51 slides from Applied Industrial Technologies's earnings presentation, Jan 26, 2023
Slide 1: Fiscal Q2 2023 Recap
Fiscal Q2 2023 Recap January 26, 2023 - The Premier Provider of Advanced Motion, Power, Control, & Automation Solutions to Critical Industrial Infrastructure -
Slide 2: Safe Harbor Statement
Safe Harbor Statement This presentation contains statements that are forward-looking, as that term is defined by the Securities and Exchange Commission in its rules, regulations and releases. Applied intends that such forward-looking statements be subject to the safe harbors created thereby. Forward
Slide 3: Primary Messages from Management
Primary Messages from Management • Sustaining notable growth with organic sales up 21% and EPS up 41% in F2Q23; industry position, internal initiatives, strategic evolution, and execution supporting continued outgrowth and margin expansion. • Underlying demand resilient across both segments through
Slide 4: Fiscal Q2 2023 Key Financial Highlights
Fiscal Q2 2023 Key Financial Highlights • Sales up 20.9% YoY o Up 21.1% on an organic basis o Acquisitions +0.5%, currency -0.7% • Net Income of $80.5M and EPS of $2.05 o EPS up 40.8% from prior year of $1.46 o Includes $8.9M pre-tax ($0.17/sh) of LIFO expense in F2Q23 vs. $4.7M ($0.09/sh) in F2Q22
Slide 5: Current Investor Discussion Points
Current Investor Discussion Points Discussion Point Update Detail Strong sales growth trends through F2Q23 reflecting a productive F2Q23 YoY organic sales growth over 21% vs. 19% in F1Q23; average 1. Underlying Demand U.S. manufacturing backdrop, as well as ongoing traction with growth daily sales u
Slide 6: Segment Results – Service Center Based Distribution
Segment Results – Service Center Based Distribution Service Center Distribution Segment Sales, in Millions Segment Overview: Representing 67% of fiscal 2022 sales - the segment includes our legacy distribution operations including ~400 local service centers across North America, Australia, and New Z
Slide 7: Segment Results – Engineered Solutions
Segment Results – Engineered Solutions Engineered Solutions Segment Sales, in Millions Segment Overview: Representing 33% of fiscal 2022 sales - the segment consists of 1) our Fluid Power network specializing in distributing, engineering, $344.4 $354.9 $342.9 designing, integrating, and repairing hy
Slide 8: Fiscal Q2 2023 Margin and Expense Highlights
Fiscal Q2 2023 Margin and Expense Highlights Gross Profit, SD&A, and EBITDA Metrics • Gross margin down 28 bps YoY LIFO $ in millions Q2 23 Q2 22 Chg YoY Impact YoY o Includes an unfavorable 39 bps YoY impact due to LIFO o Up 22 bps sequentially compared to F1Q23 o Price actions, channel execution,
Slide 9: Cash Flow and Balance Sheet
Cash Flow and Balance Sheet Free Cash Flow (in Millions) - Fiscal 1H Period • F2Q23 cash from operations of $62.9M; free cash of $55.6M $150.9 o Free cash at 69.1% of net income in the quarter, and up 93.6% YoY o F1H23 free cash of $76.0M, 48.3% of net income o Inclusive of ongoing working capital g
Slide 10: Fiscal 2023 Guidance
Fiscal 2023 Guidance Fiscal 2023 Guidance Updated Considerations: • Raising FY2023 guidance to reflect strong F2Q23 performance and Prior Current an increase to F2H23 assumptions (10/27/22) (1/26/23) • Sales growth now expected at 13% to 15% Total Sales - YoY % change 5% - 9% 13% - 15% • Similar ran
Slide 11: Appendix: Number of Selling Days by Fiscal Quarter and Full Year
Appendix: Number of Selling Days by Fiscal Quarter and Full Year Fiscal Period Q1 Q2 Q3 Q4 Year 2021 64.0 62.0 63.0 63.5 252.5 2022 64.0 61.0 64.0 63.5 252.5 2023 64.0 61.0 64.0 63.5 252.5 2024 63.0 61.0 63.5 64.0 251.5 11
Slide 12: Appendix: Net Sales and Operating Income by Segment
Appendix: Net Sales and Operating Income by Segment Three Months Ended December 31 (dollar amount in thousands) Q2 FY22 Q2 FY23 Service Center Based Distribution Segment: Net sales $ 587,218 $ 705,392 Operating income $ 67,450 $ 86,484 Egineered Solutions Segment: Net sales $ 289,656 $ 354,888 Opera
Slide 13: Appendix: Reconciliation of EBITDA
Appendix: Reconciliation of EBITDA Three Months Ended December 31 (dollar amount in thousands) Q2 FY22 Q2 FY23 Net Income $ 57,026 $ 80,457 Interest expense, net 7,007 6,185 Income tax expense 15,013 25,493 Depreciation and amortization of property 5,436 5,552 Amortization of intangibles 8,084 7,814
Slide 14: Appendix: Reconciliation of EBITDA Margin
Appendix: Reconciliation of EBITDA Margin Three Months Ended December 31 (dollar amount in thousands) Q2 FY22 Q2 FY23 Net Sales $ 876,874 $ 1,060,280 EBITDA 92,566 125,501 EBITDA Margin 10.6% 11.8% 14
Slide 15: Appendix: Reconciliation of Free Cash Flow
Appendix: Reconciliation of Free Cash Flow Three Months Ended September 30 (dollar amount in thousands) Q1 FY17 Q1 FY18 Q1 FY19 Q1 FY20 Q1 FY21 Q1 FY22 Q1 FY23 Cash provided by Operating Activities $ 41,864 $ 9,440 $ 11,797 $ 50,018 $ 81,842 $ 48,642 $ 25,943 Capital Expenditures (2,999) (6,336) (3,
Slide 16: Appendix: Reconciliation of Net Leverage Ratio
Appendix: Reconciliation of Net Leverage Ratio (dollar amount in thousands) Q2 FY21 Q3 FY21 Q4 FY21 Q1 FY22 Q2 FY22 Q3 FY22 Q4 FY22 Q1 FY23 Q2 FY23 Net Income $ (5,334) $ 56,063 $ 59,244 $ 52,969 $ 57,026 $ 68,306 $ 79,113 $ 76,880 $ 80,457 Interest expense, net 7,658 7,608 7,673 7,390 7,007 5,852 6
Slide 17: Investor Presentation
We Keep Industry Running Investor Presentation
Slide 18: Safe Harbor Statement
Safe Harbor Statement This presentation contains statements that are forward-looking, as that term is defined by the Securities and Exchange Commission in its rules, regulations and releases. Applied intends that such forward-looking statements be subject to the safe harbors created thereby. Forward
Slide 19: Company Profile: Strategic Focus on Technical Products & Solutions
Company Profile We Are One of the Largest Distributors and Solution Providers of Industrial Motion, Power, Control, & Automation Technologies Strategic Focus on Technical Products & Solutions ~80% of Sales Generated From #1 or #2 Market Positions $3.8B $410M $5B Revenue EBITDA Market Cap Bearings &
Slide 20: Multi-Channel Capabilities
Multi-Channel Capabilities Service Centers • Local MRO / Aftermarket Support • Leading Motion / Power Control Expertise • Technical Shop, Repair, Consult Services • Over 400+ Locations Concentrated in North America Fluid Power • Fluid Power System Design, Build, Integration • Industrial, Off-Highway
Slide 21: Product Portfolio
Product Portfolio Power Bearings, Advanced General MRO; Fluid Power Flow Control Transmission Linear, Seals Automation Hose Products ~85% of Sales Focused in Critical Motion Control, Fluid Power, Flow Control, & Automation Products & Solutions 5
Slide 22: Customer Application / Cross-Sell Potential of Applied Products & Solutions
Customer Application / Cross-Sell Potential of Applied® Products & Solutions Service Centers Service Centers Specialty Flow Control Service Centers Automation Solutions Mounted bearings, gearing, & Fluid power MRO supplies, including Pumps, valves, instrumentation, hoses, & filtration to Maintenance
Slide 23: Primary Supplier Partners
Primary Supplier Partners Leading Manufacturers with World Class Brands Focused on Premier Industrial Solutions 7
Slide 24: Customer & Geographic Exposure
Customer & Geographic Exposure Industrial Machinery Metals 16% 10% Food & United States Beverage 87% 9% Sales By Forest Sales By General Customer Type Products 8% Geography Industry * 37% Canada 8% Chemical & Petrochemical 7% Mexico Cement & Aggregate Other 3% Transportation 5% 2% Oil & Gas 4% 4% *
Slide 25: Applied Value Creation Model
Applied® Value Creation Model Supports Growth Into Demand-Rich, Operational Focus CORE Higher Margin, & Emerging Areas of • History of Cost Discipline • World-Class Brands • Operational Excellence Initiatives • Critical Support to Industrial Infrastructure the Industrial Sector • Shared Services Dep
Slide 26: Key Growth & Operational Considerations
Key Growth & Operational Considerations Our products & solutions are increasingly critical across the industrial supply chain… • Break / Fix Demand: Structurally higher given greater production and capacity utilization on aged manufacturing infrastructure across North America. • Customer Outsourcing
Slide 27: Current Investor Discussion Points – Q2 FY23
Current Investor Discussion Points – Q2 FY23 Discussion Point Update Detail Strong sales growth trends through F2Q23 reflecting a productive F2Q23 YoY organic sales growth over 21% vs. 19% in F1Q23; average 1. Underlying Demand U.S. manufacturing backdrop, as well as ongoing traction with growth dai
Slide 28: Fiscal 2023 Guidance
Fiscal 2023 Guidance Fiscal 2023 Guidance Updated Considerations: Prior Current • Current guidance assumes sales growth at 13% to 15% (10/27/22) (1/26/23) • Similar range on an organic basis as ~50 bps of M&A contribution is offset by foreign currency headwinds Total Sales - YoY % change 5% - 9% 13%
Slide 29: Historical Financial Highlights
Historical Financial Highlights Net Sales 8% Five-Year CAGR (2017-2022) EBITDA 14% Five-Year CAGR (2017-2022) (in billions) (Adjusted; in millions) $3.8 $410 $3.5 $3.2 $3.2 $331 $3.1 $318 $293 $2.8 $278 $2.5 $2.6 $226 $215 $201 2015 2016 2017 2018 2019 2020 2021 2022 2015 2016 2017 2018 2019 2020 20
Slide 30: Historical Free Cash Generation
Historical Free Cash Generation Durable & Solid Cash Generation Through All Cycles Strategic Initiatives Aligned to Drive Free Cash Flow (3-Year Rolling Average) Greater Cash Generation $250 • Average FCF Conversion of ~113% Past 3 Years Free Cash Flow, 3-Year Rolling Average $200 • Increased Scale
Slide 31: Balance Sheet & Liquidity
Balance Sheet & Liquidity Net Leverage Ratio (Net Debt to Trailing Adjusted EBITDA) Balance Sheet & Liquidity (As of December 31, 2022) • Net leverage ratio at 1.0x • $166M of cash on hand 2.6x 2.6x 2.5x • Total debt down ~40% since early 2018 2.5x 2.3x 2.1x 2.1x 1.9x • ~$700M of balance sheet capac
Slide 32: Acquisitive Growth
Acquisitive Growth Active Acquisition Pipeline Aligned with Long-term Growth Priorities… • Acquisitions Remain an Element of Growth Formula Acquisition Priority Areas o 45 acquisitions since 2000 o 28 acquisitions since 2012 representing over $1B in annual sales Focused on Expanding Current Offering
Slide 33: Intermediate Financial Objectives
Intermediate Financial Objectives Net Sales – Grow to $5+ Billion Strategic Drivers & Considerations • Mid Single-Digit Plus Organic Growth on Average Over an Upcycle $5.0+ • Greater Cross-Selling Across Legacy Customer Network $3.8 $3.1 • Secular Tailwinds From Leading Technical Industry Position •
Slide 34: Why Invest In Applied?
Why Invest In Applied®? Strong & Growing Enhanced Growth Profile Competitive Moat Cash Generation • • Significant Cross-Sell Opportunity Exposure to Secular Tailwinds • • Leading Position in Technical Product Areas Engineered Solutions & Service Capabilities • >100% Conversion (on Net Income) • Expa
Slide 35: Segment Overview
Segment Overview Service Center Based Distribution Engineered Solutions Legacy service center distribution network across Specializing in distributing, engineering, designing, & 67% North America, Australia, & New Zealand; Focused on MRO motion & power control solutions for critical break-fix 33% in
Slide 36: Service Center Network
Service Center Network • Network of service locations supporting industrial motion & power control MRO requirements • Over 400 locations across North America, Australia, & New Zealand • Local market focus with overnight inventory replenishment from 12 distribution centers • 24 / 7 emergency service
Slide 37: Fluid Power: Overview & Industry Application
Fluid Power: Overview & Industry Application The Leading Provider of an Unmatched Industrial Power & Efficiency Solution Key Applications & Market Focus Fluid Power 101: Hydraulic & pneumatic technologies using Off-Highway liquids & gases under pressure to transmit power Industrial Technology Mobile
Slide 38: Fluid Power Position & Value Proposition
Fluid Power Position & Value Proposition We Provide Innovative Fluid Power Solutions Through Unmatched Engineered Systems Design, Assembly, Integration, & Service Capabilities Engineering & Design System Build & Integration Service & Repair Largest Fluid Power Distributor in North America HFX48M (24
Slide 39: Flow Control: Overview & Industry Application
Flow Control: Overview & Industry Application The Leading Provider of Process Flow Control Solutions to the Industrial Sector Flow Control Key Applications & Market Focus OEM & Life Flow Control 101: Products used to manage & control Chemical Manufacturing Sciences the flow of liquids & gases within
Slide 40: Flow Control Position & Value Proposition
Flow Control Position & Value Proposition We Offer the Largest, Most Comprehensive Flow Control Product & Service Portfolio Focused on Mission-Critical & Full-Cycle Solutions Flow Control Strategic Rationale & Growth Strategy Covering • Enhances leading technical MRO position Everything On • Higher
Slide 41: Automation Solutions
Automation Solutions A Growing Provider of Next-Generation Automation Supplies & Solutions Focused on Machine Vision, Robotics, Motion, & Digital Technologies Evolving Toward the Factory of the Future… Machine Vision: • Scanners • 1-D/2-D ID • 2-D/3-D Vision Robotics: • Neural / AI Solutions • Five
Slide 42: Increasing Focus on Next Generation Automation & Industry 4.0
Increasing Focus on Next Generation Automation & Industry 4.0 Market Opportunity Technology converging with traditional industrial supply chains as customers address skilled labor constraints & plant efficiency, while considerations around manufacturing re-shoring & U.S. industrial infrastructure ha
Slide 43: Increasing Focus on Next Generation Automation & Industry 4.0
Increasing Focus on Next Generation Automation & Industry 4.0 Products, Solutions, & Vast Network with Entrenched Customer Expansion into Experience Across Legacy Relationships Across Underpenetrated Next Generation Automation Operations Industrial End Markets & Smart Technology Solutions Locations
Slide 44: Maintenance Supplies & Solutions
Maintenance Supplies & Solutions A Leading National Distribution Platform for C-Class MRO Supplies Through Vendor Managed Inventory (VMI) & Vending Solutions Machine Shop • 200+ Sales & Service Representatives • 4 Distribution Centers “Core Business” SM VMI Solution Cutting Tool, Manufacturing • 250
Slide 45: Talent Development
Talent Development Management Development & Planning Strengthening Leadership & Organizational Capabilities • Expanding Organizational Vitality • Integrated HR Information System Enhancing the Hire-to-Retire Process • Enhancing Performance & Realizing Potential o Recruitment • Creating Succession &
Slide 46: Environmental - Social - Governance (ESG)
Environmental - Social - Governance (ESG) Our ESG Focus Takes Many Forms • 100 years of conducting business Integrity Respect Customer Commitment ethically & responsibly Focus to Excellence • Low-carbon footprint as a distributor • Advise customers on energy savings & reducing their carbon footprint
Slide 47: Safety & Sustainability Performance
Safety & Sustainability Performance • Dedicated safety focus with comprehensive training programs across company • Formalized EHS policy, analysis, monitoring, & accountability focus • Low carbon footprint as a distributor • Conduct customer energy audits on motors, belting, & gearing • Develop flui
Slide 48: Corporate Governance
Corporate Governance Key Governance Features Board Refreshment & Tenure • Independent Chairman; all directors independent except CEO Average Tenure of Board Members < 7 Years • Key committees composed of only independent directors • Women represent 33% of board members <= 4 Year 3 • Strong “Pay for
Slide 49: Appendix
6) APPLIED Industrial Technologies® Appendix
Slide 50: Appendix: Reconciliations
Appendix: Reconciliations EBITDA, Adjusted EBITDA, & Adjusted EBITDA Margin Twelve Months Ended June 30 (dollar amount in thousands) 2015 2016 2017 2018 2019 2020 2021 2022 Net Income $115,484 $29,577 $133,910 $141,625 $ 143,993 $24,042 $144,757 $257,414 Interest expense, net 7,869 8,763 8,541 23,48
Slide 51: Appendix: Reconciliations
Appendix: Reconciliations Free Cash Flow Fiscal Year, Ended June 30 (dollar amount in thousands) FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 Cash provided by Operating Activities $76,842 $90,422 $111,397 $110,110 $157,007 $162,014 $164,619 $147,304 $180,601 $296,714 $241,697 $187,570