AIT - NYSE

Ladies and gentlemen, welcome to the fiscal 2024 Fourth Quarter Earnings Call for Applied Industrial Technologies. My name is Abby, and I'll be your operator for today's call [Operator Instructions]. Please note that this conference is being recorded. And I will now turn the call over to Ryan Cieslak, Director of Investor Relations and Treasury. Ryan, you may begin.

Okay. Thanks, Abby. 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. And with that, I'll turn it over to Neil.

Thanks, Ryan. And good morning, everyone. We appreciate you joining us. I'll begin with some perspective and highlights on the key drivers of our results, including an update on industry conditions as well as expectations going forward. Dave will follow with more detail on the quarter's financials and provide additional color on our fiscal 2025 guidance, and then I'll close with some final thoughts. So first, I'd like to acknowledge and thank our Applied team for their hard work and consistent execution throughout fiscal 2024. While we faced a more mixed end market backdrop during the year, the commitment to our strategy and relentlessly serving our customers is standing out across the industry and strengthening our long term potential. It's an honor to be part of this team as we work together as One Applied to achieve our commitments now and fully capture the tremendous opportunity we see ahead for the company. Overall, the strength of our team and strategy was apparent in our fourth quarter. We delivered double digit earnings growth on strong execution, positive margin momentum and cost control. This more than offset weaker than expected end market demand as the quarter played out, which I'll touch on more shortly. As it relates to our margin performance, it was very encouraging end to another solid year of progress in expanding our margin profile with gross margins close to 31% and EBITDA margins exceeding 13% for the first time. While lower LIFO expense provided some benefit in the quarter, it's important to note LIFO expense is normalizing from record levels in prior years. Additionally, when excluding LIFO expense, both gross margins and EBITDA margins expanded nicely over prior year levels in the quarter. We saw benefits from several areas, including strong channel execution, favorable mix across our Engineered Solutions segment where EBITDA margins approached 16% in the quarter as well as variable expense adjustments and cost control inherent to our model and operating discipline. For the full year, we expanded gross margins by nearly 70 basis points and EBITDA margins by approximately 50 basis points, both reaching new highs. When looking back to fiscal 2017, which is when we began implementing various initiatives around our current strategy, gross margins have increased nearly 150 basis points while EBITDA margins have expanded over 400 basis points. Overall, these results provide further evidence of the benefits of our strategy and ongoing evolution as well as the margin improvement potential ahead as we continue to leverage our differentiated industry position and internal initiatives. This includes ongoing mixed tailwinds long term as we expand our solutions portfolio and grow our local account base as well as continued benefits from technology investments, analytics, increased scale and an enhanced organic growth profile. As it relates to sales trends consistent with broader industrial data points, in recent months, we saw additional moderation in the end market demand as the quarter played out. This resulted in organic daily sales declining 2% over the prior year compared to a 0.7% increase in the third quarter. The year-over-year trend improved some in June on a firm finish to the month and an easier comparison. Similar to last quarter, trends were bifurcated with sales declines primarily concentrated in the fluid power operations of our Engineered Solutions segment where equipment OEMs continue to work through excess fluid power component inventory. Sales within our MRO focused areas of our business, including service center and flow control operations held in better with related sales up slightly year-over-year. As a reminder, MRO related sales represent approximately 70% of our overall business. That said, MRO billing activity was more mixed compared to last quarter as customers conservatively managed maintenance spending within the uncertain business environment. This bifurcated demand backdrop is evident when looking at our top 30 end markets where 14 generated positive sales growth year-over-year compared to 15 last quarter. We're still seeing decent growth across areas such as food and beverage, metals, transportation, refining and mining. This was offset by the declines in machinery, energy, pulp and paper, fabricated metals, rubber and plastics and utilities. Muted demand trends have sustained into fiscal -- into early fiscal 2025 with organic sales through mid-August trending down a mid single digit percent compared to prior year levels. We would point out early first quarter trends are always difficult to gauge given seasonal slowness in the summer and some normalization following our year end. Also, July started off relatively slow, but improved as the month progressed with the back half finishing flat compared to prior year levels, including a strong finish in the last week. So the demand backdrop remains choppy, which we believe reflects impact from higher interest rates and uncertainty around the upcoming US election. This is resulting in customers conservatively managing production schedules and taking a more methodical approach to capital project spending near term. It will be important to see how the latter part of the first quarter shapes up, including activity in September, which is typically a better gauge for underlying demand as production schedules normalize following summer breaks and related plant shutdowns. Looking more into each of our segments. Sales in our Service Center segment declined modestly over the prior year on an organic daily basis. Year-over-year trends held relatively steady through the quarter but sequential trends were below normal seasonal patterns. Sales were softer across our local account base and within our consumables MSS business, partially offset by ongoing growth across larger national accounts and fluid power aftermarket sales. Technical brake fix demand, which represents about half our service center sales, held relatively steady during the quarter as broader production activity was consistent at a more normalized pace. This aligns with the US industrial capacity utilization readings during the quarter, including increases in May and June. On the other hand, spending on general MRO and capital maintenance projects was more mixed as we saw customers tighten controls and operational expenses and defer capital spending. That said, relative to broader market indicators and benchmarks, our Service Center operations continue to show outperformance as well as more resilient growth profile compared to prior cycles. It's important to note that the segment grew 8% organically on a two year stack basis during the quarter and 29% on a three year stack basis, which we believe highlights top-tier industry growth over a multiyear period. Overall, our Service Center team continues to benefit from a strong industry position, service capabilities and ongoing sales force initiatives, as well as greater cross selling opportunities. We're also seeing incremental growth through our digital channels, including EDI and applied.com where related sales increased approximately 9% during fiscal 2024 and including over 6% in the fourth quarter. Combined with ongoing talent initiatives and our local service capabilities, we continue to capture new growth opportunities across both legacy and emerging end markets. Within our Engineered Solutions segment, sales declined 4.6% on an organic daily basis compared to the prior year, primarily reflecting ongoing softness across our fluid power operations. As mentioned earlier and consistent with last quarter, most of the weakness in Fluid Power is tied to reduced shipments of off highway mobile OEM components and systems. We estimate fluid power off highway mobile sales represent about 20% of segment sales or 7% of total sales. We expect the off highway market to remain somewhat muted for another quarter or so as OEM customers continue to work through excess inventory. However, we remain constructive on the growth trajectory developing in this core area of fluid power, given our leading market position and capabilities serving growing industry trends tied to machinery automation, power management, electronic control integration, connectivity and electrification. The pace of required innovation across off highway mobile equipment is accelerating faster than ever, given these secular trends and the growing focus on safety, skilled labor constraints and sustainability. Our strategies and teams are aligned to support thousands of specialized OEMs, engineer, design and integrate these advanced features into their equipment with world class technologies from top fluid power suppliers. In addition, the demand for stationary fluid power systems across industrial focused end markets remain steady and should continue to positively develop in coming years given various tailwinds. This includes required investments focused on updating aging manufacturing equipment, including enhancing the efficiency and life cycle of hydraulic systems, power units, filtration systems and hydraulic presses. During the quarter, the Engineered Solutions segment was also pressured by ongoing sales decline across the technology vertical, which we estimate negatively impacted segment organic sales growth by approximately 100 basis points. This vertical has been a headwind on the segment for nearly six quarters but we see positive signs developing. As a reminder, our focus in this vertical provides various fluid conveyance, pneumatic, process control and automation solutions to production supply chains and infrastructure across semiconductor and electronics manufacturing, as well as data center facilities. Recent indicators suggest demand for semiconductors and related fabrication equipment could begin to recover in fiscal 2025, following an extended downturn for more than a year with commentary from related customers increasingly positive. We're also positioned to benefit from ongoing growth across data center infrastructure, including providing various flow control and robotic solutions for server cooling, material handling and technical maintenance. Some of these trends in the technology sector are poised to benefit our automation operations as well. During the quarter, automation sales declined organically by mid single digit percent but increased 7% sequentially. Our automation business funnel remained high and demand signals from several high profile end market verticals suggest billing and shipment activity could pick up soon. We're also in a great position given our expanding automation footprint and network capacity, including greenfield initiatives, a recent facility expansion in the Pacific Northwest and our May 2024 acquisition of Grupo Kopar. Within our flow control operations, which represent about 45% of our Engineered Solutions segment, sales increased by a low single digit percent over the prior year. Consistent with prior quarters, our flow control operations are benefiting from new business tied to customers' decarbonization and energy transition efforts, including supporting process systems used for carbon capture utilization and storage, as well as producing alternative fuel sources. We continue to see a solid pipeline developing around this industrial megatrend that should directly benefit our leading flow control operations for many years. We're also benefiting from new business tied to data center growth tailwinds across the US, including providing valve and inspection solutions in support of liquid processing. The data center end market was a nice incremental contribution to our flow control sales growth in fiscal 2024 and we see additional growth opportunities developing moving forward. I'm also encouraged by the segment's margin performance in the quarter with EBITDA margins up nearly 100 basis points over the prior year and EBITDA growing nearly 5% year-over-year despite the sales decline. The performance partially reflects a stronger mix of Engineered Solutions sales growing during the quarter, as well as benefits from ongoing pricing and margin initiatives. Our Grupo Kopar acquisition also had a modest positive mix impact to the segment gross margins, and we look forward to seeing additional contributions moving forward as they fully onboard. Overall, the segment's margin performance highlights the positive tailwind we expect to persist long term as we continue to scale the segment and grow our position across Engineered Solutions and systems. Lastly, we had another record year of cash generation in fiscal 2024 and we accelerated capital deployment with over $250 million spent on organic investments, acquisitions, share buybacks, dividends and debt repayment. Over the past five years, we deployed over $1 billion in capital towards these areas. During the last three years, we deployed nearly $70 million in CapEx, which represents a nearly 30% increase compared to the prior three year period. This includes investments in technology, distribution centers, advanced equipment supporting our technical capabilities and facility expansions tied to our technology vertical and automation operations. Our system investments have enhanced our working capital management and inventory sourcing, both of which will remain key to our ability to gain share and service customers while optimizing our investment in inventories to effectively do so. As it relates to M&A, we've made five acquisitions over the past year, including two bolt-on transactions we announced today in Total Machine Solutions and Stanley Proctor. Both companies bring strong technical knowledge and service capabilities and an aligned supplier relationships in the regional markets that will enhance our competitive position. Of note, TMS will supplement our Service Center growth potential in the US Upper Northeast with local customer focus and capabilities across the food and beverage vertical. Stanley Proctor will join our Fluid Power network and bring specialization and capabilities in the design and assembly of hydraulic power units, as well as fluid power, rebuild and repair services. M&A remains a top capital allocation priority in fiscal 2025. Our pipeline is active with varying size targets across both segments and focused on enhancing our technical differentiation and value added service capabilities. We were also active in share repurchases in fiscal 2024, acquiring nearly 400,000 shares for $73 million with over $460 million cash on our balance sheet and our attractive cash flow potential as well as over 1 million shares remaining on our authorization, we see ongoing scope for share repurchases moving forward, considering valuation on our long term growth potential and our enhanced margin profile. We will also remain focused on growing our ordinary dividend moving forward. Overall, our balance sheet and cash generation potential provides significant firepower and flexibility to further scale our business and accelerate stakeholder returns in fiscal 2025 regardless of near term end markets. This presents a compelling component of our long term value creation potential when considering industry wide fragmentation, required investments to support evolving customer demands and differentiated industry position and related M&A opportunities. As always, we will maintain our disciplined returns based approach and be transparent on capital allocation priorities as they develop. Lastly, before I turn it over to Dave, I'd like to take a moment to thank every stakeholder of this great organization from our customers, associates, suppliers to other business partners, communities and shareholders. We value your ongoing support and commitment to our journey. We've accomplished a great deal together in the past five years. This includes EBITDA and adjusted EPS compounded annual growth of 11% and 17% respectively, EBITDA margin expansion of nearly 300 basis points, more than $1.3 billion in free cash generation and a meaningful increase in our returns on capital. That said, in many ways, we feel like we're just getting started with a significant opportunity we see ahead and that we're planning for, which we believe will further compound our recent success into even greater value creation in coming years. So at this time, I'll turn the call over to Dave for additional detail on our financial results and outlook.

Thanks, Neil. Just as a reminder, as in prior quarters, we have posted a supplemental quarterly investor presentation to our Investors site for your additional reference. We hope that you will find this useful as we recap our most recent quarter performance and initial fiscal 2025 guidance. Turning now to the details of our financial performance in the quarter. Consolidated sales increased 0.2% over the prior year quarter. Acquisitions contributed 150 basis points while the difference in selling days had a positive 80 basis point impact. This was partially offset by a negative 10 basis point impact from foreign currency translation. [Excluding] these factors, sales decreased 2% year-over-year on an organic daily basis. As it relates to pricing, we estimate the contribution of product pricing on year-over-year sales growth was in the low single digits for the quarter and slightly below last quarter. Turning now to sales performance by segment. As highlighted on Slide 7 and 8 of the presentation, sales in our Service Center segment decreased 0.7% year-over-year on an organic daily basis when excluding a 1.2% positive impact from acquisitions, the positive 0.8% impact from the difference in selling days and a negative 10 basis point impact from foreign currency translation. On a sequential basis, segment sales per day decreased 0.5% from fiscal third quarter 2024, which was below normal seasonal patterns, though primarily reflecting April and May trends. From a vertical market standpoint, softer demand in the segment was primarily concentrated across machinery, fabricated metals, aggregates and energy. We continue to see positive sales growth across national accounts, while international sales were also positive year-over-year. This was offset by softer trends across local accounts and our maintenance supplies and consumables business. Segment EBITDA increased 16% over the prior year while EBITDA -- segment EBITDA margin of 14.6% was up 190 basis points year-over-year, which includes a favorable 80 basis point impact from lower LIFO expense. Within our Engineered Solutions segment, sales decreased 1.8% over the prior year quarter. This includes a positive 200 basis points of growth from acquisitions. On an organic daily basis, accounting for the difference in selling days, segment sales decreased 4.6% year-over-year. The year-over-year decline was primarily driven by a high single digit percent decline in fluid power and to a lesser extent, a mid single digit percent decline in automation. This was partially offset by low single digit growth across our process flow control operations. Segment EBITDA increased approximately 5% over the prior year while segment EBITDA margin of 15.7% was up 95 basis points from prior year levels inclusive of a favorable 30 basis point impact from lower LIFO expense. Moving to gross margin performance. As highlighted on Page 9 of the deck, gross margin of 30.7% increased 146 basis points compared to the prior year level of 29.2%. During the quarter, we recognized LIFO expense of $0.3 million compared to $8.1 million in the prior year quarter and $4.8 million last quarter. LIFO expense continues to normalize from record levels in recent years. We saw additional moderation in the fourth quarter, primarily related to more balanced inventory purchases and a nominal layer liquidation benefit in the quarter, driven by reductions in various product categories to align with current demand levels as well as [easing] supplier price increases over the past year as we previously highlighted. This net LIFO tailwind had a favorable 67 basis point year-over-year impact on gross margins. Excluding this LIFO impact, we still generated solid gross margin expansion in the quarter despite ongoing mix headwinds tied to lower sales across our Engineered Solutions segment and local accounts. Underlying performance reflects strong channel execution, a greater mix of solution sales, effective freight management and ongoing margin initiatives. We estimate price cost was relatively neutral to the quarter's performance. As it relates to our operating costs, selling, distribution and administrative expenses increased 2.4% compared to prior year levels. SD&A expense was 18.7% of sales during the quarter, up from 18.3% during the prior year quarter but down compared to the last quarter. On an organic constant currency basis, SD&A expense was down 0.2% over the prior year period. The team showed strong execution in controlling costs in the quarter against the muted demand backdrop despite ongoing inflationary headwinds. We also benefit from ongoing efficiency gains and reduced variable expense on lower sales, which helped balance higher associate costs, the ongoing inflationary pressures and growth positioning as we focus on the pending demand reacceleration and strategic growth investments. Overall, our cost management, combined with favorable gross margin expansion, resulted in reported EBITDA increasing 9.6% year-over-year during the quarter while EBITDA margin of 13.2% increase 113 basis points year-over-year and nearly 140 basis points sequentially. On a full year basis for fiscal 2024, EBITDA increased 5.5% compared to a 1.5% sales increase while EBITDA margin was up 47 basis points. Below the operating income line, we also continue to benefit from reduced debt levels and greater interest income from higher cash balances and investment yields. Combined with a slightly higher tax rate relative to prior year levels, reported earnings per share of $2.64 increased 12.6% from prior year levels. On a full year basis for fiscal 2024, adjusted EPS of $9.75 increased 11.4%, our fourth consecutive year of double digit EPS growth. Moving to our cash flow performance. Cash generated from operating activities during the fourth quarter was $119.2 million while free cash flow totaled $111.7 million or 108% of net income. For the full year, we generated free cash of $346.5 million, which was up 9% from the prior year and a record high despite greater working capital investment during the year, reflecting sustained earnings growth, our enhanced margin profile and ongoing progress on working capital initiatives. From a balance sheet perspective, we ended June with approximately $461 million of cash on hand and net leverage at 0.2 times EBITDA, which is below the prior year level of 0.5 times and down slightly from 0.3 times last quarter. Our balance sheet is in a solid position to support our capital deployment initiatives moving forward, as well as enhanced returns for all stakeholders. During the quarter, we repurchased approximately 235,000 shares for $44.5 million, bringing the full year fiscal 2024 total of share repurchases to 398,000 shares for $73 million. I will turn now to our outlook, which is detailed on Page 12 of the presentation. We are establishing full year fiscal 2025 guidance, including EPS in the range of $9.20 to $9.95 based on assumptions for total sales of down 2.5% to up 2.5% including down 4% to up 1% on an organic daily basis as well as EBITDA margins of 12.1% to 12.3%. Our outlook takes into consideration sales trends through mid-August, increased economic uncertainty, continuing strategic growth investments. At the midpoint of guidance, we're assuming ongoing moderation in broader market demand through the first half of the year as customers continue to normalize production levels and manage through current business uncertainty. We assume market demand stabilizes in the back half of the year. Combined with easy comparisons through the year, the midpoint of guidance assumes sales decline year-over-year through the first half of the year, stabilize in the third quarter and return to growth in the fourth quarter. In addition, based on quarter-to-date sales trends through mid-August, we currently project fiscal first quarter organic sales to decline by a mid single digit percentage over the prior year quarter. From a margin and cost perspective, we assume ongoing inflationary pressures, albeit at a more modest level than fiscal 2024. We also expect some margin headwinds near term, reflecting expense deleveraging on sales declines as we evaluate the direction of end market demand and position the business for reacceleration in coming quarters. As such, our guidance assumes EBITDA margins decline slightly on a full year basis, pending further transparency on broader economic conditions, our near term growth trajectory and LIFO expense trends. Lastly, from a cash generation perspective, we expect another solid year of free cash flow performance given easing working capital investments in the front half of the year. In addition, we expect ongoing organic investments supporting our growth strategy and value proposition, technology investments and supply chain with capital expenditures targeted in the $28 million to $30 million range for fiscal 2025. With that, I will now turn the call back over to Neil for some final comments.

Thanks, Dave. So to wrap up, fiscal 2024 was another meaningful year for Applied. We executed well within a slower demand environment while positioning the company for long term success through several acquisitions and internal growth investments. We entered fiscal 2025 with strong conviction in our potential while focused on executing and managing through a muted end market backdrop near term. We expect customers will continue to conservatively manage operational and capital spending near term amid ongoing business and economic uncertainty. As such, we're taking a prudent approach to our initial guidance, pending additional clarity on the direction of broader macro and industrial activity. Ultimately, we believe near term slowness will be shortened duration and we're positioning the business accordingly through ongoing investments and growth initiatives. In addition, our track record shows we know how to operate in any environment with various self help opportunities, active cost controls and operational discipline that provides support if a softer demand backdrop prolongs. That said, we see several potential catalysts on the horizon, including a possible reacceleration in US industrial production following subdued activity the past 18 months. This appears reasonable when considering structural tailwinds positively impacting US manufacturing activity and a greater level of deferred maintenance over the past several quarters. In addition, tailwinds should emerge in coming quarters as the Fed begins easing interest rates and we move beyond election uncertainty, while demand across our technology vertical and automation operations is poised to rebound following over a year of reduced activity. Combined with easing comparisons and our M&A pipeline, we see a path for year-over-year sales trends to gradually improve through fiscal 2025 and potentially accelerate into the back half of the year. We also remain favorably positioned to benefit from various secular megatrends developing across North American industrial market. This includes localizing and reshoring supply chains, required infrastructure investments, equipment modernization on aged industrial assets and the build out and maintenance of systems used for decarbonization. We believe our North America focus and comprehensive portfolio of technical solutions, including motion control, fluid power, specialty flow control and automation solutions will play a critical role in supporting these growth tailwinds. Further through our ongoing growth development initiatives, we are actively evaluating new business opportunities to expand our solution and service capabilities. While we remain focused on serving markets with products and solutions close to our core, we believe greater scale and certain existing capability and investing in near adjacencies could meaningfully strengthen our competitive position, organic growth and margin profile. This includes ongoing investments in our digital channel, shop and belting services and IoT offering across our service center network. We also continue to evaluate service and support offerings in automation as customer requirements expand and aftermarket opportunities begin to emerge across our focus areas. Considering these dynamics as well as fiscal 2024 margin performance and nearly $2 billion of current balance sheet capacity, we are increasingly confident in the opportunity developing beyond our intermediate term objectives of $5.5 billion in sales and 13% EBITDA margins. We'll look to provide additional color on our next financial objectives as we receive greater clarity on the broader macro backdrop post the US election and make further progress. Overall, our track record over the past five years highlights the power of our strategy and value creation potential, and we are extremely motivated and engaged based on what we believe lies ahead. As always, we thank you for your continued support. And with that, we'll open up the lines for your questions.

[Operator Instructions] And your first question comes from the line of Kenneth Newman with KeyBanc.

So sorry if I missed it, but I think in the past you would give what was embedded at the midpoint of your guidance, your expectations for the macro outlook, whether it’d be industrial production or capacity utilization. Did you guys mention what's embedded there at the midpoint today? And if not, could you please provide that?

Ken, I'll start. I'd say for us, right, the midpoint assumes first half declines by mid single digit organically and the second half increases low single digit organically. And then as we think about it from a market assumption standpoint, it would assume mid single digit market declines at the low end and low single digit market declines at the high end of our guidance.

And then for my follow-up, Obviously, a lot of puts and takes here on the margins [looking] forward into the first quarter. And obviously, you had a really good margin performance in Engineered Solutions despite the weaker organic demand. Just how resilient can Engineered margins be relative to 4Q on what seems like pretty muted growth here 4Q to 1Q?

And so just -- maybe I'll talk about it overall from a margin standpoint and what would be in probably the implied or the first quarter type guidance is that we think gross margins could be down sequentially from the fourth quarter and right, obviously in printed results, and we show the LIFO good improvement into the activity. But with mix and potentially some lower sales on the engineered solutions side that's where we would think would impact those margins sequentially in the site.

I'd add, we're very optimistic about the performance of the Engineered Solutions segment margins and contribution in the most recent quarter. And what that does demonstrate is the ongoing evolution towards more value add, which continues to improve that margin profile as we move forward. So we really see that business rebound that's going to contribute nicely to the overall AIT gross margin performance and EBITDA margins.

What I was going to say then as we move through the year, we see the potential local accounts accelerate or pick up into the side as well as others that will be mix positive or mix accretive across technology and automation.

Yes, that was going to be my clarifying question there is, does the incremental margins in Engineered Solutions look like legacy growth numbers or better just given all the cost out that you've had there?

I would say -- the starting point, I would say, would be similar. Obviously, we have initiatives going forward that's going to help them further accelerate, and those continue to be in process for us.

[Operator Instructions] And your next question comes from the line of Chris Dankert with Loop Capital.

I guess maybe if we could stay on the cost out of the equation here, really nice margin performance in the quarter. I guess, how much of that was maybe discrete actions versus just pulling the reins back on some of the discretionary costs? Maybe just if you could give us some additional color on kind of how to think about SG&A in the quarter here.

So as I think about it in the fourth quarter, I think it shows kind of the resiliency of the model. And there's sales activity or some reductions in the area. What fluctuates as we think about it from incentive sides, we can think about temps, requirements on overtime in those other areas. And so with 30% of the cost stack basically a variable we saw that nice adjustment and fluctuation in the side and we've demonstrated those capabilities in the model. And so as we look going forward, we would expect those to continue to contribute into the first quarter and really the first half.

And then maybe to zoom out a little bit. We've been talking about some of the major drivers reshoring recapitalization, what have you. I guess it seems like a lot of customers are just kind of hitting pause into the back half of the year here. Is there any way to quantify how many of these projects are high level conceptual stuff that people are talking about versus actual kind of shuffle ready stuff that could move forward more quickly in the first half of calendar '25?

Well, a few things there. So I would say from a reshoring standpoint, and I think one of the best ongoing indicators now would be the industrial manufacturing capacity the Federal Reserve shows, right? And it's been up the last 26 months, the longest expansion that they've had in over 20 years. So it tells me the activity continues at a high rate. It's sustainable. I think even from 2022 to now, it's up 2.5%. And so that's going to create more opportunities for our service center side of the business. And then our work with the teams as we see infrastructure projects planning around technology spend and that infrastructure that's coming and that we see in data centers and the localization in chips manufacturing those continue on. And so we just think we have customers near term responding to rates and some economic uncertainty, basically tightening belts and deferring, not making large material changes. And dialog with them as they look further beyond into the start of the calendar year, our fiscal second half, I think many are more optimistic on their type of activity that's going to be going on. And obviously, we're going to be well positioned and prepared to help them execute those projects.

And if you’ll maybe just indulge one more housekeeping one, and forgive me if I missed it. But any comment on just kind of the margin profile of TMS or Stanley Proctor and kind of how that impacts the business from a margin perspective?

I would say similar would be the looking at.

And at this time, we have no further questions. I will now turn the call back over to Mr. Schrimsher for any closing remarks.

Thank you very much. I know we have some away in holiday at this time of the year, but we appreciate you joining us. We know and look forward to connecting with many in the upcoming quarter. So again, thanks for being with us today for the ongoing support. And we look forward to talking with many of you in the coming days. Thank you.