Release Date: August 15, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Applied Industrial Technologies Inc (AIT, Financial) delivered double-digit earnings growth in the fourth quarter despite weaker end market demand.
- Gross margins approached 31% and EBITDA margins exceeded 13% for the first time.
- The company saw benefits from strong channel execution and favorable mix across its Engineered Solutions segment.
- AIT expanded gross margins by nearly 70 basis points and EBITDA margins by approximately 50 basis points for the full year.
- The company generated record free cash flow of $346.5 million for fiscal 2024, up 9% from the prior year.
Negative Points
- Organic daily sales declined 2% year-over-year in the fourth quarter.
- Sales within the Engineered Solutions segment declined 4.6% on an organic daily basis.
- Muted demand trends have sustained into early fiscal 2025, with organic sales through mid-August trending down mid-single digits.
- Sales were softer across the local account base and within the consumables MSS business.
- The company expects ongoing moderation in broader market demand through the first half of fiscal 2025.
Q & A Highlights
Q: What are the expectations for the macro outlook embedded in your guidance?
A: At the midpoint, we assume first-half declines by mid-single digits organically and second-half increases by low single digits organically. Market assumptions include mid-single-digit declines at the low end and low single-digit declines at the high end of our guidance. - Neil Schrimsher, President, Chief Executive Officer, Director
Q: How resilient can Engineered Solutions margins be given the muted growth outlook?
A: We expect gross margins could be down sequentially from the fourth quarter due to mix and potentially lower sales in Engineered Solutions. However, the ongoing evolution towards more value-add continues to improve the margin profile. - Neil Schrimsher, President, Chief Executive Officer, Director and David Wells, Chief Financial Officer, Vice President, Treasurer
Q: How much of the margin performance was due to discrete actions versus pulling back on discretionary costs?
A: The fourth quarter performance shows the resiliency of our model, with adjustments in variable costs like incentives, temps, and overtime. About 30% of our cost stack is variable, which contributed to the margin performance. - Neil Schrimsher, President, Chief Executive Officer, Director
Q: Can you quantify how many reshoring and recapitalization projects are high-level conceptual versus shovel-ready?
A: Industrial manufacturing capacity has been expanding, indicating ongoing high activity. Customers are currently tightening belts due to economic uncertainty but are optimistic about activity picking up in the calendar year's first half. - Neil Schrimsher, President, Chief Executive Officer, Director
Q: What is the margin profile of the recent acquisitions, TMS and Stanley Proctor?
A: The margin profile of these acquisitions is similar to our existing operations. - David Wells, Chief Financial Officer, Vice President, Treasurer
Q: What are the expectations for fiscal 2025 guidance?
A: We are establishing EPS guidance in the range of $9.20 to $9.95, with total sales down 2.5% to up 2.5%, and EBITDA margins of 12.1% to 12.3%. The outlook considers sales trends through mid-August, economic uncertainty, and strategic growth investments. - David Wells, Chief Financial Officer, Vice President, Treasurer
Q: How do you see the demand backdrop evolving in fiscal 2025?
A: We expect near-term slowness but are positioning for a potential reacceleration in US industrial production and easing interest rates. We are optimistic about demand picking up in the second half of the fiscal year. - Neil Schrimsher, President, Chief Executive Officer, Director
Q: What are the key drivers for the Service Center segment's performance?
A: The segment showed outperformance relative to broader market indicators, with ongoing growth across larger national accounts and fluid power aftermarket sales. Digital channels also contributed to incremental growth. - Neil Schrimsher, President, Chief Executive Officer, Director
Q: What are the expectations for the Engineered Solutions segment?
A: We expect the off-highway market to remain muted for another quarter but are constructive on the growth trajectory due to our leading market position and capabilities. The segment's margin performance highlights positive long-term tailwinds. - Neil Schrimsher, President, Chief Executive Officer, Director
Q: How do you plan to deploy capital in fiscal 2025?
A: M&A remains a top priority, with an active pipeline. We also see scope for share repurchases and are focused on growing our ordinary dividend. Our balance sheet and cash generation provide significant flexibility for capital deployment. - Neil Schrimsher, President, Chief Executive Officer, Director
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
