Applied Industrial Techs Q4 2026 Earnings Call Transcript

Applied Industrial Techs (NYSE: AIT ) released fourth-quarter financial results and hosted an earnings call on Thursday. Read the complete transcript below. This content is powered APIs. For comprehensive financial data and transcripts, visit Access the full call at Summary Applied Industrial Technologies reported record fourth-quarter sales and earnings for fiscal 2026, with organic sales growth of 10% and EBITDA margin expansion of over 60 basis points.

The company highlighted strong demand across its top 30 end markets, with notable growth in metals technology, utilities, and energy machinery, while facing declines in chemicals and transportation. Engineered Solutions segment led the sales growth with a 13% increase, driven by robust demand in automation and fluid power operations. The Service Center segment saw an 8% organic sales growth, supported by strong performance in national strategic accounts and local accounts. 8%, with organic sales growth expected to remain strong in the first half of the year.

The company increased its intermediate financial targets, aiming for $7 billion in sales and a 14% EBITDA margin over the next five years. Management emphasized ongoing strategic initiatives, including M&A activities, technology investments, and cross-selling momentum. Challenges include potential geopolitical and trade policy impacts, inflationary pressures, and LIFO expense volatility. Cash generation remained strong, with free cash flow totaling $461 million in fiscal 2026, despite higher working capital requirements.

Full Transcript Trevor, Operator Welcome to the fiscal 2026 fourth quarter earnings call for Applied Industrial Technologies. My name is Trevor and I'll be your moderator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

If you wish to ask a question at that time, please press STAR followed by the number one on your telephone keypad. Prior to asking a question, lift your handset to ensure the best audio quality. If at any time during the conference call you need to reach an operator, please press STAR zero. Please note that this conference is being recorded.

I will now turn the call over to Ryan Cieslak, Vice President of Investor Relations and Treasury. Ryan, you may begin. Ryan Cieslak, Vice President of Investor Relations and Treasury Okay, thanks, Trevor, and good morning to everyone on the call. This morning we issued our earnings release and supplemental investor deck detailing our fourth quarter results.

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, we will use non-GAAP financial measures during the conference call, which are subject to the qualifications referenced in our SEC filings. Our speakers today include Neil A. 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 A. Schrimsher, President & Chief Executive Officer Thanks Ryan and good morning everyone. We appreciate you joining us.

I'll begin today with perspective and highlights on our results, including an update on industry conditions and expectations going forward, as well as provide an overview of our new intermediate financial targets. Dave will follow with more financial detail on the quarter's performance and provide additional color on our fiscal 2027 guidance. I'll then close with some final thoughts. So overall we reported a solid finish to fiscal 2026 with record fourth quarter sales and earnings that exceeded our expectations.

The quarter was underscored by organic sales growth of 10%, which was the strongest in more than three years and a notable improvement from the 6% growth we reported last quarter. We levered the stronger growth very well, expanding EBITDA margins by more than 60 basis points to over 13%, growing EBITDA by 16% and EPS by 13% compared to the prior year, which is inclusive of ongoing LIFO expense headwinds. In total, these are strong results to end a year that was both defining and pivotal on many fronts, including showing strong evidence of our operating durability as well as early signs of the significant growth potential taking shape across our business.

I want to thank our Applied Industrial Techs team for their ongoing execution. The focus drove another year of exceeding our commitments and creating meaningful value for our customers, suppliers and all stakeholders, further validating the power of our collective efforts and differentiated industry position. So several key points to highlight in more detail. First, underlying demand improved across both segments during the quarter.

Trends strengthened through the end of the quarter with organic sales increasing over 10% year over year in June, despite more difficult comparisons, the stronger sales growth was volume driven reflecting greater technical MRO and capital spending activity combined with ongoing benefits from our internal sales initiatives and industry position. Strengthening underlying demand was apparent in year over year trends across our top 30 end markets where 20 generated positive sales growth compared to 17 last quarter and 15 in the prior year. Quarter growth was strongest across metals technology, utilities and energy machinery, rubber and plastics and pulp and paper.

This was partially offset by declines primarily in chemicals, lumber and wood and transportation. Sales growth during the quarter was led by our engineered solutions segment which delivered 13% organic sales growth year over year, up from 9% last quarter. During the quarter, we saw stronger demand across legacy and emerging customer verticals as well as solid backlog conversion. Segment order trends also remained positive during the quarter, increasing by a double digit percent year over year for the third straight quarter.

Sales growth in the quarter was strongest in automation where organic sales increased over 20% year over year. This was the strongest organic growth in over four years, underscoring the solid demand developing for our automation solutions as the adoption of robotics, machine vision and digital technologies ramps higher with more productive capital spending. Growth also strengthened across our industrial and mobile fluid power operations where sales increased by a high single digit percent over the prior year. Demand is improving across many of our legacy fluid power markets including construction, metals and machinery.

In addition, our engineering project funnel is expanding as OEM customers increasingly focus on upgrading fluid power systems and integrate new advanced features into their mobile equipment. Our fluid power performance is also benefiting from Hydrodyne, which as you recall, we acquired 18 months ago. We've made tremendous progress across our synergy work streams and contribution from Hydrodyne improved throughout fiscal 2026. Of note, the second half of fiscal 2026 Hydrodyne sales increased by a double digit percent year over year while their EBITDA margins improved over 200 basis points.

In addition, segment performance during the quarter benefited from strong technology vertical contribution including favorable growth across the semiconductor space as well as new business continuing to develop around data centers. As a reminder, our technology vertical represents over 15% of our engineered solutions segment today with related participation across all three areas of the segment including automation, fluid power and flow control. Our service center segment also had a solid quarter.

Organic sales growth of 8% accelerated from 4% last quarter with average daily sales up approximately 5% sequentially and ahead of normal seasonality for the second straight quarter. Greater break-fix and technical MRO activity continued to broaden throughout the quarter. Of note, 27 of our top 30 industry verticals were up year over year in our US service center network during the fourth quarter with notable strength across metals, pulp and paper, rubber and plastics and utilities and energy. Growth was strongest across national strategic accounts where sales continue to benefit from our internal initiatives and one Applied value proposition.

We also saw demand strengthen across small and mid sized local accounts where sales increased by a high single digit percent year over year during the quarter, providing further evidence of the recovery taking shape across the industrial sector. It's also worth noting the service center segment's performance throughout fiscal 2026. Despite more mixed end market demand to start the year, segment sales grew organically year over year every quarter. In fiscal 2026, total sales finished up nearly 6% while EBITDA grew 8% inclusive of greater LIFO expense.

Looking at the segment's performance over the past five years, organic sales growth has averaged 8% while EBITDA growth has averaged 13% overall. This is notable performance that highlights a stronger and more durable growth profile that exists across our service center segment today, reflecting benefits from internal initiatives as well as secular and structural tailwinds positively impacting our core market position. So overall a solid quarter highlighting continued positive top line momentum building across Applied Industrial Techs. At the same time, our team remains focused on driving stronger returns as this more favorable growth backdrop continues to develop.

We saw solid evidence of this during the quarter where we levered 10% sales growth into 16% EBITDA growth representing incremental margins of over 19% or more than 22% when excluding LIFO expense. We also had a strong quarter of free cash generation which increased 16% over the prior year. Free cash totaled 461 million in fiscal 2026 which was down modestly over the prior year.

Despite greater working capital requirements to support growth in the back half of the year, ongoing initiatives and system investments continue to optimize our working capital KPIs including areas of accounts receivable and inventory management with net working capital as a percent of sales ending fiscal 2026 at a six year low. Moving forward, we remain well positioned to drive stronger earnings growth and solid cash generation with ongoing support from our internal initiatives and mix tailwinds. From a capital deployment standpoint, we had another productive year in fiscal 2026 deploying approximately 425 million on share buybacks, dividends, CapEx and M&A.

Over the past two years, related capital deployment totaled just under $1 billion. 2 million shares for 317 million. We also increased our quarterly dividend by 11% and continue to invest in our technology platforms, distribution centers and growth capacity during the year. We expect to remain active with capital deployment in fiscal 2027 with nearly 2 billion of balance sheet capacity.

As always, we will remain disciplined with a focus on deploying capital that enhances our scale, growth profile and competitive position. Going forward, M&A remains a top priority and we continue to actively evaluate various targets across both our segments. Lastly, I'd like to take a moment to provide some initial thoughts on our fiscal 2027 outlook as well as our intermediate financial objectives, which we increased this morning. Dave will provide greater detail on our guidance assumptions, but overall we enter fiscal 2027 with solid growth potential and operational momentum developing across both our segments.

Positive sales momentum has continued into the first quarter, with organic sales to date up approximately 7% compared to prior year levels. End market demand in aggregate appears to be on solid footing with limited pockets of weakness or signs of slowing near term. Broader macro indicators including ISM, industrial production and durable goods orders continue to trend favorably.

In addition, following a more muted growth backdrop in fiscal 2026, we expect potentially greater contribution from higher margin flow control sales in fiscal 2027 as MRO and project activity across process end markets improve following a greater level of deferred spending this past year, particularly in chemicals and refining verticals. We remain mindful of the evolving geopolitical backdrop and trade policy uncertainty, both of which could impact the cadence and trajectory of end market growth depending on how things develop. We will also face more difficult comparisons, most notably in the second half of the year following our recent strong performance.

These considerations are contemplated in our initial fiscal 2027 guidance. Beyond critical and core end market dynamics, we expect ongoing positive contribution from our internal sales initiatives, including greater cross selling momentum and benefits from sales productivity investments. We also expect structural and secular tailwinds to remain positive and potentially more impactful factors to our demand moving forward.

Of note, our ongoing evolution has positioned Applied Industrial Techs at the intersection of exciting and powerful growth trends tied to rising technical support at customer plants, industrial system upgrades, automation adoption including physical AI integration and the build out of critical infrastructure across both legacy and emerging customer verticals. Our related exposure to these trends is high given our industry position supporting US manufacturing and deep technical knowledge of our customers facilities as well as greater scale we have today in areas of advanced automation and fluid power.

Further, our balance sheet and cash generation provide meaningful capacity to further compound our growth through ongoing M&A. As I mentioned earlier, our pipeline remains active and we believe M&A contribution could be more meaningful to our sales growth through fiscal 2027 and beyond as we further execute our strategy. The M&A backdrop is increasingly productive as targets face heightened competition, required operational investments and extended ownership life cycles. Our acquisition track record including more than 18 transactions since 2018 combined with our leading technical solutions platform makes us a compelling home for the companies we are currently evaluating.

So we see many catalysts and tailwinds supporting our ongoing growth across Applied Industrial Techs as we enter the next phase of our evolution. At the same time, we have great potential to further expand our EBITDA margin profile moving forward. Our business model provides inherent operating leverage and we continue to target mid to high teen incremental EBITDA margins at mid single digit organic sales growth. The ongoing expansion of our engineered solutions segment and local account growth across our service centers provide durable and structural mix tailwinds that should intensify in a more favorable demand environment.

We also see opportunities to further optimize our productivity and operating leverage through ongoing technology investments, expanding our shared services model and leveraging AI while ongoing synergy progress across recent acquisitions including Hydrodyne provide further margin support. The opportunity ahead is exciting and one that has been built through compounding years of executing our strategy, committing to continuous improvement, leveraging our differentiated industry position and adhering to a disciplined approach to capital investment.

From various organic investments and positioning made across our core service center segment to strategic moves into flow control and automation, our strategy has driven intentional transformation across our business to serve customers more completely, expand our market potential and strengthen our overall value proposition. Our historical performance provides strong evidence of the power of our strategy and potential. In the past five years we've grown sales by 9%, EBITDA by 14%, EPS by 18% and free cash flow by 15% on a compounded annual basis.

Over the same period, gross margins have expanded 120 basis points and EBITDA margins have expanded by over 260 basis points, while our return on capital metrics have improved notably. 5 billion prior and increasing our EBITDA margin objective to 14% from 13% prior. We believe these objectives are well within the company's capability and can be achieved over the next five years depending on broader macro conditions, the cadence and scope of M&A and other factors. Overall, our team is now engaged and ready to execute on these next milestones, which we believe provides the framework for significant value creation for all stakeholders moving forward.

At this time, I'll turn it over to Dave for additional detail on our results and outlook. Dave Wells, Chief Financial Officer Thanks, Neil, and good morning to everyone joining today. Just another reminder before I begin. As in prior quarters, we have posted a supplemental investor presentation to our investor site for your additional reference.