Welcome to the Fiscal 2021 Third Quarter Earnings Call for Applied Industrial Technologies. My name is Cheryl, and I'll be your operator for today's call. . 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..

Okay. Thanks, Cheryl, and good morning to everyone on the call. Hope you're all doing well. This morning, we issued our earnings release and supplemental investor deck detailing our third quarter results. Both of these documents are available in the Investor Relations section of applied.com. .

Thanks, Ryan, and good morning, everyone. We appreciate you joining us, and hope you're doing well. I'll start today with some perspective on our third quarter results, current industry conditions and our position going forward.

Dave will follow with a summary of our most recent quarter performance as well as some specifics on our forward outlook, and then I'll close with some final thoughts. Overall, we had a strong third quarter that highlight solid execution and a number of positive trends developing across the business.

I want to recognize the entire Applied team through the foundation of the strong results you see materializing across our company today. Their perseverance and operational focus over the past year reflects our one Applied culture and puts us in a great spot entering a period of significant potential for the company.

As it relates to the quarter's performance, I want to emphasize 4 key points that stand out. First, we saw a sustained recovery in demand that accelerated into March. Secondly, our technical and solutions focused value proposition is driving incremental growth opportunities. Third, we are managing supply chain and channel dynamics very well.

And our final key point, we are benefiting from a leaner cost structure. With regard to the broader demand recovery, underlying trends improved across the business as the quarter progressed, driving daily sales above normal seasonal patterns and our expectations.

Combined with the initial lapping of prior year pandemic-related weakness, sales returned to modest year-over-year growth following double-digit declines over the past 3 quarters. .

Thanks, Neil. Before we begin, a reminder regarding the availability of the supplemental investor deck, which is posted to our investor site each quarter for your additional reference as we discuss our most recent quarter performance. Now turning to our results for the quarter. Consolidated sales increased 1.2% over the prior year quarter.

Acquisitions contributed 1.8 points of growth, and foreign currencies increased quarter sales by 0.6%. This was partially offset by 1 less selling day over the prior year period, typically impacted sales by 1.6%. Netting these factors, sales increased 0.4% on an organic daily basis.

Average daily sales rates increased over 8% sequentially on an organic basis versus the prior quarter, which was higher than our normal seasonal trends. Excluding some weather-related disruption during February, underlying sales activity strengthened sequentially as the quarter progressed, including accelerating trends during March.

Sales performance was relatively consistent across both segments, as highlighted on Slides 6 and 7. Sales in our Service Center segment increased 0.4% year-over-year on an organic daily basis when excluding the impact from foreign currency and 1 less selling day in the quarter.

This represents a notable improvement from the double-digit declines in the recent quarters and partially reflects easier comparisons as we begin to lap the onset of the pandemic in March. The segment's average daily sales rate has now improved over 18% from the fiscal '20 June quarter.

Underlying demand improvement was broad-based during the quarter, though end markets such as food and beverage, aggregates, pulp and paper, lumber and forestry and chemicals remain most productive right now.

As Neil mentioned, we are also seeing improved sequential trends from heavier industries, while growth across our international operations has provided additional support.

Within our Fluid Power & Flow Control segment, sales increased 4.5% over the prior year quarter with our recent acquisitions of ACS and Gibson Engineering contributing 5.9 points of growth. On an organic daily basis, segment sales increased 0.2%.

The segment benefited from favorable demand within technology, life sciences and chemical end markets as well as improving trends across off-highway mobile applications. This benefit was partially offset by ongoing year-over-year declines across certain industrial and process-related end markets, albeit an improved rate. .

Thanks, Dave. As we close out fiscal 2021, I'm encouraged by what I see developing across our company. Our value proposition, technical industry focus and expansion into emerging industrial solutions provides a clear path for favorable growth going forward.

We have the most comprehensive portfolio and technical service capabilities, premier engineered solution expertise and greatest track record of consistency and commitment to this vital space. Our local presence and ongoing talent investment provides further support to this foundation.

Now more than ever, these attributes are critical to suppliers and customers as they accelerate growth investments and solidify supply chains ahead of a potential extended upcycle.

Emerging signs of reshoring and investment in industrial infrastructure are promising and could represent notable tailwinds for our business, if they fully materialize, while our expanding automation footprint is presenting new growth opportunities in faster-growing and higher-margin industrial applications.

And lastly, our cross-selling initiative remains in the early innings, but is gaining momentum with related business wins increasing and broader teams engaged.

Considering our embedded customer base, and addressable market exceeding $70 billion and growing, we believe this initiative represents a significant opportunity that should expand our share across both legacy and emerging market verticals in coming years.

Combined with our self-help margin initiatives and strong balance, we have great potential to accelerate our earnings power and stakeholder returns long term. So once again, we thank you for your continued support. And with that, we'll open up the lines for your questions..

. And our first question comes from Michael McGinn from Wells Fargo..

Great quarter. I just want go back to the acquisitions. I think in the -- you mentioned, they added 15, but you were expecting maybe at the onset of guidance, like 11 to 13. So that's like a 25%.

So we're -- now I'm just trying to square, is that like were you expecting some declines in those businesses and that 25% is the case of growth? Can you talk about how fast some of your new auto plays are growing at the moment?.

Yes, Michael, I would say, I think we talk collectively, the run rate on the businesses prior were around $100 million in the expectations, maybe in the 10 to 11 for the 2 most recent additions, ACS and Gibson.

I think the -- we're seeing, they are seeing the benefits of greater entrants back into customers to implement projects and have those commissions. So we're seeing that come through as an encouraging sign. And then we continue to work than the cross opportunities with customers.

So if I look back at the businesses in the space, it has the capability in normal times to be at a high single digit, maybe double-digit area in the side. Obviously, in this, we're going to be looking for opportunities to further accelerate.

But a little bit better than our expectations, which I think is a sign of, one, the performance and two things opening back up in some of those industry positions and customer base..

Okay. Question relates to -- you mentioned some of the as we enter this recovery, some of the working capital considerations, I'm interested in some of the people considerations. You have a decent team of, I guess, I would call them spec engineers supporting that fluid power segment.

What is the capacity within that team there? Do you foresee yourself adding more people or consolidating into a center of excellence for those spec engineers, I guess, I would call them?.

Right. So both application engineers and then some engineering support that goes on as we configure and build the systems. And so I'd say our deployment model is both. We will have local engineers inside of those operations in our facilities.

But we also have centralized teams and expertise to help and use good engineering tools and software that can help us meet surging demands across and kind of share work across facilities or across engineering areas of expertise. So we feel like we are in a very good position right now. We continue to be active.

We will -- beyond campus to make quality additions to the team, but we feel like we are in a good spot right now. And the team is excited as they get to engineer and be involved in more customer applications, more product applications and more technology opportunities..

. And our next question comes from David Manthey from Baird..

So first off, just as we track what constitutes normal sequential patterns on a consolidated basis, is typical seasonality the way you think about it sort of down low single in the first quarter, up low single second quarter, up mid-single third quarter and then flattish in the fourth quarter? Is that a decent template to use as we gauge this going forward?.

That would be..

Okay. All right.

Then in the FPFC segment, could you parse out trends you're seeing in hydraulics versus flow control? Any disparity between those 2 parts of that segment?.

Yes. I don't know if there's a great disparity in it. The hydraulics business has had the benefit of continued work of connecting electronics to solutions and for construction off-highway mobile applications.

So perhaps a little stronger than flow control, but we were encouraged by the progress in the quarter and seeing orders and backlog increase there. There is a chemical refinery segment. It was maybe more late cycle in this recovery, and that is a portion of that Flow Control business.

But the team is also doing a nice job and it's focused on its diversification on space of hygienics, food and beverage, personal care, pharma and some of those others. And so that diversification is also helping the Flow Control business..

Okay. That makes sense. And then when the pandemic started, I seem to remember the theory was that some of these process industries just unplugged and walked away and that there would be some sort of a greater level of Service Center sales as they crank production back up.

Have you seen any sort of restart type of sales? Or are the accelerating sales you're seeing on the Service Center side just mainly break fix and kind of routine production-related sales, if there's any way you have visibility for that?.

Yes. I think especially in discussions with the team and with customers, we are seeing greater break-fix activity as capacity and production ramps, but also the work on the teams on projects to be ahead. I think there is a good recognition and seeing trends come through.

If you were idled for a longer period of time or took down normally continuous operating equipment, you were experiencing a few more issues. So I think now the work is going on, when do they plan a downtime to administer some of these projects. But right, it's a ramping environment.

And so it's a little harder for some of those customers to say, I want to plan for these cycles. So we're seeing perhaps some rolling projects, some smaller projects until they can feel like they can get to a point for a little bit of extended shutdown.

And I think with that, those won't be multiple weeks, maybe weeks and weekends that we'll see that activity go on..

At this time, I'm showing we have no further questions. I'll now turn the call back to Mr. Neil Schrimsher..

All right. Thank you very much. So a busy earnings time, I can tell. And hopefully, a clean, straightforward quarter and a positive view on the outlook. We do look forward to connecting with many of you as we go throughout the quarter. So thank you for taking the time and joining us today..

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