Applied Industrial Technologies, Inc. ($AIT)

Welcome to the fiscal 2026 Third Quarter Earnings Call for Applied Industrial Technologies. My name is Alexandra, 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 now begin.

Okay. Thanks, Alexandra, and good morning to everyone on the call. This morning, we issued our earnings release and supplemental investor deck detailing our third quarter results. Both of these documents are available in the Investor Relations section of applied.com. . 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 and 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, 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 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 outlook. I'll then close with some final thoughts. So overall, we reported a solid third quarter underpinned by stronger organic sales growth across the business. . Specifically, sales increased 6% organically over the prior year, which was the strongest growth in over 2 years. This was up notably from 2% last quarter. and at the high end of our third quarter guidance. In addition, orders, backlog and business funnel activity continue to build positive momentum. We also delivered another quarter of steady underlying margin performance with gross margins holding firm year-over-year, inclusive of ongoing LIFO headwinds. These positive dynamics drove record quarterly EBITDA that was at the high end of our expectations as well as 6% above the prior year or 8% when excluding the impact of LIFO. At the same time, we continue to invest internally to support our growth potential and strategy. So taken together, a very productive quarter with many encouraging signals for the business moving forward. I want to thank our Applied team for another solid quarter of execution. So a few key points to emphasize. First, stronger sales growth in the quarter was broad-based with several encouraging underlying trends. Of note, average organic daily sales increased $0.05 sequentially, which was above normal seasonal patterns. Trends strengthened as the quarter progressed with organic sales in March, up 10% over the prior year period. The stronger growth was volume driven with customer spending behavior increasingly positive and showing signs of broadening. More positive underlying demand was apparent in year-over-year trends across our top 30 end markets where 17 generated positive sales growth compared to 15 last quarter. In addition, 2-year stack trends across our top 30 markets improved notably on a sequential basis. Growth was strongest across metals, technology, machinery, aggregates, utilities and energy, mining and construction. This was offset by declines primarily in chemicals, lumber and wood, transportation, rubber and plastics and refining. Stronger sales activity was evident across both segments in the quarter with particular strength in our Engineered Solutions segment, which delivered over 9% organic growth year-over-year. Growth was strongest across automation and fluid power, both increasing by a double-digit percent year-over-year in the quarter. Organic sales growth across our flow control operations also improved and was a contributor. In addition, segment orders were up by a double-digit percent over the prior year for the second straight quarter with backlog and book-to-bill, both increasing sequentially during the quarter. Overall, this performance is an encouraging sign for our engineered solutions segments expanding and differentiated growth potential as several favorable dynamics are converging. Of note, sales cycles for our advanced automation solutions are turning faster, as customers put money to work in brownfield applications to drive production agility within existing capacity and address labor constraints. Our engineering depth tailored solutions and comprehensive application and support are helping customers navigate automation deployments in both high-tech industries as well as across our legacy industrial verticals. In addition, project activity and investment in process infrastructure across the U.S. is gradually increasing. We're also seeing recovery continuing to take shape in our legacy industrial and mobile OEM fluid power in markets, following a prolonged multiyear downturn. Alongside structural and secular growth in newer verticals where our exposure has increased in recent years following the ongoing expansion of the segment. On this last point, we're seeing solid demand build across our technology vertical, which today represents over 15% of the Engineered Solutions segment and contributed over 300 basis points to the segment's organic sales growth rate in the quarter. Our exposure to the technology vertical includes an established an ongoing position across the semiconductor space as well as emerging growth opportunities developing within the data center market. On Slide 8 of our earnings presentation, we've added an overview of our position and the solutions we provide within these verticals, which spans across all 3 areas of the segment, including fluid power, automation and flow control. In semiconductor, we provide various fluid conveyance, pneumatic, robotic and mechatronic solutions that are primarily tied to wafer fab equipment manufacturing as well as flow control solutions used in material processing. In data center, our deep expertise of fluid management and handling combined with established supplier relationships, are presenting growing opportunities supporting various thermal management applications through engineered assemblies. In addition, our automation team provides robotic and machine vision solutions that automate and trace material handling within a data center facility. Our data center service capabilities and coverage were also enhanced through our Hydradine acquisition, where they are providing various fluid conveyance solutions and assemblies specified in liquid cooling systems. So overall, a very diverse and embedded position within these key growth verticals that highlights our ongoing evolution and technical capabilities as we continue to expand our Engineered Solutions segment. I'm also encouraged by the growth potential developing across our core service center segment. organic sales growth of 4% in the third quarter strengthened from last quarter, with average daily sales up approximately 5% sequentially on an organic basis and ahead of normal seasonality. We Trends were strongest during March, where organic sales increased over 6% compared to the prior year, including nearly 8% within the U.S. Customer spending behavior continues to strengthen as greater capacity utilization drives more brake fix activity and required maintenance on critical and age production equipment. This drove stronger growth across strategic national accounts as well as our local accounts during the quarter. In addition, 13 of our top 15 industry verticals were up year-over-year in our U.S. service center network during the third quarter. This compares to 10 last quarter and 6 in the prior year quarter. Benefits from our sales initiative and 1 applied value proposition are reading through as we support our customers' heightened technical MRO requirements within an increasingly positive U.S. industrial backdrop. This includes our deep knowledge and supplier relationships tied to critical motion control equipment and infrastructure, supported by our local service capabilities. I would also note, over the past several years, our service center team has been executing on a comprehensive strategic plan, focusing on deepening our customer relationships, modernizing our sales processes and tools and enhancing our speed to market through investments in talent, systems and analytics. In addition, our service center team's value proposition has strengthened through the expansion of our Engineered Solutions segment, giving them access to engineering, design, assembly, repair and integration support to address our customers' legacy industrial system needs as well as emerging required investments in automation. This is driving new business wins as well as greater cross-selling activity. We estimate cross-selling contributed over 100 basis points to the segment's organic growth in the quarter, which is up from the first half fiscal 2026 levels and an encouraging sign. Overall, these initiatives remain ongoing and provide solid company-specific growth drivers for our Service Center segment moving forward. as end-market demand cycles higher and as customers look to leverage the many secular and structural tailwinds developing across the North American manufacturing sector. So overall, a solid quarter highlighting building top line momentum across Applied and our differentiated industry position. Positive sales trends have continued in the early part of our fourth quarter with organic sales trending up by a high single-digit percent year-over-year month-to-date in April. We're also well positioned to drive further EBITDA margin expansion and stronger earnings growth, assuming the improved top line trends sustained moving forward. During the third quarter, EBITDA margins were in line with our expectations while our year-over-year trends improved as the quarter progressed and sales growth strengthened. As a reminder, on an annualized basis, we target mid- to high-teen incremental EBITDA margins at mid-single-digit organic sales growth with strong support from our ongoing internal margin initiatives, continuous improvement culture and structural mix tailwinds. With that being said, we remain mindful that we continue to operate in a dynamic environment where customers purchasing decisions remain sensitive to broader macro uncertainty that is persisting. This includes an ongoing dynamic trade policy and tariff backdrop. To date, we have not seen a significant impact from recent tariff and trade policy modifications. Price increase announcements from our suppliers remain steady and over the last several quarters have normalized to a more regular cadence following an active pace this time last year. However, the inflationary environment and suppliers' approach to pricing remains highly fluid at this point. We continue to work closely with our suppliers as they assess the evolving backdrop as well as other inflationary pressures on their supply chains. As evidenced by our performance over the past year, our teams continue to effectively manage broader inflationary pressures. And overall, we remain well positioned. We operate from an agile business model in well-structured markets tied to critical and technical processes with strategic supplier relationships. Combined with structural mix tailwinds and various self-help gross margin countermeasures inherent to our strategy, we are highly confident in our ability to continue to adapt and execute as the tariff and broader inflationary backdrop continues to evolve. And lastly, before I turn it over to Dave, just a few thoughts as it relates to capital deployment and ongoing opportunities moving forward. Year-to-date, we've remained active, deploying over $300 million on share repurchases, M&A and growing our dividend. With regard to M&A, which remains a top priority and key element of our growth strategy, we are actively evaluating various targets across both our segments with our focus primarily on midsize and smaller tuck-in companies. While timing of M&A can vary quarter-to-quarter, I continue to believe the next 12 to 18 months will be more active period for Applied, given the work being done and as we continue to execute on our strategy. In that, I think it's important to reflect on the potential. Since 2018, we've closed 18 acquisitions, representing over $1 billion in acquired sales. This included key strategic acquisitions that expanded our engineered solutions capabilities into areas of flow control and automation as well as strengthened legacy positions in Fluid Power and within our service center network. Over that same period, we've grown EPS by 16% and free cash flow by 18% and on a compounded annual basis. I believe that flywheel position and approach to M&A is even stronger today, given the investments we've made in our team, processes and systems as well as the compelling value proposition we offer to many companies looking to join our leading technical industry position within a still fragmented industry. In addition to ongoing M&A activity, we remain proactive with share buybacks. Long term, we see significant value creation potential across supply, considering our strategic initiatives, industry position, exposure to secular growth tailwinds and margin expansion potential. When appropriate, we will continue to utilize share buybacks to enhance shareholder returns. And as indicated in our press release today, I'm pleased to announce our Board has approved a new authorization to repurchase up to 3 million shares. At this time, I'll turn it over to Dave for additional detail on our results and outlook.

Thanks, Neil, and good morning to everyone joining today. Just another reminder, our quarterly earnings presentation is available on our Investors site. We hope that you will find this a useful reference as we recap our most recent quarter performance and updated guidance. Turning now to our financial performance of the quarter consolidated sales increased 7.3% over the prior year quarter. Acquisitions and foreign currency were a modest tailwind in the period, adding 50 and 80 basis points of growth, respectively. The number of selling days in the quarter was consistent year-over-year. Metis factors, sales increased 6% on an organic basis. As it relates to pricing, we estimate the contribution of product pricing on year-over-year sales growth was approximately 250 basis points in the quarter, which was in line with our guidance and last quarter's trend. Netting this impact, we estimate volumes grew 3.5% over the prior year, a nice acceleration from the prior quarter. Moving to consolidated gross margin performance. As highlighted on Page 9 of the deck, gross margin of 30.4% and was relatively unchanged compared to the prior year level. During the quarter, we recognized LIFO expense of $5.6 million compared to $2.2 million in the prior year quarter. On a net basis, this resulted in an unfavorable 27 basis point year-over-year impact on gross margins. Excluding the LIFO headwind, gross margins improved year-over-year reflecting ongoing progress with our internal margin initiatives, price of T&O execution and more favorable mix. As it relates to our operating costs, selling, distribution and administrative expenses increased 7.5% compared to prior year levels. On an organic constant currency basis, SG&A expense was up 6% year-over-year. Our teams continue to drive strong cost discipline while also focusing on various efficiency initiatives tied to technology investments, shared services and sales tools. This helped offset ongoing inflationary headwinds and annual merit increases, higher incentives and ongoing growth investment into the business during the quarter. SG&A expense as a percentage of sales was at 19.4% and which was relatively unchanged from the prior year, but improved approximately 40 basis points sequentially. We saw cost leverage improve nicely through the quarter as sales growth strengthened. Overall, stronger organic sales growth, modest M&A contribution and favorable underlying gross margin performance resulted in reported EBITDA increasing 6.2% over the prior year. This is inclusive of greater LIFO expense year-over-year, which negatively impacted EBITDA growth by 2.3 percentage points compared to the prior year quarter. Reported EBITDA margin of 12.3% was down 13 basis points from the prior year level with year-over-year LIFO headwinds negatively impacting EBITDA margin by 27 basis points. EBITDA margins were in line with our third quarter guidance range of 12.2% to 12.4%. In addition, year-over-year EBITDA growth and EBITDA margin trends strengthened as the quarter progressed. Reported earnings per share of $2.65 in the third quarter increased 3.1% from prior year EPS of $2.57. On a year-over-year basis, was impacted by a higher tax rate and net interest expense, partially offset by a lower diluted share count. Results this quarter included $1.7 million or approximately $0.05 per share of nonroutine discrete tax expense related to prior year tax provision adjustments. We expect our tax rate in the fourth quarter to be within a range of $24.4 million to 24.6%. Turning now to sales performance by segment. As highlighted on Slides 10 and 11 of the presentation. Sales in our Service Center segment increased 4.2% year-over-year on an organic daily basis. This excludes 20 basis points of contribution from acquisitions and a positive 130 basis point impact from foreign currency translation. Organic sales growth was driven by stable price contribution and stronger volume growth across our U.S. service center operations, partially offset by softer international sales. Segment EBITDA increased 2.7% over the prior year, while segment EBITDA margin of 14.2% decreased 42 basis points. Year-over-year segment EBITDA and EBITDA margin trends were impacted by LIFO headwinds and higher employee-related costs, including incentives as well as a difficult prior year comparison. On a year-to-date basis, segment EBITDA growth of approximately 5% is slightly ahead of reported sales growth, while segment EBITDA margins are relatively unchanged year-over-year. Within our Engineered Solutions segment, sales increased 10.2% over the prior year quarter, with acquisitions contributing 90 basis points of growth. On an organic basis, segment sales increased 9.3% year-over-year, primarily reflecting strong volume growth across our fluid power and automation operations as well as improved growth across our flow control operations. Segment EBITDA increased 11.9% over the prior year or approximately 14% when excluding the impact of LIFO expense. In addition, segment EBITDA margin of 14% and was up 21 basis points from prior year levels, inclusive of a 50 basis point year-over-year LIFO headwind. The strong EBITDA growth and EBITDA margin performance in the quarter primarily reflect solid underlying incremental margins on stronger sales growth, firm gross margin performance and ongoing cost accountability. Moving to our cash flow performance. Cash generated from operating activities during the third quarter was $100.1 million, while free cash flow totaled $95.4 million, representing conversion of approximately 96% relative to net income. Compared to the prior year, free cash was down 8%, reflecting greater working capital investment in relation to stronger sales growth partially balanced by ongoing progress with internal initiatives. From a balance sheet perspective, we ended March with approximately $172 million of cash on hand and net leverage at 0.3x EBITDA. Our balance sheet remains in a solid position to support our capital deployment initiatives moving forward, including accretive M&A, dividend growth and share buybacks, during the third quarter, we repurchased over 346,000 shares for $93 million, bringing the year-to-date total to over 897,000 shares for $236 million. Turning now to our outlook. As indicated in today's press release and detailed on Page 14 of our presentation, we are tightening our full year fiscal 2026 guidance toward the high end of our prior range following our third quarter performance. We now project EPS within the range of $10.60 to $10.75 based on sales growth of 7.2% to 7.7%, including a 3.8% to 4.2% organic sales growth assumption as well as EBITDA margins of 12.3% to 12.4%. Previously, our guidance assumed EPS of $10.45 to $10.75 and on sales growth of 5.5% to 7%, including 2.5% to 4% on an organic basis and EBITDA margins of 12.2% to 12.4%, our updated guidance assumes a fiscal fourth quarter EPS range of $2.85 to $2.96 on organic sales growth of 4% to 5.5% year-over-year. as well as EBITDA margins in the range of 12.6% to 12.8%. We expect inorganic M&A sales contribution to be slightly lower sequentially in the fourth quarter as we anniversary our Iris factory automation acquisition at the beginning of May, combined with ongoing initial contribution from our Thomson Industrial Supply acquisition, which we announced last quarter. Our fourth quarter organic sales growth assumption takes into account more difficult prior year comparisons in May and June. In addition, while we are encouraged by the positive sales momentum developing we remain mindful of ongoing geopolitical developments and trade policy uncertainty, which may continue to influence customer spending behavior. As a result, we continue to assume a degree of variability persists across our end markets near term. Lastly, from a margin perspective, we expect fourth quarter gross margins to be relatively stable sequentially. This assumes slightly higher LIFO expense compared to the third quarter. With that, I will now turn the call back over to Neil for some final comments.

So as we prepare to close out fiscal 2026, we do so from a position of strength with several growth catalysts beginning to emerge across our business. As Dave highlighted, we remain prudent with our near-term assumptions and outlook as we are still navigating an evolving and dynamic market backdrop influenced by geopolitical and trade-related uncertainty. As we've seen over the past year, this could still present a choppy and uneven end market demand as customers continue to balance this complex landscape. That said, the trajectory of our sales and broader industrial macro indicators year-to-date in calendar 2026 are currently more indicative of an early end market recovery beginning to take shape, followed by a prolonged stagnant period of deferred maintenance and capital spending throughout the last 2 years. Business funnel and order momentum is sustaining positive trajectory, while technical MRO spending requirements are high, given aged manufacturing equipment across North America. As these trends progress, we expect customers to partner with larger, more capable providers like Applied, given our comprehensive solutions and technical service capabilities. At the same time, applied automation, growth is accelerating as adoption of cobots, mobile robots, machine vision and IoT solutions are increasingly viewed as need to have. We are also favorably positioned to benefit from multiyear growth tailwinds continuing to develop across our technology vertical, while our cross-selling initiative is gaining traction. So overall, the momentum is building in the right direction. Our teams are executing well. The industry and competitive position we've assembled is strong. We are excited about the opportunities in front of us and remain highly focused on translating our growing momentum into superior long-term shareholder value creation. With that, we'll open up the lines for your questions.

[Operator Instructions] Your first question comes from the line of Christopher Glynn with Omnicom.

I was curious if you may have mentioned a little bit, but wanted to at any rate, go a little deeper into the trends you're seeing with locals versus nationals. I'm guessing some of the sequential acceleration may have been led by the local accounts picking up some momentum, but I speculate.

Okay. So I can start so Chris, I'd say we saw good growth with both. So local accounts year-over-year were up 5% and versus 3.5% in Q2. But we also saw good growth in progress with national accounts, up 7% year-over-year. And versus the 4% that we saw in the second quarter.

Great. And then I also wanted to you got some really exciting things going on with automation and in the fluid power comparisons were so down. Flow Control has been kind of more of a narrower sign way trajectory, but clearly some broadening out there. Wondering if you could also kind of go down a layer or 2 into the flow control of the process arena.

Sure. So if you think about Flow Control, they benefited from the tech vertical segment. really 300 basis points to flow control in the side. In the quarter, they had 6%. So high single digit I mean, mid-single strong mid-single-digit growth. We also saw benefit in primary metals, general industry and energy and the utilities on the side. Chemicals would be the 1 that would be still down year-over-year, but the trend is improving on that front. So we're encouraged as we close the year and then move into the next fiscal year.

Okay. And just an interesting comment you made about, I think it was the automation side where kind of sales lead times and conversions were shortening up a bit. Are you seeing that as a trend on the process side as well?

Yes. That reference was really around customers moving from their projects moving faster. So when we're part of a larger project, we're seeing good speed there. And when we're providing productized solutions, it just seems more customers are interested in accelerating automation projects for what they can do for their productivity or ongoing quality assurance in their offering. So that is encouraging as well as the order rates and the backlog that we've been building. .

Your next question comes from the line of Ken Newman with KeyBanc Capital Market.

Maybe for the first question on Engineered Solutions, the operating leverage there seemed a little bit lighter than I would have expected, just given the 9% organic growth there. I know you guys are still kind of talking to mid-single-digit growth with mid- to high teens incremental margins on the EBITDA side. Maybe can you just talk about what we saw in the margins? How much of that was maybe driven by LIFO headwinds or mix? And then Dave Neil, if you want to talk about what you think about normalized operating leverage in just the ES segment alone as we go into fourth quarter and beyond.

So I think incrementals in the quarter for ES were 16% and ex LIFO more than 19% on that front. So we feel good about that performance in the side. Within that, within Flow Control, they had some projects that came in lower. But depending on the mix, that can be typical in the front. And then Ken, you'll recall, right, Hydradine to date really at fleet average for the company so under the Engineered Solutions average, but with continued focus and continued improvement. So we're well pleased on that front. So I think that's what we would see from the performance side Kenan, I just would add, I think through the quarter, we saw incremental margins and EBITDA margins in the segment on a year-over-year basis, strengthen as the top line strengthen as well. So overall, I'd say the results from the incremental margin and operating leverage standpoint were in line with our expectations and nice improvement as the quarter played out.

Got it. Okay. And then for the follow-up, it was really nice to hear about the orders within engineers being up double digits for the second straight quarter here. How should we think about the timing of those orders flowing through the P&L into fiscal '27? And I'm just curious how much conservatism might be built into this fourth quarter guide as it relates to what you're seeing from the order front?

So I think, one, we want to be prudent as we talked about, with a little bit of either trade policy moderations that could go on or some of the geopolitical. We are encouraged by the orders. We've talked about timing of the order conversion can vary. One is going to be around the complexity of the order and our engineering time. But also some of these projects are tied to overall customers' projects. So we're in a sequence of an overall project gain chart. So there are some that will go in a 60- to 90-day time period. There will be others that can extend out.

Okay if I could just squeeze 1 more in. Could you just remind us how big the step-up is in the May and June comps versus last year?

Yes. So compared to the May compared to April will be 200 basis points higher. And then the May time period or the June time period will be another step-up of 200. .

[Operator Instructions] Your next question comes from the line of Andrew Obin with Bank of America. Please go ahead.

Good morning. on, Andrew. Just maybe dig in on M&A environment because especially a big driver for value creation. Just maybe a little bit more color. Your M&A has been sort of slower post-COVID what are you seeing that encourages you because I think you've been constructive for a while, but we haven't seen a huge acceleration in the M&A activity. So what do you think is changing? Or what's remaining stable? And what would it take to sort of unlock the M&A potential.

Well, I think as we talked, I mean, we've got clear priorities that we're working in Engineered Solutions prospects or targets around fluid power, around flow control and automation good bolt-on opportunities as well as midsized companies and opportunities like Hydradine presented. And then we'll also have in the pipeline adjacency work that we could have or geographic around the service center side of the front. So we are active and engaged at various stages of the M&A process. So I think that's what builds. I think an improving environment may cause some of these companies to look at the opportunity as well. So I just gauge it by we've got clear priorities. I know where we're engaged, the level of the team's work in that I expect M&A to be a stronger contributor over the next 12 to 18 months.

And maybe a couple of markets that you highlighted as headwinds. And I think 1 of them was refining and chemicals, and I think you address chemicals and the other one, transportation. We've heard on sort of refining and chemicals that I think, generally do what's happening in Iran, people, global companies have sort of paused some of the spending, but the view is that it is going to come back in the second half of calendar particularly given what high prices are doing to profitability of North American assets. So that's question number one. And question number two, on transportation, are you guys going to be impacted positively if or when trucks come back?

Yes. So if I think about refining and chemicals, I could agree with the logic on second half improvement and activity there. I would also say, given our North American footprint and focus with the geopolitical in the Middle East, we are likely to see more activity occur in U.S., North America on those fronts. And I'd say, broadly across transportation, not our largest segment, but we will participate. So an improving environment would be good for us.

Your next question comes from the line of David Manthey with Baird. Please go ahead. .

Hi. Good morning. This is narcan hopping on for Dave this morning. Apologies if I missed this in the opening remarks. But for my first question, I know pricing can be imperfect to measure since you don't sell every SKU every year, but that caveat, can you give us your best framing of how the 6% organic growth this quarter is split between price and volume? And if price realization is tracking ahead of the 1% to 2% range.

We said pricing in the quarter was about 250 basis points we estimate based on the analysis where we do have like SKUs and extrapolating that that would indicate obviously about 350 basis point benefit from volume. That 250 basis points was consistent sequentially and in line with expectations in terms of pricing we expect kind of a Q4 guide assumes that to moderate just a bit, really a function of some of the year-over-year kind of tariff and other binary impact driven price increases that we saw in our Q4 prior year. So a nice contributor, but also a nice volume rebound as well in the quarter. .

Super helpful. And if you could provide an early April read on volume specifically through the first few weeks, that would be great too. You're seeing customers prebuy or pause given the dynamic policy environment. And Lastly, can you remind us and define what Applied specifically means to you today and how you're measuring progress internally?

Sure. We start with the what we're seeing in terms of volume month-to-date at high single digits. We're up did remind everybody that the comp does kind of the comparative steps up in May and June, about 200 basis points each month. So a little bit tougher comps as we move across the quarter. but encouraged by the start that we see kind of month to date. I'm sorry, the other part of the question?

I can take it. It was on 1 applied. And if you think about it from an end customer standpoint, there's really nothing moving inside of their facilities that our products, our services, our solutions are not a part of. So our service center teams have a great operating know-how of the customers moving equipment and that functionality and how the customers make money with uptime and production. And then from a 1 applied standpoint, we're supporting those plant operations with greater engineered solutions expertise, whether that be in fluid power systems, process flow control and now more on the discrete automation side as many look to utilize collaborative robots or mobile robots in their facility, vision systems for quality control and inspection and really more IoT or connectivity to pull performance data off that operating equipment within a facility or across multiple facilities. And so we see a growing capability or growing need of customers for that full utilization. And our teams are comfortable in doing this. We have a growing pipeline of projects and that we've touched on in the comments, really contributing over 100 basis points to the service center this quarter, and we expect that to continue to grow.

At this time, I'm showing we have no further questions. I'll now turn the call over to Mr. Schrimsher for any closing remarks.

I just want to thank everyone for joining us today, and we look forward to talking with you throughout the quarter.

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