Applied Industrial Technologies（AIT）Q1 FY27 EPS 小幅超预期、订单+30%，但指引仅因回购机械上调，盘中股价反跌4.6%

Applied Industrial Techs (NYSE:AIT) reported first-quarter financial results on Tuesday. The transcript from the company’s first-quarter earnings call has been provided below.
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Summary
Applied Industrial Techs reported strong financial performance, with Q1 EBITDA and EPS growing 10% and 13% respectively year-over-year, supported by 7% organic sales growth.
The Engineered Solutions segment exhibited robust performance, with 14% organic sales growth and a 30% increase in orders year-over-year, driven by automation and fluid power demand.
The company’s future outlook is optimistic, with modestly raised EPS guidance for fiscal 2027 and expectations of sustained sales growth, despite potential economic uncertainties.
Operational highlights include expanded gross margins, effective cost management, and strategic capital deployment focused on M&A to enhance technical differentiation.
Management expressed confidence in the company’s strategic positioning, highlighting strong demand signals across both segments and favorable trends in key markets such as U.S. manufacturing.
Full Transcript
OPERATOR
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. If you wish to ask a question at that time, please press Star 1 to raise your hand. To withdraw your question, press Star 1 again. Prior to asking questions, lift your handset to ensure the best audio quality. If at any time during the conference call you need to reach an operator, please press Star zero.
Please note that this conference is being recorded. I will now turn the call over to Ryan Cieslak, Vice President of Investor Relations and Treasury. Ryan, please go ahead.
Ryan Cieslak (Vice President of Investor Relations and Treasury)
Okay, thanks, Al, and good morning to everyone on the call. This morning we issued our earnings release and supplemental investor deck detailing our first 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, we will use non-GAAP financial measures during the conference call, which are subject to reconciliations referenced in our SEC filings. 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.
Neil A. Schrimsher (President & Chief Executive Officer)
Thanks, Ryan, and good morning, everyone. We appreciate you joining us. I’ll begin today with perspective and highlights on our results, including an update on industry conditions and expectations going forward. Dave will follow with more financial detail on the quarter’s performance and provide additional color on our updated fiscal 2027 guidance. I’ll then close with some final thoughts. So overall we had a nice start to fiscal 2027. We delivered strong earnings performance in the first quarter, with EBITDA and EPS growing 10 and 13% respectively over the prior year. Customer activity was directionally positive throughout the quarter with organic sales growth of 7% in line with our outlook provided in mid-August. On a two-year stack basis, organic growth of 10% was up modestly compared to the seasonally strong trend we had in the fourth quarter.
We also drove solid margin performance in the quarter against ongoing inflationary headwinds, with EBITDA margins expanding year over year and achieving the high end of our guidance. Favorable mix, ongoing internal margin initiatives, and cost leverage are supporting our margin trajectory. Of particular note, our Engineered Solutions segment delivered a strong quarter on both the top and bottom line with orders continuing to strengthen. Underlying demand across our Service Center segment also remains positive with sales growth strengthening as the quarter progressed and into October.
Overall, we’re executing well with a productive growth environment and on track to deliver solid performance for the year. Digging more into the sales trends, underlying demand remained favorable throughout the quarter. Market conditions were strongest across our U.S. operations where organic sales increased 8% year over year. Company-wide volumes were up 5% from the prior year reflecting greater technical MRO and capital spending activity combined with ongoing benefits from our internal sales initiatives and industry position. From an end market perspective, 18 of our top 30 market verticals generated positive sales growth, which is down from 20 last quarter but up from the prior year quarter.
On a two-year stack basis, 18 were positive compared to 17 last quarter, highlighting a sustained positive underlying trend. Growth was strongest across metals, technology, machinery, utilities and energy, mining, and oil and gas. This was partially offset by declines primarily in lumber and wood, aggregates, and rubber and plastics and food and beverage. Sales growth during the quarter was led by our Engineered Solutions segment, which delivered 14% organic sales growth year over year, up slightly from 13% last quarter. Segment order trends also remained positive during the quarter, increasing by more than 30% year over year with backlog continuing to strengthen and book-to-bill at its highest level in more than four years. Sales growth in the quarter was strongest in automation, where organic sales increased by more than 20% year over year.
For the second straight quarter, demand for our automation solutions focused on robotics, machine vision, and digital technologies remained solid as customers address structural labor constraints, safety and quality requirements, and supply chain resiliency initiatives. With a favorable production environment, it is increasingly evident customers are investing in automation to meet lasting operational requirements and strengthen their competitive position long term.
Our scaling footprint across the U.S. and Mexico, combined with the leading engineering and application expertise and strategic relationships with premier automation suppliers, is providing a clear competitive advantage as we connect these solutions across our legacy customer base. With our automation backlog growing more than 30% sequentially and year over year during the quarter, we see sustained solid growth momentum moving forward. Fluid Power also remains a bright spot, with organic sales increasing by a high-teens percent over the prior year, reflecting strength within semiconductor and data center markets as well as positive demand across industrial and mobile OEM customers. The growth outlook across Fluid Power remains strong as well, with related backlog ending the quarter at its highest level in four years. Secular tailwinds within both legacy and emerging customer verticals are driving durable demand for fluid conveyance, industrial power, pneumatic automation, and next-generation hydraulic systems.
We’re in a great spot to leverage these growth catalysts as the largest Fluid Power distributor and solutions provider in the U.S., with premier system engineering and assembly capabilities. I’m also encouraged by the stronger demand developing within our Flow Control operations, where organic sales increased more than 6% year over year, a solid pickup from last quarter. We’re seeing stronger Flow Control demand across metals, utility and energy, and technology end markets, while customer activity across process, heavy chemicals, and refinery verticals is starting to firm. Overall, all three areas of our Engineered Solutions segment are trending nicely to start the year, a positive sign for the segment’s growth durability as well as earnings contribution potential.
This was evident in the quarter where the segment’s inherent operating leverage read through nicely, with 14% sales growth translating to 25% EBITDA growth, representing incremental margins of 24%. Demand signals across our Service Center segment also remain positive. Organic sales growth of 3.5% moderated from 8% last quarter, though primarily reflecting a more difficult comparison, with a two-year stack of 8%, up modestly from the seasonally strong trend last quarter. Year over year growth improved every month in the quarter, with the positive trend continuing into October where segment organic sales are up a high single-digit percent month to date.
Demand conditions were strongest across the U.S. Service Center operations during the quarter, where organic sales increased approximately 6% over the prior year, with break-fix and technical MRO activity remaining firm throughout the quarter. We also continue to see stronger demand across local accounts, providing another positive signal on the durability of the cycle. In addition, customer sentiment and demand indications remain constructive, reflecting elevated technical MRO requirements and a positive U.S. manufacturing backdrop.
Of note, U.S. Service Center bookings increased 6.7 percent sequentially from the fourth quarter, which was nicely ahead of normal seasonality. Segment growth was partially offset by muted end-market demand in Canada and Mexico, which is consistent with more subdued manufacturing and industrial indicators within those regions over the past several quarters, and partially reflects the evolving trade backdrop. Canada and Mexico represent approximately 12% of our Service Center segment sales, and while near-term trade dynamics remain uncertain, we expect improving trends within these regions as the year progresses based on current business pipelines, easy comparisons, and internal actions. Overall, our core Service Center business is tracking directionally in line with our expectations year to date, with demand indicators remaining supportive moving forward.
In addition to an overall positive demand backdrop, we’re in a great position to continue to translate the current trajectory of sales growth into greater earnings growth and ongoing EBITDA margin expansion through cost leverage and internal initiatives as well as benefits from favorable mix. Our first quarter performance is a good reflection of this. Of note, gross margins expanded 25 basis points over the prior year, or nearly 50 basis points excluding the impact of LIFO.
This was ahead of our first-quarter guidance, with underlying gross margin performance favorable across both segments during the quarter. We benefited from positive mix during the quarter, reflecting stronger growth across the Engineered Solutions segment and local accounts. We’re also executing well across various margin initiatives, which are helping offset higher employee-related cost, freight and fleet expense, inflation, and ongoing growth investments.
As a result, we achieved 15% incremental margins on EBITDA during the quarter, or 19% when excluding LIFO, which was at the high end of our first-quarter outlook and against a difficult prior-year comparison. Our underlying business model combined with ongoing operational initiatives and structural mix tailwinds provide solid support levers to continue to expand EBITDA margins and drive solid earnings growth in the current demand backdrop. And lastly, we remain on track to have another active year of capital deployment to further supplement our growth potential and shareholder returns. M&A remains a top capital allocation priority for fiscal 2027. Our pipeline is active with varying size targets across both segments. This includes several mid-sized targets at various stages of due diligence that could enhance our technical differentiation and value-added service capabilities. Our balance sheet and cash generation provide meaningful capacity to further compound our growth through M&A. As always, we remain disciplined with our approach, with a primary focus on generating appropriate returns while enhancing our competitive position and long-term growth opportunity. At this time, I’ll turn it over to Dave for additional detail on our results and outlook.
Dave Wells (Chief Financial Officer)
Thanks, Neil, and good morning to everyone joining today. Just another reminder before I begin. As in prior quarters, we have posted a supplemental investor presentation to our investor site for your additional reference. We hope that you will find this useful as we recap our most recent quarter performance. Turning now to details of our financial performance in the quarter, consolidated sales increased 7.6% over the prior year. Acquisitions and foreign currency were a modest tailwind in the period, adding 30 and 20 basis points, respectively, of growth. The number of selling days in the quarter was unchanged year over year. Netting these factors, sales increased 7.1% on an organic basis. As it relates to pricing, we anticipate the contribution of product pricing to year over year sales growth was approximately 200 basis points in the quarter.
Moving to consolidated gross margin performance, as highlighted on page 7 of the deck, gross margin of 30.4% was up 25 basis points compared to the prior year level. During the quarter, we recognized LIFO expense of $5.6 million compared to $2.6 million in the prior year quarter and $6.4 million last quarter. On a net basis, this resulted in an unfavorable 23 basis point year over year impact on gross margins. Excluding LIFO expense, gross margins were up nearly 50 basis points year over year, reflecting ongoing progress with our internal margin initiatives, solid channel execution, and favorable mix.
As it relates to operating costs, selling, distribution, and administrative (SG&A) expenses increased 7% compared to prior year levels. On an organic constant currency basis, SG&A expense was up 6.5% year over year. As a percentage of sales, SG&A expense improved 12 basis points year over year to 19.3%. I would note the prior year period included a favorable AR provision recovery, which negatively impacted the fiscal 2027 first quarter year over year SG&A trend by 1.2 percentage points.
We also experienced higher-than-expected employee health benefit costs in the quarter from claims activity, which we self-insure and expect to return to more normalized levels moving forward. Our team remains disciplined on spend while also focusing on various efficiency initiatives tied to technology investments, shared services, and sales productivity tools. This is helping to balance inflationary headwinds and growth investment in the business.
Overall, organic sales growth combined with solid gross margin performance and cost leverage resulted in reported EBITDA increasing 9.6% over the prior year. This is inclusive of greater LIFO expense, which negatively impacted year over year EBITDA growth by 2.1 percentage points in the quarter. Reported EBITDA margin of 12.4% was up 22 basis points from the prior year level, with year over year LIFO headwinds negatively impacting EBITDA margin by 23 basis points.
Earnings per share of $2.97 increased 12.7% from prior year EPS of $2.63. On a year over year basis, EPS was favorably impacted by a lower diluted share count, partially offset by higher interest expense. Turning now to our performance by segment, as highlighted on slides 8 and 9 of the presentation, sales in our Service Center segment increased 3.5% year over year on an organic basis. This excludes 40 basis points of contribution from acquisitions and a positive 30 basis point impact from foreign currency translation. Growth was primarily driven by volume growth across our U.S. Service Center operations, reflecting favorable end market demand and benefits from our internal sales initiatives, partially offset by softer end market demand in Canada and Mexico.
Segment EBITDA increased 1.6% over the prior year, while segment EBITDA margin of 13.6% declined 35 basis points year over year. The year over year trend in segment EBITDA and EBITDA margins was negatively impacted by higher LIFO expense and the tough comparison against favorable prior year AR provisioning, which combined represented a 3.3 percentage point headwind to year over year EBITDA growth as well as more than a 40 basis point year over year headwind to EBITDA margin.
Within our Engineered Solutions segment, organic sales increased 14.1% over the prior year quarter. The year over year increase was primarily driven by double-digit growth across our automation and fluid power operations, reflecting solid end market demand including positive technology vertical contribution, as well as improving demand across our flow control operations. Segment EBITDA increased 24.7% over the prior year, and segment EBITDA margin of 15.1% expanded 129 basis points year over year, inclusive of higher LIFO expense compared to the prior year period.
Moving to our cash flow performance, cash generated from operating activities during the first quarter was $86.4 million, while free cash flow totaled $73.4 million, representing conversion of approximately 67% relative to net income. Compared to the prior year, first quarter free cash was down as a result of working capital investment tied to stronger demand and higher capital expenditures, partially offset by ongoing progress with internal working capital management initiatives.
From a balance sheet perspective, we ended September with approximately $112 million of cash on hand and net leverage at approximately 0.3 times EBITDA, which was unchanged from the prior year period. Our current revolving credit agreement has available capacity of approximately $806 million and an additional $800 million accordion option. Combined with availability under our AR securitization facility, we have significant financial capacity to support our capital deployment initiatives moving forward, including accretive M&A, dividend growth, and share buybacks.
During the first quarter, we repurchased more than 245,000 shares for approximately $80 million. Turning now to our outlook, as indicated in today’s press release and detailed on page 12 of our presentation, we are modestly raising full year fiscal 2027 EPS guidance to reflect an updated diluted share count following first quarter buyback activity. We now project EPS in the range of $11.70 to $12.20 compared to prior guidance of $11.65 to $12.15. That said, we are maintaining our sales guidance of about 4 to 6.5% as well as EBITDA margins of 12.5 to 12.8%.
Guidance continues to assume 150 to 200 basis points of year over year sales contribution from pricing. Our sales outlook remains largely unchanged from the views we provided in mid-August. End market demand indicators remain favorable, and we’re encouraged by positive order and business funnel momentum that continues to develop. However, guidance continues to take into consideration ongoing economic uncertainty tied to current geopolitical, interest rate, and trade policy dynamics as well as more difficult comparisons in the back half of the year.
Combined with sales trends month to date in October, we currently project fiscal second quarter organic sales to increase by 6 to 8% over the prior year. We would also note prior year comparisons are slightly more difficult in the November and December periods relative to October. In addition, while holiday timing is more favorable this year, we remain balanced with our near-term sales expectations given variability that can occur in the seasonally slower fall and winter months as customers adjust production schedules, project phasing, and capital investments within a still dynamic macro backdrop.
Lastly, from a margin standpoint, we’re encouraged by our first quarter performance and reiterating the outlook provided in mid-August. We continue to assume ongoing inflationary pressures and growth investments for the second quarter. We expect gross margins to be stable to up slightly on a sequential basis and EBITDA margins of 12.3 to 12.5%. We are assuming a more normalized level of margin performance in the second quarter following solid execution in the first quarter, which we believe is prudent considering the inflationary backdrop, potential variability in LIFO expense, and ongoing growth investments.
That said, we remain focused on a number of ongoing margin and productivity initiatives that should continue to provide support moving forward. With that, I will now turn the call back over to Neil for some final comments.
Neil A. Schrimsher (President & Chief Executive Officer)
So to wrap up, we are encouraged by our first quarter performance, including double-digit earnings growth, solid margin execution, and sustained positive order momentum. Organic sales growth month to date in October of approximately 10% highlights positive momentum entering our fiscal second quarter. We continue to take a prudent approach with our outlook given limited visibility in how current trade policy, geopolitical, and interest rate dynamics might impact end market demand as the year progresses.
That said, we remain positively biased considering the current growth backdrop, our market position, and internal initiatives. Customer demand is showing solid durability year to date with support from both structural and secular tailwinds that are more meaningful than prior cycles. Broader industrial macro indicators all continue to signal a positive U.S. manufacturing environment, with the ISM PMI above 50 for nine straight months following three years of sub-50 readings.
In addition, U.S. industrial capacity utilization remains well below its pre-COVID highs, while several of our core industrial markets have yet to fully participate in the current upcycle and could begin to inflect moving forward, including chemicals, petrochemical, refining, transportation, and lumber and wood. Considering these dynamics and the fact our positive volume growth trajectory is only three-quarters into the current recovery within a potentially structural, stronger technical MRO and capital investment backdrop, we believe we remain particularly early in our growth cycle.
Further, our market position is driving new and meaningful company-specific opportunities as we support elevated technical MRO requirements in many of our core legacy end markets, as well as increased exposure across areas of automation and the technology vertical within our core Service Center business. Our overall share of the addressable market continues to progress nicely across a still highly fragmented market. We see significant opportunity to continue to expand our presence in this technical aftermarket as customers partner with more capable providers with breadth and scale.
In addition, our deep capabilities and strategic supplier relationships across areas of fluid conveyance, pneumatics, industrial power, process flow control, and robotics are opening up new addressable markets supporting the build-out of advanced industrial systems and related energy infrastructure. As AI proliferates within this, we see potential meaningful aftermarket opportunities in the future on this essentially new industrial installed base.
We are well positioned to capitalize on these trends given our domain knowledge, engineering expertise, service facility density, and scale. In addition, our team’s collaboration and alignment on selling one Applied Industrial Techs value proposition is gaining nice momentum, supporting greater cross-selling contribution to our growth profile as the demand cycle continues to move forward. And then lastly, our balance sheet and liquidity provide strong support to opportunistically pursue ongoing organic investment and strategic M&A in the current environment, as well as other capital deployment that could augment returns for all stakeholders going forward. So overall, a great start to fiscal 2027 with a significant opportunity still ahead for the Applied Industrial Techs team. With that, we’ll open up the lines for your questions.
OPERATOR
Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please pick up your handset and press star one on your telephone keypad. If you would like to withdraw your question from the queue, press star one again. As a reminder, if at any time you need to reach an operator, please press star zero. We’ll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Chris Dankert with DA Davidson.
Your line is now open. Please go ahead.
Chris Dankert (Analyst)
Hey, morning guys. Thanks for taking the questions. I guess to jump in, you know, the thing that stood out most to me: ES orders up 30% plus. I guess can you give us a little bit more color there? Anything you can share in terms of just average delivery timeline? Is this kind of pointing us towards double-digit growth in the segment for ’27? Any additional color would be really helpful.
Neil A. Schrimsher (President & Chief Executive Officer)
Sure. So I think overall, pleased with the continued order development, you know, double digit for the fourth straight quarter, so nice. Really good participation across automation, fluid power, and a high single-digit pickup in flow control, so encouraging there as well. I think timing, as we’ve talked about before, can vary. It can be a 90- to 180-day turn. You know, that said, I know some of the projects based on engineering or the phasing of the overall project could extend slightly longer than that. But good signals on the order and the development. We’re pleased with the backlog progress and, you know, as we shared, book-to-bill highest in over four years — all positive signals for us.
Dave Wells (Chief Financial Officer)
We did, I think, see a little bit more in terms, Chris, of some of the blanket orders that did positively impact the most recent quarter as well, so you do have some of that mix. So, continue to solidify, to your point, our view on the back half of the year for Engineering Solutions. Continue to be pleased with that order development, you know, but not all that’s going to follow that 90- to 180-day type of time frame for delivery. Nonetheless, very encouraged by the continued momentum we see there.
Chris Dankert (Analyst)
No, that’s really helpful, guys, thank you. And nice to see the progress in flow control in particular. I guess as my follow-up here, to focus more on the second quarter signposts you laid out with October up at least, so far, 10% and some of the timing comps around holidays being a little bit easier. I guess maybe what’s kind of implied in the low end of the guide here — kind of what are we sort of assuming would go wrong to get us near the bottom end there?
Neil A. Schrimsher (President & Chief Executive Officer)
Yeah, I think on the low end, Chris, I mean nothing that we’re seeing today for the low end of the guide on that. I think at midpoint and high, just working to be prudent on, you know, things that we talked about that as they develop — whether pricing, tariff, or some of the geopolitical on that side. There is a comparable step-up for November and December of a couple hundred basis points in the comparable of that and, you know, as we talked about last year as well, right, each holiday season can kind of take some of their own nuances.
We’re connected with customers well right now. I think it’s early to know their firm plans, and so clearly we’re serving the production and project requirements well in October, and we’ll be there for them in November and December. I do think the holiday setup post-Christmas, with four days together, is positive, but obviously we’ll see how that plays out and develops.
Dave Wells (Chief Financial Officer)
We don’t talk a lot about service center backlog because it is such, you know, book-and-churn, but it was encouraging there as well, where we saw backlog up about 20% year over year on the service center segment, up 7% sequentially. So, you know, gives some further confidence in both the upcoming quarter. You’re seeing some of the back half activity that phases out.
Chris Dankert (Analyst)
Got it. Makes sense. So I’ll hop back in queue. Thanks so much, guys.
Neil A. Schrimsher (President & Chief Executive Officer)
Thanks, Chris.
OPERATOR
Your next question comes from the line of Andrew Obin with Bank of America. Your line is now open. Please go ahead.
Andrew Obin (Analyst)
Yes, good morning. Can you hear me?
Neil A. Schrimsher (President & Chief Executive Officer)
Yes, we can.
Andrew Obin (Analyst)
Excellent. Just maybe a question on service center profitability — and maybe this was a function of sort of how we modeled it — but I think the margin came in a tad weaker than we thought. You sort of highlighted some headwinds outside of North America. Could we just talk a tad more about sort of what were the key moving pieces up and down in service centers? And also maybe if there were sort of any unusual things in the corporate line — I apologize if I missed it.
Thank you.
Dave Wells (Chief Financial Officer)
No worries, Andrew. I can start. And so I’d say overall we expected somewhat muted year-over-year service center segment margin trends in the first quarter, given the really more difficult comparison. There was a negative impact that we touched on. With the higher LIFO expense and also prior year favorable AR provisioning. So, you know, if you combine those, that was a 3.3 percentage point headwind to year-over-year EBITDA growth, as well as a 40 basis point headwind to the EBITDA margins. And as you pointed out, trend was also impacted by softer volumes outside of the U.S., as well as some of the higher medical on the employee-related cost in the period. So we do expect year-over-year margin trends in the second quarter for the service center segment, as LIFO and the AR provision impact normalizes to combine with stronger top-line trends that we have, to be at an improved, higher level.
Andrew Obin (Analyst)
And then any positives on the corporate line?
Dave Wells (Chief Financial Officer)
I mean, corporate was pretty much in line with expectations. Nothing unusual there, Andrew.
Andrew Obin (Analyst)
Okay, gotcha. Thank you. And then maybe a question — you sort of highlighted strength in automation. Was that sort of as expected, or is automation coming in better than expected? Because we’re sort of hearing similar commentaries from OEMs — ABB, Schneider both highlighted pretty strong automation trend. I’m a bit surprised by that. We’re seeing as much strength as we are so early. I don’t know, maybe just expand on that if you can.
Neil A. Schrimsher (President & Chief Executive Officer)
Yeah, we’re seeing high interest, I think, as customers look to operate and see the demand requirements that they have, deal with labor scarcity, and other market drivers. So we see high interest and activity in collaborative robots and mobile robots on the side. From a growth standpoint, in the 20s for two straight quarters, orders have been strong in that, so we’re carrying good productive backlog and adding to it. And so really helping customers across our legacy base — as I think about food and beverage, technology segments, others — bring automation into their operating plants.
So we’re encouraged. Got a very good position. Team’s clearly focused. We’re making some investments in additional capacity for throughput to serve some of that demand that will go this quarter, and so we’re pleased about automation as well as the rest of Engineered Solutions.
Andrew Obin (Analyst)
Yeah, everybody calls it physical AI these days. But thank you so much for the color. I appreciate it.
Neil A. Schrimsher (President & Chief Executive Officer)
Okay, thank you.
OPERATOR
Your next call comes from the line of Ken Newman with KeyBanc Capital Markets. Your line is now open. Please go ahead.
Ken Newman (Analyst)
Hey, good morning guys.
Neil A. Schrimsher (President & Chief Executive Officer)
Good morning.
Ken Newman (Analyst)
Morning. So maybe for my first question — maybe I’ll ask Andrew’s question on incremental margins for service center a little bit differently. You know, Dave, is there a way to help us quantify just how much the margins in service center were impacted by lower Canada and Mexico demand in the quarter? And I hear you that you’re expecting that to kind of normalize here, 1Q to 2Q. But are you already seeing evidence of that in the 10% October growth?
Dave Wells (Chief Financial Officer)
Yeah, we’re seeing recovery out of both areas. I would say it was down the list in terms of factors. I mean, obviously we had some natural buffers as business levels slowed down, in terms of incentives — things variable of that nature — pullbacks in the temp and overtime, things of that nature. So really less of a contributing factor. I mean, as I look at it, the year-over-year comparison on the AR provisioning was a significant impact. LIFO — like I said, you combine those two, as Neil said, a 3.3 percentage point headwind to EBITDA growth, 40 basis points impact on EBITDA margin.
So much different scenario if you just roll those two back. The employee health care costs — a lot of those were more focused in the service center segment as you read through that. So those are really the top three contributing factors. Of the four, the last on the list would be the softer volumes in Mexico and Canada. So, like I said, encouraged we’re seeing some of that recovery as we move through this quarter, and I would expect, like I said, to see the continued progress as both the LIFO, some of the medical, and, you know, obviously you don’t have the AR provisioning issue to deal with in the quarters going forward.
More normalized comparatives — would expect to see that nice trend we’ve been seeing in terms of EBITDA profitability growth out of both segments.
Ken Newman (Analyst)
Got it. Okay. And then just maybe, if we just keep to the incremental margin lines of questioning here: you know, obviously you’ve got some visibility here in operating margins improving quarter over quarter, but how do we think about the setup for incremental margins for the full year? And is the back half potentially able to do high-teens, low-20% type of incremental margins, or is that still too early of a call at this point?
Dave Wells (Chief Financial Officer)
Let’s say, overall in the setup, right, at the midpoint on incremental margins would be the mid to high teens. But, you know, with the midpoint on the guide assuming 16% to 17% incrementals, then at the high end assuming 18% incrementals, and with the goal posts that we shared for the second quarter — you know, at the midpoint that would have incrementals at 17% versus 15% in Q1 — and that’s got some normalizing level of gross margins in that. So that’d be the view on the incrementals. Clearly, we’ve demonstrated opportunities to be better on those fronts, but we think those are the right expectations now.
I was very encouraged by the gross margin performance. I mean, even inclusive of the 23 basis point LIFO headwind, you know, kind of being up to, you know, 25 basis points year over year, even with LIFO headwinds. So, you know, you get that favorable mix impact, as we’ve talked about, with some of the ES segment contribution, and that’s going to continue to be a contributor here as we move through the balance of the year. You there again?
Ken Newman (Analyst)
I’m good, thanks.
Dave Wells (Chief Financial Officer)
Okay, thanks.
OPERATOR
Your next question comes from the line of Brett Lindsay with Mizuho. Your line is now open. Please go ahead.
Brett Lindsay (Analyst)
Hey, good morning all. My first question just on ticket size and breadth. So I guess as you drill down on the order book and backlog, are you seeing the average ticket sizes or any evidence that customers are moving forward with larger, more comprehensive project scope? So is the ticket size going up, or do you think that some of this acceleration is just simply pent-up projects that have been delayed and are finally converting?
Neil A. Schrimsher (President & Chief Executive Officer)
I think the interest and the aspects of the area of the plants or the facilities that are going to get included are expanding, and so there can be An increase in size. I mean, that said, these on the engineered solutions side are still often a few hundred thousand dollars and not these multimillion-dollar investments. I do not think it’s just pent-up and deferral. So interest is higher activity, new applications into that front. So, you know, given that, you know, engineered solutions have been, you know, positive seven quarters now, double digit, four into the front. I take that as all positives and really led thus far by automation and fluid power.
Both encouraging, but we’re starting to see that pick up in process flow control as they move up into that area, which will be very good as well.
Brett Lindsay (Analyst)
Yeah, that’s great. And then maybe just to follow up on ES and the margin uptick you saw there up 130 basis points, I guess as you look at the contribution and the attribution to the performance, is it higher valued engineered content just becoming a bigger part and share of ES and then, you know, where are the normalized margins ultimately going to land? Should this be the building off point? I guess is the question.
Neil A. Schrimsher (President & Chief Executive Officer)
Yeah. And so, you know, we may be early to fully call all of that for the rest of the year, but we are encouraged by the solutions that we’re providing, appropriately positioning to the value that they create impact into that. And so we feel like we’re in a very good position across the automation and the fluid power side. Increased service work plus projects that we’re seeing on flow control will be good as well. So maybe we’ll stop short of saying, you know, this is the jump-off total on the go point. Clearly we have demonstrated that in the capability. Now we’re not so far off mid August when we established guidance, so we’re probably wanting to work through a little bit more of this quarter as well.
Dave Wells (Chief Financial Officer)
Yeah, Brett, I just would add, I think there’s nothing in the current quarter that was unusual. I mean, really reflects the, you know, the positive trends we’re seeing in the business to your point on selling our engineered solutions as well as the inherent operating leverage in the segment when you’re able to grow in that double-digit rate. So good sign moving forward. And then I just would reiterate as well that, again, now that flow control is starting to grow year over year, that is one of the higher-margin businesses within the segment.
So it’s helping the mix, which we think can continue as the year progresses.
Brett Lindsay (Analyst)
Got it. Thanks for the color.
OPERATOR
Your next question comes from the line of David Mante with Baird. Your line is now open. Please go ahead.
David Mante (Analyst)
Thanks. Yeah, good morning, guys. My question’s on the progression here as we’re thinking sequentially. So you had a couple of strong sequential quarters and I guess it’s normal you maybe moderate a bit after a couple of really strong sequentials. But the 5% quarter over quarter that you had this quarter seems lower than what would be a normal low single-digit kind of progression. I just wondered if you had a comment on that. And then when you’re looking at like 7% midpoint growth and the 10% in October.
I’m just trying to understand what you said about November and December comps. Should we think that November and December are each 200 basis points more difficult or was there a rising influence or moderating one? I’m just trying to understand if it’s a straight line or if it’s moving up or down.
Ryan Cieslak (Vice President of Investor Relations and Treasury)
Yes. Dave, this is Ryan. I would say that from a comp perspective, to your last part of that question, the November and December period on average is about 200 basis points more difficult than October. I think November probably a little bit more difficult than December, but it does step up over that period relative to October. I think the 10% month to date in October, great to see, off to a nice strong start. We’re seeing nice improvement across both segments.
Engineered Solutions would be up double digits, the Service Center segment up high single digits. The 6% to 8% guide that we gave really is consistent with how we thought the quarter would play out back when we established guidance in mid August. So we’re not changing it, which is sort of how we progress through the year, this early part of the year. But very nice to see how October started off. And then just being prudent in the context of, hey, as you know, as you get into the softer seasonal months of November and December, you could always have some nuances there, but very encouraged by what we’ve seen so far.
And then your point, I think you were maybe talking about the sequentials, Dave, as it relates to in the first quarter. Is that what your first part of the question was focused on?
David Mante (Analyst)
I was, yeah, yeah.
Ryan Cieslak (Vice President of Investor Relations and Treasury)
And so I think, one, I’d say, you know, coming off of a really strong fourth quarter where we had, I think, normal seasonality was, or seasonality was well above normal seasonality in the fourth quarter at very strong backlog conversion in the fourth quarter. So we knew going into this quarter we probably have some normalization there. I’d say nothing that we saw as the quarter played out that concerned us. You know, we saw improving year-over-year trends through the Service Center as the quarter played out.
Local count growth, very, very nice in the high single digits, and then obviously the order and backlog trends continuing to move in the right direction. So just more a function of coming off a pretty strong fourth quarter trend.
David Mante (Analyst)
All right, Ryan. Thanks a lot, guys.
Ryan Cieslak (Vice President of Investor Relations and Treasury)
Appreciate it.
OPERATOR
Your next question comes from the line of Patrick Shachard with Oppenheimer. Your line is now open. Please go ahead.
Patrick Shachard (Analyst)
Hey, guys. Neil, could you give us a refresher on the main technology areas within automation beyond robotics and vision? We talked about linear motion in the past. I’m wondering where that fits today and which other capabilities are becoming more meaningful growth opportunities.
Neil A. Schrimsher (President & Chief Executive Officer)
Yeah, I think linear motion is continued in the offering as well as IoT connectivity-type devices and products. I mean, we’re helping customers extract data off their operating equipment and knowing or establishing with them the key performance indicators to continue to watch, monitor, and track. So that’s an area. Vision, to your point, on quality control and inspection, and then robotics on both sides, greater use and adoption of mobile robots.
And I think the prediction and the outlook on growth on the collaborative robot side continues to be very strong. I mean, I’ve seen outlooks there for the next five years, perhaps the CAGR is 15% a year to 2030. So there’s clearly going to be more collaboratives, there’s more autonomous mobile, but there’s more—to Andrew’s point—on the physical AI. You want to be connecting to the data on that equipment to drive informed actions and behavior. And so that’s a growth area for us as well in automation.
Patrick Shachard (Analyst)
Okay, thanks. And maybe just to follow up on linear motion specifically, is the opportunity there primarily supplying components into OEM equipment, or are you increasingly combining it with controls, vision, and robotics in broader engineered solutions?
Neil A. Schrimsher (President & Chief Executive Officer)
Depending on the application, there is more because linear motion allows for very fine precision movement that can be required into the area. And so, you know, that’s where we’re going to be called in and be working with. So for very precise precision movements that are required, that’s where linear motion has clear advantages in use and application. And so those are the ones that we would be involved with, and we would be helping those providers how to think about the rest of that solution.
So not simply just reselling a component or product offering.
Patrick Shachard (Analyst)
All right, appreciate it. I’ll pass along.
Neil A. Schrimsher (President & Chief Executive Officer)
Thank you.
OPERATOR
There are no further questions at this time. I will now turn the call over to Mr. Scrimser for any closing remarks.
Neil A. Schrimsher (President & Chief Executive Officer)
I just want to thank everyone for taking the time to join us today, and we look forward to talking with you throughout this quarter.
OPERATOR
Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.
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