Applied Industrial Technologies, Inc. (AIT) Earnings Call Transcript & Summary

Welcome to the Fiscal 2025 Second Quarter Earnings Call for Applied Industrial Technologies. My name is Liz, and I'll be your operator for today's call. [Operator Instructions] 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, Liz, and good morning to everyone on the call. This morning, we issued our earnings release and supplemental investor deck detailing our second quarter results. Both of these documents are available in the Investor Relations section of applied.com. Before we begin, just a reminder that 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 that are 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. With that, I'll turn it over to Neil.

Thanks, Ryan, and good morning, everyone. We appreciate you joining us. I'll begin today with perspective on our second quarter results and current industry conditions, followed by some thoughts on recent -- on the recent acquisition of Hydradyne and expectations going forward. Dave will then provide additional financial detail on the quarter's performance and updated outlook, and I'll then close with some final thoughts. Overall, we had a productive second quarter that highlights the operational resiliency and self-help opportunities of our differentiated industry position and strategy. We grew earnings and expanded margins over the prior year in an environment where demand remained soft and sales declined slightly. We also made progress in positioning the company for stronger growth moving forward. This includes ongoing investment in our sales tools and operational systems and technical talent. The building of business funnels, which is driving stronger orders as well as the announcing and closing of our strategic acquisition of Hydradyne, which I'll discuss in more detail in a moment. As it relates to the quarter's results, both EBITDA and EPS exceeded our expectations, increasing approximately 3% and 7% over the prior year, respectively. We benefited from strong gross margin performance and cost controls. While lower LIFO expense contributed to margin performance in the quarter, both gross margins and EBITDA margins still expanded nicely over the prior year when excluding the change in LIFO expense. The positive performance was primarily driven by channel execution and ongoing margin initiatives across various areas of our business as well as variable expense adjustments and cost control, inherent to our model and operational discipline. Margin improvement was led by our Engineered Solutions segment, where EBITDA margins expanded 115 basis points over the prior year and exceeded 16% for the first time. Our Engineered Solutions segment EBITDA margin has expanded over 450 basis points the past 5 years. We're making solid progress with our internal initiatives and operational enhancements as we continue to scale this strategic area of our business. The segment's margin expansion highlights the strong market position and value proposition we have across our portfolio of fluid power, flow control, and automation solutions and should enhance our mix tailwind and overall margin expansion potential moving forward as segment sales begin to reaccelerate. As it relates to top line trends, average daily sales declined 3.4% over the prior year, which was in line with the guidance we provided in October of down mid-single to low single digits. We continue to operate within a muted end-market backdrop, with customers conservatively managing MRO spending and delaying capital investments. Underlying demand improved slightly following the slow start to October but moderated and was below normal seasonal patterns during December. Most of December's weakness was concentrated later in the month and, in our view, was primarily tied to the timing of holidays this year with Christmas and New Year's falling midweek, as well as extended customer plant idling and deferred maintenance activity within our Service Center segment. We estimate softer sales during the last 2 weeks of December negatively impacted the quarter's overall organic sales growth by approximately 100 basis points. When looking at our top 30 end markets, 11 were positive year-over-year in the second quarter, which is below the 13 reported last quarter. End markets that were up year-over-year included chemicals, food and beverage, pulp and paper, and technology. This was offset by declines primarily in machinery, transportation, aggregates, fabricated metals, oil and gas, and mining end markets. Mixed end market demand has continued in the early part of our fiscal third quarter as customers are settling into the new year and continue to operate at a gradual pace. Of note, January sales are currently trending down a mid-single-digit percent year-over-year on an organic basis. We believe ongoing macro policy and interest rate uncertainty remain headwinds. Weather has played a role across the southern U.S. region over the past month as well. That said, we do not view January sales as indicative of how the third quarter and the balance of the year could play out based on several directionally positive trends taking shape. Of note, various industrial macro data points are showing some signs of improvement. The new orders component of the ISM Index was in expansionary territory in November and December. Bookings across our Service Center network are improving, following a slow end to December, while feedback and sentiment among customers are more positive post the election. Our Service Center segment is well positioned as end market demand reaccelerates. With approximately 50% of our Service Center business tied to technical break fix situations across critical industrial processes, systems and infrastructure, we believe demand for our Service Center products and technical support could ramp quickly and broadly over the next year as customers reengage production and catch up on required technical MRO activity. This will be particularly evident across heavy manufacturing, machinery, mining, metals and aggregate markets, given their break-fix intensive nature and deferred maintenance in recent periods. In addition, a lighter regulatory agenda with the new U.S. administration represents a potential incremental new tailwind in many of our legacy end markets across our Service Center operations as well as within our flow control network. Combined, we estimate these break-fix intensive and more regulated markets represent about 40% to 50% of our total sales today. In addition, order momentum and business funnels are building across the technology vertical, which represents approximately 15% of our Engineered Solutions segment and 5% of our overall sales. We're beginning to see stronger demand across the semiconductor sector and related spending on wafer fab equipment following the demand headwind we experienced in this sector over the past several years. Stronger customer activity across the technology vertical is encouraging and a potentially strong growth tailwind moving forward. We also continue to see positive momentum developing across our automation business with orders strengthening year-to-date as various secular tailwinds continue to positively influence demand. These dynamics are driving ongoing adoption of collaborative and mobile robots, machine vision, and IoT solutions. Our strong application and engineering capabilities, along with an expanded footprint and facility capacity will further supplement our potential in this high-growth area of our business as discrete automation investments reaccelerate in coming quarters and demand for aftermarket and service support starts to emerge. On another encouraging note, order trends are beginning to stabilize and improve slightly across fluid power, industrial, and mobile OEM customers. If you recall, this has been a primary area of sales weakness for us over the past year. During the second quarter, reduced sales from industrial and mobile OEM fluid power customers negatively impacted our consolidated organic year-over-year sales growth rate by approximately 150 basis points. However, related orders from these customers were up 9% sequentially from the first quarter and relatively unchanged year-over-year during December. Combined with more normalized OEM inventory levels following recent destocking and much easier comparisons, we expect the year-over-year sales trend and related impact in this area of our business to improve moving forward. This includes potentially reemerging as a growth tailwind in coming quarters, considering secular demand and required investments, developing across fluid power systems as well as ongoing strategic investments we are making into this more specialized and highly technical area of industrial distribution. Of note, we are extremely excited about the growth and operational momentum we expect to build following the completion of our Hydradyne acquisition at the end of December. Based in Dallas, Texas, Hydradyne is one of the largest U.S. distributors focused on fluid power and motion control systems with advanced service capabilities and product offerings in hydraulics, pneumatics, electromechanical, instrumentation, filtration, and fluid conveyance. The addition of Hydradyne aligns extremely well with our strategy. With anticipated sales of $260 million and EBITDA of $30 million in the first year of ownership, Hydradyne strengthens our #1 fluid power position by extending our footprint across the southern U.S. where they operate with a team of nearly 500 associates out of 33 locations. Hydradyne also brings strong technical capabilities that complement our current fluid power service and solutions portfolio, with approximately 30% of sales tied to repair, engineering and design, system fabrication, hose assemblies, and other value-added solutions. Our combined technical capabilities and access to premier fluid power, motion, flow control, and automation technologies present a powerful value proposition for our customers that will accelerate cross-selling and market penetration. This includes enhancing our collective efforts to serve the rapid pace of innovation developing across fluid power systems. Our strategy and teams are aligned to support thousands of specialized OEMs and industrial manufacturers, engineer, design and integrate these advanced features into their mobile and industrial equipment with world-class technologies from top fluid power suppliers. The strength of our combined technical teams and footprint will also allow us to more effectively and broadly capture growth opportunities developing across emerging end markets and commercial applications. We provide more detail around Hydradyne acquisition in Slides 5 and 6 of our second quarter earnings presentation, and Dave will cover off on some of the key financial considerations, including our initial accretion expectations. In summary, we're very excited to welcome Hydradyne and their capabilities to the Applied platform. Overall, I'm encouraged by the progress we are making with our strategy, including the ongoing buildout of our Engineered Solutions segment. Following the Hydradyne acquisition, the segment is now approaching 40% of overall sales compared to 15% 10 years ago. The strategic expansion of this segment has further differentiated our industry position and strengthened our competitive moat. We've established and fortified our leading market positions, building and serving critical motion, power, and control systems across nearly every industrial vertical. It's created a unique and potentially significant cross-selling opportunity throughout our legacy embedded customer base while increasing exposure to faster-growing end markets and secular tailwinds. It's also expanding our addressable market and allowing us to evolve and enhance our competitive position as the industrial sector and related systems advance with new age processes and technologies. Combined with a positive margin profile and ongoing operational enhancements, we expect our Engineered Solutions segment to be a strong and differentiated driver of earnings growth and returns going forward. Lastly, I'm encouraged by the ongoing capital deployment opportunities with our industry position, balance sheet, and cash flow generation continue to support. Year-to-date, we've deployed over $380 million in capital, focused on enhancing our growth position and shareholder returns. This compares to $251 million of capital deployed for all of fiscal 2024. While partially reflecting our recent Hydradyne acquisition, we also continued to return capital through share buybacks, including deploying $30 million on share repurchases year-to-date. In addition, we announced this morning a 24% increase in our quarterly dividend. The increase is in line with our expectation for greater dividend growth as we align annual increases with normalized earnings growth, including the strong earnings and cash generation achieved in recent years. Our capital allocation priorities remain unchanged and highly focused on organic investments and M&A. However, our broader capital deployment trends year-to-date showcase the multiple opportunities and ways we can deploy capital to optimize shareholder returns as we continue to scale our business and achieve our strategic goals. Moving forward, our balance sheet and financial capacity remain extremely well positioned to continue to support M&A and other capital deployment opportunities. We have ongoing scope for additional buybacks for the remainder of fiscal 2025 based on our current financial capacity and the intrinsic value we see across our company long term. In addition, our M&A pipeline and related due diligence remains active across both segments, with a primary focus on bolt-on and midsized targets where we can create significant shareholder value. 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 before I begin. As in prior quarters, we have posted a supplemental investor presentation to our investor site for your additional reference. This quarterly presentation provides a more detailed recap of our second quarter results, updated guidance, and details on our recent acquisition of Hydradyne. Turning now to our financial performance in the quarter. Consolidated sales decreased 0.4% over the prior year quarter. Acquisitions contributed 190 basis points while the difference in selling days had a positive 160 basis point impact. This was partially offset by a negative 50 basis point impact from foreign currency translation. Netting these factors, sales decreased 3.4% on an organic daily basis. As it relates to pricing, we estimate the contribution of product pricing on year-over-year sales growth was slightly less than 100 basis points for the quarter and largely in line with our expectations. Turning now to sales performance by segment. As highlighted on Slides 9 and 10 of the presentation, sales in our Service Center segment declined 1.9% year-over-year on an organic daily basis. This excludes a positive 30 basis point impact from acquisitions, a positive 160 basis point impact from the difference in selling days, and a negative 70 basis point impact from foreign currency translation. The organic sales decline was primarily driven by reduced MRO spending, lower capital maintenance project activity, extended customer plant idling, and the timing of holidays in the month of December. The impact from weaker sales in late December was most pronounced across our Service Center operations. This followed more stable trends in October, November, where segment sales were relatively unchanged year-over-year. Growth in national accounts during the quarter was more than offset by weaker sales from local accounts. Segment EBITDA increased 1.4% over the prior year, while segment EBITDA margin of 13.4% improved nearly 30 basis points year-over-year. Within our Engineered Solutions segment, sales increased 0.4% over the prior year quarter, with acquisitions contributing 5.1 percentage points of growth, and the impact from 1 extra selling day provided an additional 160 basis points of growth. On an organic daily basis, segment sales decreased 6.3% year-over-year. The decline was primarily driven by ongoing sales weakness across fluid power OEM customers, mostly reflecting reduced demand across mobile fluid power markets. This was partially balanced by more stable trends across industrial implant applications as well as improving demand in technology-related fluid power end markets. Meanwhile, sales within our automation operations declined by a high single-digit percentage year-over-year on an organic daily basis. This is consistent with last quarter and primarily reflects our headwinds from customers continuing to delay spending in response to macro uncertainty. Softer fluid power and automation sales were partially offset by ongoing growth across our flow control operations, where average daily sales increased 2% year-over-year and over 4% sequentially, reflecting firm project activity on process infrastructure. In addition, despite the sales decline in the quarter, segment EBITDA increased 8% over the prior year while segment EBITDA margin of 16.3% expanded 115 basis points from prior year levels. The performance primarily reflects strong gross margin expansion tied to our internal initiatives and value proposition, more favorable mix, and to a lesser extent, lower LIFO expense as well as contributions from ongoing operational enhancements as we continue to execute our Engineered Solutions strategy. Moving to consolidated gross margin performance. As highlighted on Page 11 of the deck, gross margin of 30.6%, increased 114 basis points compared to the prior year level of 29.4%. During the quarter, we recognized LIFO expense of $0.7 million compared to $3.4 million in the prior year quarter. This net LIFO tailwind had a favorable 25 basis point year-over-year impact on gross margins. Excluding this 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 the strong channel execution, our Engineered Solutions segment performance, and the benefits of ongoing margin initiatives. As it relates to our operating costs, selling, distribution and administrative expenses increased 2.3% compared to prior year levels. SD&A expense was 19.3% of sales during the quarter, reflecting an increase of 51 basis points from the prior year quarter. On an organic constant currency basis, SD&A expense was up 0.3% over the prior year period, but down over 1% when adjusting for the extra payroll day in the quarter. Our team did a nice job controlling costs in the quarter against the muted demand backdrop while managing inflationary pressures in order to continue to balance and sustain critical investments for growth. We also benefit from ongoing efficiency gains and reduced variable expense on lower sales, which helped balance higher administrative and occupancy costs. In particular, the quarter included approximately $1.5 million of due diligence and transaction-related expenses related to the Hydradyne acquisition. Overall, positive gross margin performance, coupled with the benefit of spend initiatives resulted in reported EBITDA increasing 3.3% year-over-year while EBITDA margin of 12.6% expanded 45 basis points from the prior year level of 12.1%. Combined with greater interest income on higher average cash balances and a slightly reduced share count, we reported earnings per share of $2.39, which was up 6.7% from prior year adjusted EPS levels of $2.24. Of note, prior year adjusted EPS excludes a pretax $3 million or $0.08 per share deferred tax valuation allowance benefit. Moving now to our cash flow performance. Cash generated from operating activities during the second quarter was $95.1 million, while free cash flow totaled $89.9 million, representing conversion of 96% relative to net income. Year-to-date, we have generated approximately $212 million of free cash flow, which is up 34% year-over-year and represents conversion of 114% relative to net income. Our cash flow growth so far this year primarily reflects more modest working capital investment compared to prior year as well as ongoing progress with internal initiatives and our enhanced margin profile. Turning now to our acquisition of Hydradyne. As Neil mentioned, we we're extremely excited about this transaction. It represents another notable milestone for Applied and our overall value proposition to customers, suppliers, and all stakeholders. Not only does the acquisition fit extremely well with our M&A priorities and return-based capital deployment strategy, Hydradyne's local customer-centric culture and operational caliber aligns well with our operating framework, which will provide a strong foundation on which to build positive momentum early on. As it relates to some of the financial considerations of the deal, the purchase price of $276 million was funded with cash on hand, representing a transaction multiple of 9.1x enterprise value to forward EBITDA before anticipated synergies. We expect the transaction to generate approximately $260 million in sales and $30 million in EBITDA as well as be accretive to EPS by approximately $0.15 within the first 12 months of ownership. The EPS accretion estimate is net of projected acquisition intangible amortization expense of over $11 million in the first year or $0.22 per share, as well as reduced interest income on lower cash balances after funding the transaction. In addition, these assumptions are before anticipated synergies tied to cross-selling, leveraging complementary solutions, harmonizing technical capabilities and systems, and driving operational efficiencies across the combined operating platforms. We expect synergies to begin to develop in fiscal 2025 but be more meaningful in fiscal 2026 and 2027. Based on our initial projections, we are targeting net synergies of $5 million to $10 million within the first 3 years of ownership. Of additional note, following the transaction, our balance sheet remains strong with pro forma net leverage increasing to a modest 0.5x and approximately $1.5 billion of balance sheet capacity remaining. Turning now to our outlook. As indicated in today's press release and detailed on Page 14 of our presentation, we are raising full year fiscal 2025 guidance to reflect our stronger second quarter earnings performance and estimated initial contribution from our acquisition of Hydradyne. We now project EPS in the range of $9.65 to $10.05 based on sales growth of 1% to 3% and EBITDA margins of 12.2% to 12.4%. Previously, our guidance assumed EPS of $9.25 to $10, sales growth of down 2.5% to up 2.5%, and EBITDA margins of 12.1% to 12.3%. Our updated guidance assumes full year fiscal 2025 sales decline organically by 3% to 1% on an average daily basis compared to our prior assumption of down 4% to up 1%. We are now assuming year-over-year organic sales trends improve more gradually in the second half of fiscal 2025. We believe this is reasonable, given ongoing uncertainty tied to macro policy and interest rates, which could continue to restrain customer capital spending and production growth near term. We're also taking into account the slower start to early third quarter organic sales trends, which as noted earlier, are currently down by a mid-single-digit percentage over the prior year in January. The midpoint of guidance now assumes average organic sales decline by a low single-digit percent year-over-year in the second half of fiscal 2025, including mid-single to low single-digit declines in the third quarter, followed by a return to modest growth in the fourth quarter. We are projecting M&A generated sales, including Hydradyne to contribute 600 to 700 basis points of year-over-year sales growth in the second half of the year, partially offset by ongoing foreign currency transaction and translation headwinds. Overall, while we remain constructive on our setup moving forward, considering easier prior year comparisons, improving demand indicators, and sustained benefits from our internal initiatives, we believe a balanced approach to our near-term outlook remains appropriate, more definitive signs of a positive inflection in underlying industrial activity. Lastly, from a margin perspective, we expect third quarter gross margins to decline sequentially to around 30%. This assumes a more normalized level of gross margin execution relative to our strong second quarter performance as well as slightly higher LIFO expense. Combined with ongoing inflationary headwinds, anticipated growth investments, our annual merit increase, which was effective January 1, and initial integration costs, mix considerations from our Hydradyne acquisition, we expect third quarter EBITDA margins to moderate sequentially to 12% to 12.2%. Those still expand year-over-year. Lastly, our updated guidance assumes initial EPS accretion from Hydradyne is modest in the third quarter as we begin integration and align initiatives within a muted end market backdrop. We expect accretion to begin to ramp in the fourth quarter and into fiscal 2026 as initial synergies are achieved and end markets begin to recover. With that, I will now turn the call back over to Neil for some final comments.

So to wrap up, I'm proud of the Applied team and our performance through the first half of fiscal 2025. We're delivering on our commitments and making strong progress toward our interim financial objectives of $5.5 billion of revenue and 13% EBITDA margins. Near term, we believe the underlying demand environment could remain muted and somewhat choppy, pending a more defined direction on macro policies post the election. As our second quarter results show, we have the ongoing self-help opportunities to manage and perform well if demand remains sluggish near term. That said, as we look forward and consider our industry position, we continue to believe we are close to entering a very favorable growth period at Applied. We feel good about the positive demand signals developing, including stronger order trends across our higher-margin Engineered Solutions segment. Investments over the past several years should optimize our organic growth potential as end markets begin to recover. This includes recent facility expansions to optimize our service capabilities across the technology vertical and our automation operations. Our recent Board meeting was held at one of these facilities, where we saw firsthand the growth potential of our expanded capacity and technical market position as well as some of the building customer activity beginning to develop. We also believe break-fix activity should accelerate across our Service Center network into the spring and summer as production schedules ramp back up. This could drive more heightened technical MRO and capital spending as customers reengage initiatives to modernize equipment and expand production facilities now with the election behind us and as additional transparency develops on U.S. trade policies and interest rates. Our technical domain expertise and access to core industrial equipment puts us in a leading position to help customers manage through these operational requirements. Lastly, we're in a strong position to benefit from ongoing industry consolidation over the next several years, considering the high fragmentation and technical requirements associated with our industry segment. We believe the drivers of consolidation are higher today. Customers' supply chain focus has intensified. They are potentially facing one of the more favorable U.S. manufacturing backdrops in decades while also managing through limited technical labor availability and greater mandates to eliminate operational risk. Accelerating innovation and significance of motion, power, and control systems and our increasing service requirements, including access to new production solutions and system repairs. Combined with structurally higher inflation, we believe these considerations could accelerate consolidation across sector, both organically and through M&A as customers and suppliers increase business with larger, more capable distributors. The value of our scale, technical service, engineering capabilities, strategic supplier relationships, and available balance sheet capacity has never been stronger in our marketplace. Overall, we look forward to fully capturing this growth potential through the remainder of fiscal 2025 and years to come. And as always, we thank you for your continued support. With that, we'll open up the line for your questions.

[Operator Instructions] Your first question comes from the line of David Manthey with Baird.

The first question is in the second quarter, excluding rebates and the LIFO tailwind, you improved core gross margin by about 80 basis points year-over-year. And on one of the slides, you mentioned execution, ES segment and initiatives. I'm wondering if you can further refine the sources and the sustainability of that improvement.

Yes. I can start, David. I would say in the energy segment, good performance. We got benefit from mix. Scale is coming through for us into that side. And so we think just overall good execution as the team looks to appropriately price to the value of the systems and solutions that we have. So positive in point of sale there but also benefit in the technical nature the products and solutions mix as well as some of the customer side in that. I think as Dave pointed out, we did get some supplier benefit into the side, I would say, roughly 10 to 20 basis points of that, that could have been -- or that was tied to achieving a higher tier into that side so it came through into this quarter. We would not look for that to replicate necessarily in the third quarter. And that really points us to saying gross margins are more low 30s percent in the third quarter and the rest of the back half. But we did get another 10 to 15 basis points of just good continued execution across the business as well.

You get to your point, Dave, stripping out that unusual support, vendor support and the LIFO, which combined in 10 to 20 basis points on the vendor support, 25 basis points in LIFO, solid underlying performance. About 50 basis points of that did come out of the Engineered Solutions segment, a combination, as Neil indicated mix, I mean, a big piece of that reading through is, as we said, we were up 2% year-over-year in terms of our flow control shipments up 4% sequentially. That is one of our richer gross margin performing businesses as well as just kind of here again, pricing for the value and some of the favorability that we're seeing coming out of that segment. Beyond that, proud to see that 5 to 15 basis points improvement in the Service Center side of the business. So really hitting in all cylinders there with the continued to work around operational efficiencies, pricing in both pieces of the equation and really maximizing the channel benefit and the market position that we do hold.

Okay. And second, Dave, maybe you could talk about depreciation and amortization due to the acquisition of Hydradyne separately, just whether there's some step-up there. And then also related to Hydradyne, you mentioned today $5 million to $10 million of synergies over the first 3 years. I'm wondering, number one, is that a run rate by the time you hit the end of 3 years? And then second, is that cost synergies, sales synergies or both?

Yes. The majority -- it's about, let me say, 70-30 mix in terms of sales synergies, cost synergies. We'll get those by virtue of benefit of harmonization, leverages some of our licensing for both businesses, our legacy fluid power business and Hydradyne on an [ Epicor ] product that we do have some very favorable licensing costs for, and then do anticipate, I said, some -- obviously, the sales synergies coming through as we continue to leverage. And particularly given the underserved nature of that southeastern region that we've been looking to enhance our position in for so long as we targeted this acquisition, seeing some of that come through. So a combination of both. The $0.22 impact in terms of depreciation and amortization expense, as we talked about, stripping out specifically Hydradyne.

Yes, maybe I'll take that one. Just as it relates to depreciation, Dave and amortization into the back half, we'll step up to, in total, closer to $17 million per quarter. And so Hydradyne, including the intangible amortization as well as depreciation, about $3 million of incremental D&A or depreciation, amortization per quarter in the back half of the year.

Yes. And Dave, I'd say then, as we think about the synergies as we break them out, we think the cost margin side is in that more 70% to 80% end of that. Obviously, scale helps us some in that. We think on the purchasing side, some of the indirect support. But with that said, we're excited about the additional sales synergy opportunities and perhaps in that 20% to 30% range that, that opens up to leverage the capabilities, strong service and repair and solutions in the geographies that can link with the Service Centers in. And then the acceleration that we think across those end market segments in electronic controls, perhaps electrification, in time, we'll open up some of the sales synergies as well. So overall, very excited about the strategic addition to us in a core focus area of fluid power and in an important geography.

And your next question comes from the line of Ken Newman from KeyBanc Capital Markets.

First, I just wanted to clarify, Neil, on the January trends, trending down mid-single digits. I think it makes sense that it's being impacted by some of the holiday timing that you saw in December. And I am curious if you have any color on what the weekly trends through the month or how the ABS trends have kind of shifted from the beginning of the month towards the end? And whether or not we're back to pre-shutdown levels or wouldn't expect it to get there?

Sure. And so I would say, Ken, most of the drag in January was early in the month, and I'd say probably the first couple of weeks, down double digit. I would really say the last couple of weeks, up low single digit, right? A few days to go here as we move through. So that would be the break. And so that builds part of our view that it's hard to extrapolate holidays in November, December and the early start of January as the full indicator. So we're encouraged by the pickup over the last couple of weeks.

Right. That's very helpful. And then Neil, you're essentially at your 40-60 segment mix between the Engineered Solutions and Service Center businesses. Do you or the Board have a sense of where you want that mix to ultimately go from here? And how do you envision the pace of that mix shift change from the growth that you've seen in the last 5 years?

So I think we've got still great potential on both segments. We talked about it, time to get to the -- perhaps 60% Service Center, 40% approaching that. With that said, opportunities on both segments to organically grow; cross-sell opportunities that help both as well as future M&A. Could I anticipate Engineered Solutions growing past 40% in time to 45% or 50%, a good healthy balance across the business? Absolutely. But that will play out. And there will be continued opportunities for bolt-ons on the Service Center side. But if it stabilizes out in at a future date at a good healthy 50-50 with both profitably growing, that will be a good spot for the company.

Yes, that's helpful. Maybe if I could just squeeze one more in here. You talked about the year-to-date Engineered orders being up year-over-year just driven by automation and tech. Just to clarify, are you -- is the expectation that the revenue growth in those subsectors flip positive here in the second half? And maybe just some color on where the automation business is run rating from a revenue perspective today?

Yes. So I'll start and work backwards. I'd say run rate of the automation business is probably in that [ $240 million ] type range around that on the side. We did touch on order rates encouraging, probably automation in the high single-digit, tech double digit in that front. But collectively, good activity broadly in Engineered Solutions, maybe more low single-digit with the broader impact that we've had in fluid power and in the off-highway mobile segment. But as we talked in the remarks, a little bit of an improvement there that we think could be encouraging as it goes across. As far as the conversion timing, it really depends. Some of them are very quickly in conversion. Others that have a more technical nature, complexity in the build-out could be 120 perhaps more days into the site in that technical conversion on the site. So it really depends on the application of that conversion, or where it fits in with the customer and their overall project, which that can also cause some slotting or timing impacts as well.

And then, Ken, as you think about the guidance by segment from a top line perspective, I think there as it relates to the down mid-single to low single digits organically in the third quarter, we think the segments could probably trend around that in a somewhat similar way this quarter. And then as we get into the fourth quarter, there's a path, clearly, given the order trends that we've seen in the Engineered Solutions segment, to start to see the segment grow a little bit above where we see the Service Center segment from that standpoint.

Your next question comes from the line of Chris Dankert with Loop Capital Markets.

I guess, congrats on the quarter. We're looking at gross margin here. The delineation there was very helpful. I guess anything to call out on the freight side that was a tailwind in the quarter? How do we think about maybe freight going into the back half of fiscal '25 here?

Chris, I'll start. I'd say nothing significant to call out. Teams continue to do a good -- have a good focus and execution on freight, and we will continue that emphasis. We know the importance of it. So I don't think a material input in the quarter nor a big change in expectations for the back half.