Q4 2024 Earnings Summary
- Applied Industrial Technologies is optimistic about the performance of their Engineered Solutions segment, which has shown strong margin improvements due to an ongoing evolution towards more value-added offerings. This is expected to improve their margin profile and contribute nicely to overall gross margin and EBITDA margins as the business rebounds.
- Industrial manufacturing capacity utilization has been up for the last 26 months, the longest expansion in over 20 years, indicating sustained high activity that will create more opportunities for Applied's service center business. The company is well-positioned to benefit from trends such as reshoring, infrastructure projects, data center growth, and localization in chip manufacturing, which are expected to accelerate activity in the fiscal second half of 2025.
- With 30% of their cost stack being variable, Applied has demonstrated the resiliency of their model by effectively adjusting expenses, such as incentives, temporary staffing, and overtime, in response to sales fluctuations. This cost control ability supports their strong margin performance and positions them well to navigate any near-term demand challenges.
- Management expects gross margins to decline sequentially from the fourth quarter due to mix and potentially lower sales in the Engineered Solutions segment.
- The company is projecting mid-single-digit organic sales declines in the first half of fiscal 2025, indicating weakening demand in their markets.
- Lack of clarity on the margin impact of recent acquisitions (Total Machine Solutions and Stanley Proctor), as management's response to questions about their margin profile was unclear.
-
Macro Outlook Embedded in Guidance
Q: What's embedded in your guidance midpoint for the macro outlook?
A: The guidance midpoint assumes first-half organic declines by mid-single digits and second-half organic increases by low single digits. From a market assumption standpoint, it assumes mid-single-digit market declines at the low end and low single-digit declines at the high end of our guidance. -
Engineered Solutions Margin Resilience
Q: How resilient are Engineered Solutions margins into Q1?
A: Gross margins could be down sequentially due to mix and potentially lower sales in Engineered Solutions. However, we're optimistic about the segment's performance. The evolution towards more value-add continues to improve its margin profile, contributing positively to AIT's overall gross margin and EBITDA margins as the business rebounds. -
SG&A Costs and Margin Performance
Q: How should we think about SG&A in the quarter?
A: The fourth quarter demonstrated the model's resiliency. With 30% of our cost stack being variable, we saw adjustments in areas like incentives, temps, and overtime. These capabilities allow us to fluctuate costs with sales activity, and we expect this to continue contributing positively into the first quarter and first half. -
Customer Project Pipeline and Reshoring
Q: Can you quantify project delays versus ready projects for 2025?
A: Industrial manufacturing capacity has been up for the last 26 months, marking the longest expansion in over 20 years, indicating sustained high activity. From 2022 to now, it's up 2.5%, creating more opportunities for our service center business. While some customers are tightening belts due to economic uncertainty, many are optimistic about increased activity starting in our fiscal second half, and we're well-positioned to execute those projects. -
Margin Profile of TMS and Stanley Proctor
Q: Any comment on margins of TMS or Stanley Proctor?
A: I would say they are similar to what we're currently looking at. -
Incremental Margins in Engineered Solutions
Q: Do incremental margins in Engineered Solutions match legacy growth?
A: The starting point would be similar to legacy growth numbers. We have initiatives underway to further accelerate margins, which continue to be in process for us.
Research analysts covering APPLIED INDUSTRIAL TECHNOLOGIES.