AIT - Earnings call transcript Q3 2018 | Applied Industrial Technologies, Inc.

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Operator

Welcome to the Fiscal 2018 Third Quarter Earnings Call for Applied Industrial Technologies. My name is Virgil, and I'll 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. Please note that this conference is being recorded. the to turn Kho. now will call Julie over I Julie, begin. you may

Julie A. Kho

everyone. and Virgil, you, good Thank morning,

Our this was release issued market opened. morning before the

you portion a you website If available for latest it, it the is website. received our Investor on from Relations quarter can results at our investor supplemental retrieve Also reference deck of detailing applied.com. haven't

press available weeks as two replay Our release. the for of today's broadcast next in will the be noted

publicly in periodic at at provided Relations factors are our available of in the business only and subject outlook other we and forward-looking. success that information Applied's identified of may Before revise the whether those Accordingly, those speak differ I based are materially we'll which make question-and-answer to are with update website our the certain forward-looking and in statements. any company and and or new events results our undertakes various or obligation due and to risks, would All the to geographies, the business portion, risk made including considered the in everyone remind during expressed date statements section to begin, report of most SEC, The statements, like sectors release statements, no recent actual forward-looking applied.com. from made or as strategies Investor are including press hereof call industry Applied's during conference that otherwise. on current other discuss that expectations trends filings the various forward-looking

subject all widely the this SEC compliance and material explained are documents. those content conference measures public of and disseminated, been general to notification prior qualifications in made will press being call be and webcast addition, referenced has in teleconference and of non-GAAP with disclosed. release its to the call well considered the are in the financial are use as to the presentation media and FD, to analysts open the supplemental and the all Regulation is These investors. In our includes fully and Because In as unselectively teleconference available the constituents measures.

Applied's the Our Executive to I turn over Dave President Neil. and speakers Officer. Wells, Neil will include Chief our and call now Financial today Officer; Schrimsher, Chief

Neil A. Schrimsher

and Thank appreciate with our a I'll Julie, good morning you, joining results. us. We recap you everyone. brief begin of

Our net $XX.X increased from to XX% the share quarter compared $X.XX share grew million same to Net $XXX.X with a ago. sales prior the million earnings for $XX.X year third quarter. quarter million, per rose the to million share in $XXX.X for quarter $X.XX from income per per and XX.X% the XX.X% year in

Our along strong with across quarter acquisition two-month of contributions FCX execution the groups, reflect business results our from recent expected broad-based the Performance. third

as about pleased excited While the their the engagement our XX be I both differentiation, distribution today. closing, contributing customers thank days significant expanding that want and Throughout less technical business, to and growth, have than our MRO offering FCX more opportunities serving the for value-added our further enhance capabilities could and to or to not associates business team performance. our overall energy, for focus members we efforts product I and since our leader. Applied

our is performance quarter, for closer Dave. financial at a with the Now look here

David K. Wells

increased XXXX color in related mentioned, then exchange top performance attributed This prior year less and was selling one comprised increase Year-over-year Neil to as the impact fiscal begin with of organic good the in quarter. with the recent XXXX, move XX.X% on sales comparative X% year Neil, and included financial day half morning quarter foreign updated most point the dilutive outlook. quarter Thanks, performance, a to coupled I'll ended increase. quarter. our acquisition with on a from benefit Starting X.X% over an and also basis everyone. further currency details XX.X% additional XX March our for some line,

day and sales Excluding Performance impact, acquisition X.X% increased FCX sequentially of X.X% the year-over-year. months two per

increased Third XX Acquisitions by points fluctuations quarter $X.X sales segment X.X%. in million by our X%. Service Center-Based currency sales basis Distribution million and $XX.X foreign segment or increased this within increased sales or

the currency sales headwind a one or by impact partially increased million increase, year's in X.X% X.X%, by half Excluding quarter. to $XX.X this of driven day offset and acquisitions the selling by a was operational less core X.X% translation, which due

million increase third quarter this our or within to XXX.X% year. flow Moving million to of growth. power generated segment year-over-year and $XXX this XX.X% or compared as sales fluid segment, Acquisitions segment control increased prior $XXX

$XX by XX.X%, decrease of increase X.X% with attributed offset Excluding the selling driving XX%. of for were in increased sales acquisitions, From of differential acquisitions XX%, driven U.S. increase operational operations operational Again perspective, partially in core performance a to by XX.X%. days. up million or geographic sales a quarter our the impact a core an was

by million offset of acquisition growth, due year quarter, X% balance the sales. the of operations or year one States, over which in X.X% comprised from outside Sales less U.S. day Excluding businesses organic X.X%, X.X% represented our sales to increased prior of $XX.X impact, the increased selling a quarter. the half United decrease increase prior by from versus

Moving on to margins. gross

XX.X%, was gross Our for percentage XX profit the basis up year-over-year. quarter points

sequential point profit was XX basis realized basis initiatives. traction acquisition, benefit XX.X%. gross for the margin a XX as from business the and Excluding This improvement core result year-over-year represents improvement points from the of a various margin FCX

months XX two basis results points drove acquisition year-over-year. another margin of of expansion FCX Additionally,

businesses or including on distribution in acquisition year. $X.X foreign selling, increased one-time to to Changes compared of absolute $XX.X related currency XX.X% the quarter. FCX growth, million cost when increased prior million, administrative Acquired $X.X same quarter Our prior million, quarter and intangibles amortization the the in an acquisition. and the or the for XX.X% year-over-year in basis expenses in accounted million $XX million compared the of X.X% $X.X SG&A rates or year to by

only impact annual by increases merit million increased translation, performance and higher the and or SG&A X.X% based quarter, primarily the currency for $X Excluding of impact the incentives. year-over-year acquisitions driven of

of the This impact investments or systems the of of average quarter adverse of transaction sales. Resulting count productivity for the the continued X.X% million Excluding initiatives. $X.X $X.X final earnings, from taxes associated in complete fiscal XX primarily of from U.S. quarter the reflecting to certain XX.X% recorded $X.X and million the rate to rate in XX% quarter in rate discrete $XX.X quarter, blended acquisitions, our deferred acquisition, as for as to expect we than down with total was impact go one-time the were The which re-measurements we income effective FCX which leverage positions was pre-tax of We was included in head cost, EBITDA the year-over-year, was benefit adjustments. of range million tax the SG&A. tax or statutory basis of guided, fourth recognized XX% result million now the XXX the points a lower XX% be XX% XXXX of forward effective rate. year tax

Our consolidated balance $XXX shareholders' sheet of remains with equity million. strong

track payments. and culmination our allocation Following our consistent deliver to delevering the transaction maintaining priorities to value acquisition, the FCX remain the capital fund borrowing shareholder by of of Performance on dividend record and focused continuing

in such, As activity quarter. was repurchase the no there share

million to was $XX.X $XXX.X operating our facility extinguished the Cash new we the for initial XX, as generated FCX Additionally, million the credit fund million activities draw, acquisition. we revolver January of $XX taken Performance the executed reflected reduction, year prior collections past and was as Year-over-year lower quarter. of quarter build a receivable million $X.X $X.X accounts than improved quarter, still volumes. performance million but result of the a incremental headwind within due from

to decrease inventory levels forward June year-end, we fiscal look by to our operational million. expect we As $XX

initiatives Additionally, ongoing to our fourth currently further management collections quarter to from capital maximize our we cash expect flow. payables recognize working benefits and

Regarding $X.XX year our a to year to earnings sales $X.XX we as of of to full earnings fiscal a XXXX range per share in raised referenced increase outlook, XX.X% guidance release, XX.X%. today's our and

X.X% assumes the Excluding FCX positive and based acquisition, to continued this Performance increase of sales strategic X.X% industrial the on our the near-term outlook a year, further traction growth initiatives. between for benefit from market of

related $X.XX the I $X.XX EPS the acquisition turn some With will full-year back our costs non-cash associated final as amortization. that, in guidance one-time Neil with call for to comments. transaction FCX now incremental closing as cash over well Additionally, includes

Neil A. Schrimsher

summary, In today. Thanks, with we overall accomplishments and pleased Dave. performance are our

not to for to the finish our annual realize building process is look With full delivering underway, forward the are a XXXX. we there level year, in We we potential. know stage planning to of commitments be our strong our However, generating setting done fiscal to more work on momentum, on growth fiscal the satisfied. this and next

evermore years leadership open that, providing of our continue distribution, business we're up your and our Applied's in prospects questions. and As potential, excited to we'll for stakeholders. With growth all benefits about energized for lines XX the we celebrate

Operator

you. Thank

the question-and-answer begin We will session. now

Adam Your from first comes from Please ahead. Uhlman Research. Cleveland go question

Adam William Uhlman

morning. Good guys. Hi,

Neil A. Schrimsher

Adam. morning, Good

Adam William Uhlman

And you the I with line could on start margin earnings that a year, and for top we related can performance. do that has Hey, the for FCX you $X.XX expand and to guidance you're what up initial think well? to earnings updated bit year the business, estimate the seeing on $X.XX then guess, is target, accretion of or next your a secondly, gone for that reasonable still that, as

Neil A. Schrimsher

into I'll start The quarter. we performing and we maybe that into one month. couple Obviously, have, of business it as next coming we very more and for in, the feel is about it about well months good year. think first especially we the let going Dave come coming get

be to a the right, continues X rate. more continues there in the ranges thinking the digit and its XXs Applied that rate, in the then from Maybe think months single XX% two of X the on standpoint. somewhere to sales some and months. than our But going at upper is at are we couple projects a it is growth in bit perhaps first our we will So the be of And above upper maybe of that little in seasonality. think core FCX guidance, guidance. total rate There's

accretive the And expectations the margin It that we be to added right? of our that's month So FCX, standpoint, margins will we know then overall. have. our from

basis we coming believe has XX LIFO the into expense that. probably So some XX points well. basis the as We fourth quarter know be opportunities, we'll it margins so will core, while to points getting in total maybe be that improve or some

continuous quarter to it have in a make but may underway the with work initiatives, number to improvement that some it bit we'll little third closer And... So be was better. its

David K. Wells

of terms benefit some our volume in XXXX $X.XX some amortization expense assumptions. upside, in well volume fiscal Yeah. We're seeing guidance as as $X.XX lower benefit initial from about about benefit, the versus Adam,

XXXX about to XXXX the updated, expect thinking we've amortization that think through benefit could not the guidance, full-year flow the I year impact there. obviously, guidance. But to you full of some

Adam William Uhlman

then that big going see to expected Okay. a the quarter? just are is follow-up. LIFO you expense How And next

David K. Wells

be at good that point, point but a Adam, basis on this estimate headwind. XX got not We've to could XX

Adam William Uhlman

Okay. Thank you.

Operator

ahead. go Please Your comes next Research. from Cieslak question Ryan Northcoast from

Avi Danda

Hi This morning. guys, Ryan. on for is good Avi

Neil A. Schrimsher

Good morning.

Avi Danda

Could it had any in from to you gross the terms of and the guys quarter through. how that Thanks. how going to price dynamics impact pricing discuss contributed in as relates on indication then increases. of ability margins, growth? it as to some topline And that the is it just price your forward, additional pass suppliers to cost spreads much relates And

Neil A. Schrimsher

Sure.

one-third So to legacy sold or on the either relates value-added configuration work We it's margin I managing than true XX their like to would coming to overall, ourselves can their assemblies our remind based look that year-over-year addressing price it as the and we where the us. points metric. are as say, improvements think obvious everyone, year at at good gross you sales quarter, not or was about repeatable feel including our the prior did points product Two-thirds sequentially, basis we products. maybe on business, absolute frequency, sales less we of XX that we basis the and other a get inflation about price are of unique, if volume we SKUs, had,

you get to match don't that. perfect So

that's I if think X% price it I side range. sales standpoint about coming, and the I think more it contributed, X%, So not If is supplier may a in what could to X% than the what from about X% from in that. probably think maybe it have have and more been

of we're that in through, that still one-third expect measurement we work time recognizing SKUs cost the on a clearly and nice it And reflecting on a we basis. well. see like that others, sales our price to it's would a sell more on on as – quarterly get those feel in we job we we the the So that would then but about doing

David K. Wells

we're initiatives the Yeah, seeing, that inflationary in just plus year-over-year the to I'd as some to in point to this work the LIFO impact support offset well. here as did the some quarter margins margin benefit we that again of headwinds the continue we well saw as vendor see we price, have

Avi Danda

that's if Thanks. do may. having points in significantly supply well (XX:XX) enough With growth chain your and capacity helpful. to to the several realizing support I feel Or going Thanks, you're moving is of your level And just growth of there second level is SG&A increase like minimal question, quarters, investment higher you forward? very last equipped? maybe pinch without the

Neil A. Schrimsher

I we're position. We that the think for believe very about speed, systems benefits, yielding the investments I'll start. productivity good Those in technology we're a us. having. are efficiency, and

to those really resources around or just that were with, time we office requirements so a our freeing facing And look perhaps, be forward staffing for actions for back functionality. doing up less

nice in it a on good that's our as provide quarter. as in position, at very volume, potential feel helps that we're looking well. we and was feel what SG&A look we leverage It we the of rate the forward So

David K. Wells

we that the being SG&A year-over-year, count higher And up in quarter X.X%, with only average saw again despite clearly, volumes. head the down being

Avi Danda

you. Thank

Operator

next Jason Your from Lakes comes Rodgers Please question go ahead. Review. Great from

Jason A. Rodgers

sure for fourth the Yes. expected quarter? want tax I I to just the you rate. understand are What projecting make

David K. Wells

quarter effective through go to XX% we will tax as Fourth the final rate, back to re-measurement. XX% be

we Here as step exit then will fiscal this And Act XX% rate to caused we're that re-measurement That down QX. the on and XX%, the XXXX. since again, blended spike tax in we the move straddled Tax year. fiscal into final year change our

looking rate corner, we XX% XX% kind move at in As obviously, as of to forward tax we round effective XXXX. we're ongoing fiscal the then a

Jason A. Rodgers

in oil for of the And right. the the if the quarter performance could quarter. as gas the well and you and fourth comment performance All markets and industry oil as expectation on the gas for the

Neil A. Schrimsher

Okay.

gas, So had in oil that. our top positives sales to get industries, so XX we with and we'll performance the increases, would've around XX

and others chemicals about doing upstream, food production. improved have and think a On aggregates, sales think encouraging on it basis well, OEMs, I primary predominantly gas, are It's demonstrating metals, sequentially, trends. are would drilling the close oil XX%. or machinery either and that in to day go going XXXX ongoing per we a faring Permian is over The say horizon, longer May, areas, Permian time – some in Many output especially U.S. to many a will day. looking barrels that Basin. to X in X a is million but the day out approach by to better million will say barrels it

that So more are that's pipelines either Corpus encouraging. to There's the built being Permian that's or connecting to Houston.

and good also expect forward, that's of (XX:XX) lot driving businesses And those looking would activity. So performance for continue. located there, So we that FCX to EAD including a that's that

the teens-type a in probably year-over-year quarter, improvement. it's So

Jason A. Rodgers

are And squeeze if in I sales in. tracking? more just April, how Performance one could

Neil A. Schrimsher

expected, As as comparison. we think about single month year-over-year it's is to-date upper digits April

and think days rate up a set year-over-year we to If similar, So point But good standpoint. sequentially down. at to on. quarter slightly very activity from comparison going a I a March, with few look a good in in it's maybe ago, be going well

Jason A. Rodgers

Thank good. you. Sounds

Operator

next Please Dankert go Longbow Research. comes from ahead. from Chris Your question

Chris Dankert

for morning, taking Thanks question. good Hey, my guys.

Neil A. Schrimsher

Sure.

David K. Wells

Hello Chris.

Chris Dankert

thinking power, Ag, commentary some specifically. guess, looking at off, better, just in in business I power it any backlog was on fluid now? said what's first heavy of of the about the equipment stuff I like guess, you that doing right Kind health just fluid

Neil A. Schrimsher

a grew. from be XX% our backlog year-over-year to quarter. XX% plus strong, power think continues So fluid sequentially I performance in the It plus basis,

and productive. job, their features And and to offerings offering designs benefits. that's improve mobile do helping a industrial So to OEMs and the and and with nice technology the connecting continue teams products

with pneumatics. just control, either energy industrials, then on businesses MRO with them helping around So side, And are savings we're active machine the well. performing

business our link very think it been of into side then has and move well. about forward going we one positive well. process is that And as as the taking So quarters we should step positive business natural with controls as future aid

Chris Dankert

forward, correctly, it it. a And is Got to so focus be wanted deleveraging helpful. That's to here. going really the sure comment heard I just then sounds going like make

mean, at trying than just So that going I'm is the expense would to look fair to assume to – be read just I it's headline interest XXXX. what lower

If you'll expense range? fair million great. commentary the give a than But less us seems like interest that's $XX

David K. Wells

sure Yeah, move be expense to for as an as we expectation fiscal work mitigate through through delevering to interest XXXX. would we that the continue

Chris Dankert

it. if just Got could. And it, got then I more, one

I'm sheet, on well they like realized balance were maybe very integration, and basis. the seems inventory seems number, there gains it it kind days. is doing if like wrong, at Looking at best there at but is the FCX practice inventory a operating basis really, we you on on an really just look I lean guess, any of

David K. Wells

leverage think business and MRO to to best excellence akin about power systems, nature both I more here leverage continue we're But might same we'll of inventory again, engineered of on business think initiatives the practices I industrial the thinking across the the versus distribution there since here. here share fluid components and the try slightly the our business. different the pieces a benefits those piece to again model to operational

Chris Dankert

Sounds good. so Thanks guys. much

David K. Wells

Chris. Thanks,

Operator

question go next Barger from ahead. from Markets. KeyBanc Capital Please Your comes Steve

Steve Barger

guys. good Hey, morning,

Neil A. Schrimsher

Good morning, Steve.

David K. Wells

Good morning, Steve.

Steve Barger

got quarters how we volume bit made call has we the that assuming I if about environment? that anniversaries? should until incremental then got we should FCX on rising adjustments after about an Is this the that, how level forward in a incrementals, covered, let so in know margin XX%. think been think of going we the stay but we've me few And for next we quarter, a after the as – late, little

David K. Wells

XX% incrementals the at of if those cost strip one-time XX%, expect be you still impact to the We includes out.

Steve Barger

went for those to adjusted (XX:XX) XXX We and

David K. Wells

about expectation FCX the the roll that fall to complete edge talked We up. dollar. We $X.XX this to through mixing as benefit of FCX continue the incremental acquisition. obviously, expect in expect, up, we on to would would We Okay. $X.XX

Steve Barger

Okay.

And XQ outperform the even so able in be you first expect XXXX half that would level? and of in to to

David K. Wells

Correct.

Steve Barger

OEM very order curious cycle half about Okay. of the your into view I a calendar just further sustainability people machinery about the supply back down year. and concerned know got the or you're cycle but off chain, are in call, and I even next longevity XXXX

seeing, what hearing based cycles or Just what from from on you're customers. prior contextually you're

Neil A. Schrimsher

planning process. kicked Well, off our we annual

are are outlook the going And really But and economist XXXX right and up about some so rest XXXX positive rate in I I to business through back units determined. with be calendar having on the in the perhaps that's there it's be and high could say and in those now, talk bit and think our bottoms their into sessions will we're working will XXXX. days half the the But on we look weeks. coming some a others order be of (XX:XX) where go we'll teams right backlog most and that that and the of it the now as know if we have relevant I in and business, levels. at of horizon over right, good our out shops going little softening. activity

that's good think I what expect through to of portion XXXX it to guess, be to see a and that, carry would determined. through we So we I continue XXXX. After

Steve Barger

Sure.

any about do you customers, OEM As aerial machinery construction traditional that? equipment, exposure or more to you sense dirt or think of your have

Neil A. Schrimsher

eight are mix well. doing seven industries that blended others including don't nice that a could segments, and or that be as it's some of me cleaner in those across, To know, I

nice a So blend. it's

Steve Barger

the broad-based ramp outliers for And OEMs, seeing, demand other? or you're one that way pretty the any

Neil A. Schrimsher

a outliers in products. those more coming it is electronic come to and of No. Really driven, desired more in, to technology portion no being capabilities and

with on opportunity an FCX, increase either from stands, services right? repair standpoint component Today, service and And So or pumps actuated skids, extended is hydraulics something will now we they very valve work encouraging. doing in those that value-added that have providing to get today we we're by a think then pneumatics.

a be nice the combination will can that service that side some additional work. on So provide

Steve Barger

or getting but we line? did the cross integration, segue you're more for you've any I selling just good FCX uncovered the in a broad selling, you've involved It's services, value-added getting into in as next terms it's early really since question. Opportunities new product Yeah. learned And of the know things this, into call? my

Neil A. Schrimsher

we are I there I'd to the work on of that as in on, we horizon. opportunity as you synergy the to get we term, categories, pursue say have in all building around more do what be probably in what Teams are we specifics, know them, in and extremely excited And longer is term very even a near clearly about later XX anything little mid-term term? plans have think we a focus hey, up help good identified with and learning. encouraged them. plans don't We streams action them What do to can will that learned them? established. ourselves new how

those, also delivering we right core focus. additional on sales in that encouraged and mind, their opportunities teams are about So and the in our for enhance either seeking cost have are we responsibilities, would opportunities the or The the competitiveness enhance while margin.

Steve Barger

Right.

That's in And can Okay. the answer. and context. products, versus highly get where any less in engineered hydraulics versus greater any products you're specific Or one seeing just inflation? there bearings dynamics Are you I'll queue. back about types good a talk of more

Neil A. Schrimsher

Yeah, would it's they they're say I go pretty I think similar, in as would across. general, –

slower will that products to or older truly are migration. products I consolidation, they either new away legacy to, SKU to encourage moving move older think promote put as some perhaps, suppliers help increases on technology trying from or products more

products, those thought side. around additional to more if on going everyone no item of there's I through really the know been which new not to we to that I tariffs little So come how the we but potential those the products, It's in is a And signs And staffing, to-date work price, of see it our handle, then translating to transition through some capacity. the of as activity of an on determined that be in it shifting Hiring, that of to products out. some probably it and but plays comes the or great right? makes think, which mechanism that early those challenging of it's form some sort the customers on of could industries, to and on those going But invoice a to kind we as activity, don't side see maybe help occurs added tariffs on right? for through adopting how we also, other think in in up bit deal. come handle low

So that more if period be at of there's that least contribute time, to volume or of it, early activity in the which positive. the from on can side will can customer side,

Steve Barger

Great. for Thanks the so time. much

Neil A. Schrimsher

You bet.

Operator

Your next question comes from Jason Rodgers from Great Lakes Review. Please go ahead.

Jason A. Rodgers

Thanks up. for follow the

had how Just few of the housekeeping fixed? What's is a items. debt much debt-to-EBITDA? the current And

David K. Wells

X.X% some So X.X% we're a fixing a at of – debt-to-EBITDA. – of basis. rate forward we working greater net about with towards we're X.X% as here. move portion or gross XX% on hedges, that interest that that About

Jason A. Rodgers

And you one fiscal to end what's if flow XXXX? have target the cash

David K. Wells

has $XXX through got of contribute inventory backlog here we – reduction million story power, build for through and continue working that of still there fluid X.X% is, our in terms some the payables Targeting well bit $XX work reductions, quarter as past to a We've as as the part Yeah. some some nice pre-buy extension initiatives in this due in a headwind QX. we've in $XXX of collections, million the in again, to activity made traction the us. been million. up backlog seen But great about of

Jason A. Rodgers

Thank you.

Operator

Schrimsher Mr. closing At time, no have I'm further questions. to we for now remarks. I over any call this turn showing will the

Neil A. Schrimsher

you and we of look to quarter. will many move want as seeing joining us we forward to everyone thank just I into for today, the

Operator

gentlemen. today's Thank and Thank for you, participating. This conference. ladies you concludes

now You may disconnect.

Applied Industrial (AIT) 26 Apr 182018 Q3 Earnings call transcript