Welcome to the fiscal 2022 Fourth Quarter Earnings Call for Applied Industrial Technologies. My name is Ingrid 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. I will now turn the call over to Ryan Cieslak, Director of Investor Relations and Treasury. Ryan, you may begin.

Thanks, Ingrid, and good morning to everyone on the call. This morning, we issued our earnings release and supplemental investor deck detailing our fourth quarter results. Both of these documents are available in the Investor Relations section of applied.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, the conference call will use non-GAAP financial measures which are subject to the qualifications referenced in those documents. Our speakers today include Neil Schrimsher, Applied's President and Chief Executive Officer; and Dave Wells, our Chief Financial Officer. With that, I'll turn it over to Neil.

Thanks, Ryan, and good morning, everyone. We appreciate you joining us. I'll start today with some perspective on our fourth quarter results, current industry conditions and our expectations going forward. Dave will follow with more specific detail on the quarter's performance and our forward outlook, including fiscal 2023 guidance, and I'll then close with some final thoughts. So overall, very encouraged how we ended the year. We achieved another quarter of record performance across sales and earnings. EBITDA grew 27% and EPS was up 34% on 19% sales growth. We also continued to expand EBITDA margins, achieving new highs above 11% for the second straight quarter despite ongoing inflationary headwinds. All these numbers include meaningful LIFO headwinds as well. In total, these are strong results to end the year that included significant progress on many fronts, including continuing to position the Company for long-term success through continuous improvement actions, growth investments and reinforcing our balance sheet through debt reduction. We also drove significant improvement in our return on capital metrics throughout the year. I want to thank our Applied team for their ongoing commitment and strong execution. Our outperformance throughout the year validates our industry-leading position and strategy, and we're very excited to build on this momentum going forward. So several key points to highlight in more detail. First, underlying demand remains strong across both segments through the quarter with trends accelerating during June. Trends were positive in all our key industry verticals with particular strength in metals, aggregates, mining, pulp and paper, chemicals, lumber and wood and other various heavy industries. In addition, we believe we're capturing incremental growth opportunities from our industry position and service capabilities. Combined with ongoing price contribution, year-over-year organic sales growth of approximately 19% represented the strongest quarterly performance for all of our fiscal…

Thanks, Neil. And just as a reminder before I begin. As in prior quarters, we have posted a quarterly supplemental investor presentation to our investor site. This is available for your additional reference as we discuss most recent quarter results and our fiscal 2023 guidance. Turning now to our results for the quarter. Consolidated sales increased 18.5% over the prior year quarter. Acquisitions contributed 30 basis points of growth which was more than offset by a 50 basis point headwind from foreign currency translation. The number of selling days in the quarter was consistent year-over-year. Many of these factors, sales increased 18.7% on an organic basis. Average daily sales rates increased over 9% sequentially versus the prior quarter and were above almost seasonal patterns. As it relates to pricing, we estimate the contribution of product pricing on year-over-year sales growth was approximately 500 basis points in the quarter. Just a reminder, this assumption only reflects measurable top line contribution from price increase on SKUs sold in both year-over-year periods. Turning now to sales performance by segment. As highlighted on Slides 6 and 7 of the presentation, sales in our Service Center segment increased 21% year-over-year on an organic basis when excluding the impact of foreign currency. Growth was solid across all of our core end markets, the strongest within mining, metals, pulp and paper, energy, aggregates, rubber and plastics and lumber and wood. Segment growth also continues to benefit from traction with our sales process initiatives and ongoing pricing actions. Within our Fluid Power & Flow Control segment, sales increased 15% over the prior year quarter, with acquisitions contributing one point of growth. On an organic basis, segment sales increased 14% year-over-year and over 30% on a two-year stack basis. Segment sales continue to benefit from strong demand within technology…

Thanks, Dave. So as we begin fiscal 2023, which is our 100th year as a company, there is a strong sense of pride and excitement throughout Applied. Underlying this is our view that we're playing an increasingly critical role across the industrial space today, especially when you consider customers' labor constraints, equipment optimization initiatives and increased manufacturing investments across North America. We're also motivated by our ongoing evolution as a company, as we enhance and leverage our core service center operations while expanding across higher engineered solutions tied to advanced automation, industrial power and process technologies. The progress we're making on this evolution is optimizing our growth and margin trajectory for the future. We're keeping a close eye on the broader macro environment. The current backdrop is driving greater uncertainty as to how industrial activity might track in coming quarters. As such, we're taking a prudent initial approach with our fiscal 2023 guidance. We're focused on continuing to execute on our commitments and remain constructive, given the positive momentum sustaining across our business today, which we believe partially reflects various structural demand tailwinds within our core end markets and channels. We also believe our diversification and expansion into verticals such as technology, life sciences and other higher-growth areas, combined with a greater mix of longer cycle markets has enhanced the breadth and durability of our growth trajectory. Greater evidence of manufacturing reshoring and investment in U.S. production capacity are other encouraging signs, and there remains significant potential to gain further traction with our cross selling initiative. Long-term, we see great potential to further scale our industry position and EBITDA margin profile. Our multifaceted strategy is presenting many new and relevant catalysts which will drive an ongoing evolution at applied and further enhance our market position. Given these dynamics and our team's operational discipline, today we're establishing new intermediate financial targets, including sales over 5 billion and EBITDA margins over 12%. We believe these objectives are well within the Company's capability and can be achieved within the next five years or sooner, depending on broader macro conditions, the cadence of M&A and other factors. Overall, our team is engaged and ready to execute on these next milestones, which we believe provides the framework for significant value creation for all stakeholders. Once again, we thank you for your continued support. And with that, we'll open up the lines for your questions.

Our first question comes to line of Ken Newman with KeyBanc Capital Markets. Please proceed with the question.

Hey, good morning guys, solid quarter. So, for my first question, I just want to try to balance some of the optimistic comments you made versus the guidance that you put up this morning, particularly for the first quarter and the second half. I think you've mentioned that sales were up mid teens through early August and the guidance calling for organic to be up low double digits. I just, I just want to clarify whether that is really driven by higher conservatism? Or is there something concrete -- if you want pull the reins in a bit?

Well I can start as we look for the continuing on the first quarter, right. We talk about what we're seeing in the mid teens now. Our guidance really around the first quarter would say organic sales would be up below double digit. We think gross margins are likely unchanged, perhaps slightly down to the fourth quarter that we closed. And we think our incremental margins would be like in the fourth quarter, say, around that 17%. And then as we look out further at the guide, right, we could see if conditions moderate, sales would be more high single digits for the first half and potentially a little more softening in the second half. So today, right, we do not see that in our customers' interactions and dialogue, work with suppliers and others. But we're mindful, as we said in the remarks, right, on cross currents and other things that could influence.

I'd just add Ken that, we do have a little bit tougher comp when you look at the August September timeframe to round out the quarter, which gets us that low double digit expectation incurred for Q1. I'd also add that, on the three to seven, full year organic growth guidance that does include in the back half of the year. Market contraction, depend on what end of that spectrum you're looking at. So, we're offsetting that with the positive momentum that we can see coming into the year, a nice backlog position, particularly in our project-oriented fluid power, flow control automation businesses. Some positive price contribution carrying through as well as thinking about our flow control business and some of the longer later cycle that's lagged on the other areas of the business that came back, and it's going to continue to provide some momentum. So that coupled with cross-selling opportunities taking momentum, offsetting what we're assuming to still be a kind of negative trend in terms of market for the back half of the year.

Got it. Yes. So it sounds like it's mostly conservatism and maybe a little bit more at the top end of the guide here.

First of all, just exactly -- Yes.

Right. From a follow-up, I'm just curious, can you talk a little bit about what's embedded in the current guide in terms of the pricing cadence. Obviously, price was up sequentially from the prior quarter. Would you expect price contributions to be up sequentially from fiscal 4Q? And when do you think we start to see a peak in some of those prices just given that you're a little bit more exposed to some of these later-cycle industries versus your competitors?

Yes. I would say overall, now we're not going to guide on price, but perhaps as color or starter, we could say, price contribution overall for '23 could be similar to fiscal '22. But as you would expect, right, the cadence will reverse. So perhaps starts higher as we go into the first half when we finish this calendar year. And then starts to moderate back in the second half. I think a starter guide would be similar for the full year in '23 as it was in 2022.

Our next question comes from the line of Chris Dankert with Loop Capital. Please proceed with your question.

I guess on the intermediate term numbers you guys gave here, that 12% EBITDA margin figure. Is that -- should we think about that as a cross-cycle number, just because if I look at the EBITDA margin has put up with your add-back life. You're already pretty well into the 11%. I'm just trying to get my arms around how to think about that EBITDA margin outlook or target over time?

Yes. So, we think about it over the cycle. The contributors would be we would grow mid-single digit we would look to continue acquisitions and so perhaps acquisitions contributed 300 basis points of growth. We would have some gross margin expansion in that period and the incrementals would be in the mid- to high teens that would go in. And so as we talked, the timing can be impacted by just what are going to be the general market conditions in the environment. And so, if there is a pullback and a slowdown in that period, perhaps we're in that longer time frame of the five years. If not, or more just kind of a general recessionary modest pullback, we'll have the opportunity to get there sooner.

Got it. That's very helpful. And then just as I think about the guide for the year a little bit more granularly, should we think about the growth rates across businesses being fairly similar? Or I mean, it seems like based on the performance to date that the distribution business would be growing a bit faster. Just any thoughts there would be great.

Actually, the guidance assumes the fluid power, flow control automation segment, slightly outpacing service in our growth, just given the strong 22% that we had in that piece of the business and just that robust backlog position that we entered the year with, so slightly outpaced growth out of the project orient business.

Got you. Got you. And then maybe just one quick kind of housekeeping question. Any comment on our corporate expense for the year probably being near $100 million? Just kind of if you could drive us there.

Yes, Daniel. I see nothing like different year-over-year there kind of in line with what you've seen historically.

Our next question comes from the line of David Manthey with Baird. Please proceed with your question.

Good morning guys. I was sitting here mashing star one, so need to follow direction I guess. Rational outlook makes sense. Dave, maybe you could describe gross margin outcomes all else equal, if inflation flattens out completely. So for example, if inflation goes to zero in a given year, do you claw back some or all of the LIFO headwinds you're seeing right now?

It's not going to be looking on a time, Dave, because you think about the kind of the nature of this business and the randomness of some of the demand that you talked before with 1/3 of the SKUs repeating any given period, there's going to be a longer tail of LIFO at the inflationary impact, kind of test tomorrow. We still see a longer tail as you do replace some parts that have not been replaced in the last year plus and hit the radar. So, the guidance does assume that longer tail, some of that inflationary impact continued really through the first half of the year until things cool effect. So the guidance generally assumes a LIFO impact similar to what we saw this year. And then the opportunity does exist then obviously, maybe as you get out in the back half of the year, but more likely sub-future years to be able to realize the boron the cooling and inflationary impact or certainly rare liquidation like we saw in Q4 of our fiscal '21, some LIFO tailwinds as a result of kind of the run up that we've seen. But don't see a great deal of that materializing in our fiscal '23.

Yes, makes a lot of sense. And then as a follow-up, the -- in the release, you mentioned cost leverage despite inflation. And I guess that's telling us that revenue inflation is greater than your SG&A inflation. Neil, maybe you could help me with how do you know that you're operating more efficiently versus just benefiting from generalized inflation as it affects your model?

So, I think one would look at where we focus and that we've made investments and that we're seeing productivity in the back of the house and whether that'd be continued opportunities around shared services, warehouse management, other initiatives that we are operating efficiently in support of the business. And so, our investments are more forward facing in engineering and technology as we expand into those solutions that are touching and impacting customers on the side. So that has been our balance. We're getting some natural inflation that comes through on medical and some other areas in. But we think, all in all, we're doing very effective job of managing those in the model and going forward. It's been part of the improvement in our incrementals, and we think can contribute to us going forward.

We condition the team to look at that overall staffing cost includes the overtime, temp labor, and really do the benchmarking based on that total cost of staffing just to demonstrate where we're seeing that productivity and kind of set that expectation as we continue to move forward, maintaining that efficiency. Thanks.

Our next question is the follow-up from the line of Ken Newman with KeyBanc Capital Markets. Please proceed with your question.

Thanks for the follow-up here. Sorry if I missed this in the prepared remarks, but did you give any color on how the automation business did in the -- I'm curious if you can just give some color on what run rate is like for that business now and then maybe just talk a little bit about the M&A pipeline for some of those targets within that sector?

Sure. And sales in the quarter for automation were up mid-single digits, I think, 6% plus or so in that side. We talked about order rates and backlog expanding. The automation group did prior quarter comp was a plus 40%, so competing against a high comp in that side. I think the month of June was double digit. So, we remain highly pleased with the group and the opportunities that we're opening up. Greenfield expansion continues to progress on that side. And in our M&A priorities, automation is one of those, along with fluid power and flow control. So good activity going in developing more turnkey solutions that we feel we can take across a lot of market segments from a discrete automation side that are underpenetrated. So we think that's going to be a nice contributor for us going in. And as we think about the business going forward obviously they're at or above the high end of the guidance that would be the expectations for fiscal '23. We did say to in the prepared remarks that maybe some of that growth opportunity in addition to the tougher comps was dampened just a bit by supplier constraints and may you do that. The team has done a very nice job of still continuing net order trajectory and nice growth against those tougher comps while managing through some of the supply chain issues.

Yes. I'm curious, are you running into any installation bottleneck? So, we have heard about a couple of issues, I think you have from one of your supply partners experienced pretty big fire at the larger production line. Is that having an impact on deployments at all?

So, I would say, overall for us limited to no. And I think some of that impact is more on logistics oriented market rather than engineered solutions as it goes across. So, we feel like in our solution we're doing a nice job. I mean, obviously, there's supplier engagements and expedites and doing it. And things may move, but they're small period move out. So, the product range, the engineered range that we're more focused on has not seen or had the same level of impact.

And maybe just one more for me. Obviously, the leverage seems to be in a really strong place. You're expecting free cash generation to be better this year. Any update how we should think about what are the primary priorities for capital deployment, whether it'd be for M&A or then your purchase program or something else?

So, I'd say priorities first are growth, right? And we can make organic investments in that and M&A. So, those will be the first level priorities. We will continue to be a dividend payer, dividend increase. And then as we touched on the share repurchase authorization re-up in that, it is an opportunity. But we think in the environment, we will have opportunities for continued growth in that side. We said consistently, we'll be mindful. We will not just stack cash for long periods of time, and we can redeploy those back to shareholders. But we think the best moves that we can take would be to further grow the business across -- especially as we develop these engineered solutions.

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

I'll just simply thank everyone for joining us today. We look forward to talking with you throughout the quarter. Thanks again.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.