year-over-year range down 1% to up 3%, and EBITDA margins 12.6% to 12.8%.
• Guidance considers potential impact of tariff and trade policy uncertainty on industrial production and capital spending into spring and summer months.

• Volatile global trading and tariff backdrop weighing on broader industrial activity.
• Uncertainty around tariffs and trade policies affecting customer production and capital spending planning.
• Potential impact of supply chain disruptions and inflation on cost structure and operations.

Q: How are you thinking about the mix of customers levered to China sourcing and production slowdowns?

A: Neil Schrimsher mentioned trends in top 30 markets improved, with technology, food and beverage, aggregates, etc., showing positive signs, and expectation of pickup in machinery, utilities, and metals as domestic work increases.

Q: Is the 30% automation orders growth organic?

A: Dave Wells responded that the 30% automation orders growth is organic.

Q: How do you factor in tariff-driven price increases in guidance?

A: Neil Schrimsher and Dave Wells discussed factoring in price inflation, with little purely tariff-driven impact in Q4, and price contribution expected to be around 100 basis points in Q4 and beyond.

Q: Thoughts on MRO, production-driven products vs capital expenditure-driven sales?

A: Neil Schrimsher stated MRO is resilient, with some deferrals in capital projects, but encouraging signs in Engineered Solutions order rates and building backlog.

Q: How does guide factor in demand destruction and seasonality?

A: Dave Wells mentioned April had an impact from Easter holiday timing, and guidance factors in average daily sales considerations with normal seasonality and uncertainty.

Q: Incremental margin through the cycle?

A: Neil Schrimsher and Dave Wells discussed belief in ability to drive mid- to high-teen range incrementals, with focus on planning and operating leverage.

Q: Priorities between capital deployment, M&A, and share repurchases?

A: Neil Schrimsher stated growth is priority, with active M&A pipeline and disciplined share repurchase approach.

Q: Reshoring investments and customer tone?

A: Neil Schrimsher mentioned ongoing reshoring discussions, with investments in facilities and manufacturing employment, and customers discussing upcoming environments and supplier qualification.