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Text: Both of these documents are available in the Investor Relations section of applied.com.
In addition, the conference call will use non-GAAP financial measures, which are subject to the qualifications referenced in those documents.
We appreciate you joining us and hope you're doing well.
I'll start today with some perspective on our first quarter results, current industry conditions, and company-specific opportunities.
Dave will follow with more specific detail on the quarter's performance and provide some additional color on our outlook and guidance.
And then, I'll close with some final thoughts.
In the early fiscal 2022, we are executing well and making progress on our strategic initiatives.
We reported record first quarter sales, EBITDA and earnings per share, as well as another strong quarter of cash generation despite greater working capital investment year-to-date.
As widely evident across the industrial sector, inflationary pressures and supply chain constraints are presenting challenges as industrial production and broader economic activity continues to recover.
Nonetheless, we are in a strong position to handle these conditions and believe the current backdrop is reinforcing our value proposition and long-term growth opportunity.
As it relates to the quarter and our views going forward, I want to emphasize a few key points that continue to drive our performance.
First, underlying demand remains positive.
Second, our industry position, operational capabilities, and internal growth initiatives are supporting results.
And third, we continue to benefit from efficiency gains and effective channel execution.
In terms of underlying demand, trends remain favorable across both our segments during the quarter.
Industrial supply chain constraints are having some impact on the timing of demand flowing through to sales, though solid execution and our favorable industry position, still drove an over 16% organic increase in sales versus prior year levels.
And stronger growth on a two-year stack basis relative to recent quarters.
This positive momentum has continued into our fiscal second quarter with organic sales month-to-date in October up by a mid-teens percent over the prior year.
As it relates to customer in markets, trends during the quarter were strongest across technology, chemicals, lumber and wood, pulp and paper and aggregate verticals.
In addition, we continue to see stronger order and sales momentum across heavy industries, including industrial machinery, metals and mining, providing incremental support to our sales growth in the early fiscal 2022.
Forward demand indicators also remain largely positive.
[Technical Issue] activity across our service center network is holding up well, despite sector wide supply chain pressures.
We believe this partially reflects the diversity of our customer mix, as well as sustained MRO demand as customers catch up on required maintenance activity, provide greater facility access, and continue to gradually release capital spending.
Our ability to provide strong technical and local support, inventory availability and supply chain solutions, places our service center network in a solid position to address our customers' evolving needs near term, while helping them prepare and execute growing production requirements over the intermediate to long-term.
In our Fluid Power and Flow Control segment, we continue to see strong demand from the technology sector.
This includes areas tied to 5G infrastructure and cloud computing, as well as direct solutions we are providing to semiconductor manufacturing.
Customer indications and related outlooks across the technology end market remained robust, reflecting various secular tailwinds and production expectations continue with an ongoing recovery and longer and later cycle markets such as industrial OE and process flow.
We believe the underlying demand backdrop across our fluid power and flow control operations remains favorable.
In addition, we're seeing strong growth indications across our expanding automation platform.
The current tight labor market, combined with evolving production considerations post the pandemic, is driving greater customer interactions and related order momentum for our automation solutions.
We remain focused on expanding our automation reach and capabilities, both organically and through additional M&A.
During the quarter, we announced the tuck-in acquisition of RR Floody Company, a regional provider of advanced automation solutions in the U.S. Midwest.
The transaction further optimizes our footprint and strategy across next generation technologies, including machine vision and robotics.
Overall, the demand environment remains positive and we're seeing ongoing contribution from our internal growth initiatives.
That said, we expect supply chain constraints to persist across the industrial sector near term.
Lead times remain extended across certain product categories, driving component delays and an increase in fulfillment timing.
We saw greater evidence of this across both our segments during the quarter.
Our teams are effectively managing through these issues to date, as reflected by our first quarter results, as well as our ability to increase operational inventory levels in the U.S. by 6% during the quarter.
Our products are primarily sourced across North America, limiting our direct exposure to international freight and supply chain dynamics.
Our technical scale, local presence and supplier relationships are key competitive advantages in the current backdrop, providing a strong platform to gain share as the cycle continues to unfold.
The broader supply chain backdrop is also increasing inflationary pressures across our business, both through the products we sell and the expense we incur to support our competitive position and growth initiatives.
We saw ongoing supplier price increases develop during the quarter, with indications of additional increases in coming quarters.
Our price actions, strong channel execution and benefits from productivity gains are helping offset current inflationary headwinds, as reflected by solid EBITDA growth and EBITDA margin expansion during our first quarter.
We continue to take appropriate actions to offset these headwinds.
Overall, we are encouraged by our ongoing execution.
First quarter results highlight the strength of our position and company-specific earnings potential despite broader challenges industrywide, and reinforce our ability to progress toward both near term and long-term objectives in any operational environment.
Combined with a strong balance sheet, increasing order momentum exiting the quarter, and greater signs of secular growth tailwinds across our business, we remain positive on our potential going forward.
This will serve as an additional reference for you as we discuss our most recent quarter performance and outlook.
Turning now to our results for the quarter.
Consolidated sales increased 19.2% over the prior year quarter.
Acquisitions contributed 2.1 percentage points of growth, and foreign currency drove a favorable 80 basis point increase.
The number of selling days in the quarter was consistent year-over-year.
In many of these factors, sales increased 16.3% on an organic basis.
On a two-year stack basis, [Technical Issue] positive in the quarter and strengthened from fiscal '21 fourth quarter trends.
As it relates to pricing, we estimate the contribution of product pricing on a year-over-year sales growth was around 140 basis points to 180 basis points in the quarter.
As a reminder, this assumption only reflects measurable topline contribution from price increases on SKUs sold in both periods, year-over-year.
On a two-year stack basis, segment organic sales were up nearly 2%, an improvement from fiscal '21 fourth quarter trends.
And markets such as lumber and forestry, open paper, chemicals, aggregates, and food and beverage had the strongest growth on a two-year stack basis during the quarter, while our primary metals, machinery, and mining are showing greater improvement, both year-over-year and sequentially.
In addition to solid sales performance in our U.S. service center operations, we saw favorable growth across our international operations, which contributed to the segment's topline performance in the quarter.
Within our Fluid Power and Flow Control segment, sales increased 24% over the prior year quarter with acquisitions contributing 6.6 points of growth.
On an organic basis, segment sales increased 17.4% year-over-year and 6% on a two-year stack basis.
Segment sales continue to benefit from strong demand within technology end markets, as well as across life sciences, chemical and agricultural end markets.
Sales trends within primary metals and refinery end markets, also improved nicely during the quarter, partially offset by moderating trends across certain transportation vertical.
By business unit segment, growth was strongest across fluid power and automation.
In addition, demand across our later and longer cycle flow control operations continues to improve, with customer quote activity and order momentum building through the quarter.
Extended supplier lead times and inbound component delays had some effect on segment sales growth during the quarter, though the overall impact remains limited and manageable to date.
Moving to gross margin performance, as highlighted on page eight of the deck.
Gross margin up 28.6% declined 22 basis points year-over-year.
During the quarter, we recognized LIFO expense of $3.6 million compared to $1.1 million of expense in the prior year quarter and a $3.7 million LIFO benefit in our fiscal '21 fourth quarter.
The net vital headwind had an unfavorable 25 basis point year-over-year impact on gross margins during the quarter.
LIFO expense was higher than expected during the quarter, reflecting supplier product inflation and a greater level of strategic inventory expansion year-to-date.
Excluding the impact of LIFO, gross margins were relatively unchanged year-over-year, and up sequentially, reflecting strong channel execution, pricing actions, and ongoing progress with internal margin initiatives.
Turning to our operating cost.
Selling, distribution and administrative expenses increased 10.6% year over year, or approximately 7% on an organic constant currency basis.
SG&A expense was 20.3% of sales during the quarter, down from 21.9% in the prior year quarter.
We had another solid quarter of SD&A expense control, reflecting our leaner cost structure following business rational vision [Phonetic] taken in recent years, as well as benefits from our operational excellence initiatives, shared services model, and technology investments.
These dynamics are helping mitigate the impact from inflationary pressures, higher employee-related expenses, lapping a prior year temporary cost actions, and normalizing medical expense.
Combined with improving sales and effective price cost management, EBITDA grew 31% year-over-year, while EBITDA margin of 9.9% was up 89 basis points over the prior year.
Including reduced interest expense and a slightly lower tax rate, reported earnings per share of $1.36 was up 52% from the prior year.
Moving to our cash flow performance and liquidity.
Cash generated from operating activities during the first quarter was $48.6 million, while free cash flow totaled $45 million or 85% of net income.
We had a strong quarter of cash generation considering creating greater working capital investment year-to-date, including a strategic inventory build during the quarter to support growth and address supply chain constraints.
We continue to benefit from our working capital initiatives and solid execution across our business.
Our cash performance and outlook continues to support capital deployment opportunities.
During the quarter, we deployed a total of $36 million on share buybacks, debt reduction, dividends, and acquisitions.
With regards to share buybacks, we repurchased nearly 77,000 shares for approximately $6.5 million.
We ended September with just over $247 million of cash on hand and net leverage at 1.7 times adjusted EBITDA, which is below the prior year level of 2.1 times and the fiscal '21 fourth quarter level of 1.8 times.
Our revolver remains undrawn with approximately $250 million of capacity and an additional $250 million accordion option.
Combined with incremental capacity on our AR securitization facility, an uncommitted private shelf facility, our liquidity remains strong.
Turning now to our outlook.
This includes earnings per share in the range of $5 to $5.40 per share based on sales growth of 8% to 10%, including a 7% to 9% organic growth assumption, as well as EBITDA margins of 9.7% to 9.9%.
We are encouraged by our year-to-date operational performance and remain focused on our growth, margin, and working capital initiatives.
Combined with our favorable industry position, ongoing order momentum, and forward demand indications, our fundamental outlook and underlying earnings potential remain firmly intact.
That said, as previously highlighted, LIFO expense year-to-date is running higher than our initial expectations, assuming fiscal Q1 LIFO expense levels of $3.6 million sustained for the balance of the year.
This would result, in LIFO expense representing an approximate 40 basis point year-over-year headwind on EBITDA margins, compared to our initial expectation up 20 basis points to 30 basis points.
Combined with ongoing uncertainty from industrial supply chains and inflationary pressures, we currently view the midpoint of earnings per share guidance as most reasonable from a directional standpoint pending additional insight into how the year progresses.
In addition, based on month-to-date sales trends in October, and considering slightly more difficult comparisons in coming months, we currently project fiscal second quarter organic sales to grow by a low double-digit to low teen percentage over the prior year quarter.
We expect gross margins will be down slightly on a sequential basis during the second quarter, assuming a similar level of LIFO expense as the first quarter.
This would be directionally aligned with normal seasonal trends.
Further, we expect SD&A expense will be flat, to up slightly on a sequential basis, compared to first quarter levels of approximately $181 million.
Lastly, from a cash flow perspective, we continue to expect free cash flow to be lower year-over-year in fiscal 2022 compared to fiscal 2021 as AR levels continue to cyclically build and we replenish inventory.
That said, we are encouraged by our first quarter cash flow performance and continue to drive working capital initiatives as a partial offset across our business.
Overall, we are encouraged by how we started the year and what we see entering our fiscal second-quarter.
Order momentum remains firm across our businesses, our fluid power backlog is at record levels, and we are effectively building inventory to support our growth opportunities.
Our increased exposure to technology end markets is driving greater participation in secular growth tailwinds, while our later cycle Flow Control business is seeing increased activity across key market verticals.
We're also making great progress in building our automation platform, including organically as customer and supplier relationships continue to develop and broaden across new industry verticals, and within our legacy end markets.
Customer outlooks on underlying demand and capital spending, remain largely favorable over the intermediate term and we're on track to achieve our initial guidance provided in mid-August.
As is common across the industry right now, we're dealing with inflationary pressures, supply chain constraints, and lingering COVID related impacts.
As our historical track record and first quarter results show, we know how to execute in any environment.
In addition, I believe our strategy on our ongoing initiatives will prove out further in this environment as the industrial economy continues to evolve both cyclically and structurally.
The breadth and availability of our products, combined with our leading technical solutions and localized support, is a significant competitive advantage right now.
We look to leverage these capabilities across our expanded addressable market during these dynamic times and in years to come.
At the same time, our balance sheet and liquidity provide strong support to pursue strategic M&A opportunities.
We maintain a disciplined approach to M&A and are actively evaluating opportunities primarily across key priority areas of fluid power, flow control and automation.
There remains significant potential to further scale our leading technical industry position across these areas.
We're eager to demonstrate what we're fully capable out in the years ahead as we continue to leverage our position as the leading technical distributor and solutions provider across critical industrial infrastructure.

user
applied industrial technologies q1 earnings per share $1.36.
q1 earnings per share $1.36.
q1 sales rose 19.2 percent to $891.7 million.
applied industrial technologies - fiscal 2022 guidance maintained including earnings per share of $5.00 to $5.40.

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