管理層發言
Welcome to the Fiscal 2025 Fourth Quarter Earnings Call for Applied Industrial Technologies. My name is Carly, and I will be your conference operator for today's call. Please note that this conference is being recorded. I would now like to turn the call over to Ryan Cieslak, Director of Investor Relations and Treasury. Ryan, you may begin.
Okay. Thanks, Carly, and good morning to everyone on the call. This morning, we issued our earnings release and supplemental investor deck detailing our fourth 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, 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 fiscal 2026 guidance. I'll then close with some final thoughts. Before I discuss our fourth quarter results, I want to take a moment to acknowledge our Applied team. I'm extremely proud of what we accomplished in fiscal 2025 within a muted demand backdrop. We achieved new records for sales, EBITDA, and EPS. Full year EPS growth of 4% exceeded the high end of our initial guidance. Gross margins expanded nearly 50 basis points and surpassed 30% for the first time in our history. We also delivered another record year of cash generation that enabled meaningful capital deployment. This included the strategic acquisition of Hydradyne, our largest M&A transaction in six years. Overall, our performance in fiscal 2025 provides further evidence of our operating resiliency and value creation potential and builds on our compelling track record over the past five years. This includes compounded annual growth for EBITDA and EPS of 14% and 22%, respectively, as well as gross margins and EBITDA margins expanding 130 and 330 basis points, respectively. I'm honored to be a part of our incredible Applied team and the financial performance we continue to deliver. Our progress in fiscal 2025 ended on an encouraging note with several positive trends developing. Fourth quarter sales and EPS exceeded our expectations. Our team once again executed well against an ongoing muted end market backdrop. Sales exceeded the high end of our fourth quarter guidance by 2.5% and returned to modest positive organic growth. Underlying organic sales trends strengthened across both segments as the quarter progressed, average daily sales increased 4% sequentially, which was ahead of normal seasonal patterns for the first time in 10 quarters. Upside compared to our expectations was primarily driven by stronger-than-expected Engineered Solutions segment sales, which grew organically year-over-year for the first time in seven quarters. The segment's 2% organic daily sales increase was a notable improvement from mid-single-digit declines in recent quarters, with the underlying drivers encouraging on many fronts. Our ES teams capitalized on recent order strength as well as improving demand and business development efforts across several key growth verticals. This includes double-digit organic growth across our technology vertical and mid-single-digit organic growth across our automation platform during the quarter. Service Center segment trends were also encouraging, including exceeding normal seasonal patterns for the second straight quarter and returning to positive organic growth during the month of June. M&A sales contribution was also encouraging with progress continuing to develop at Hydradyne as well as initial contributions from our early May acquisition of IRIS Factory Automation. Taken together, our fourth quarter sales performance highlights solid execution combined with emerging growth tailwinds tied to our industry position and business pipeline. As it relates to underlying end market demand, trends remained relatively mixed during the quarter, though with some positive signs developing. Year-over-year trends across our top 30 end markets were relatively unchanged from last quarter, with 15 generating positive sales growth compared to 16 last quarter. Declines continued to cross several top markets, including machinery, primary metals, utility and energy, aggregates and chemicals. Consistent with prior quarters, declines were most pronounced across off-highway mobile and OEM verticals within our fluid power operations. This was offset by solid demand across our technology vertical, which we estimate contributed approximately 100 basis points to our consolidated organic growth rate during the quarter. Sales were also positive across pulp and paper, fabricated metals, food and beverage, and oil and gas verticals. Further, capital maintenance spending started to slowly pick up during the quarter within our service center network, while project activity across various process flow markets strengthened later in the quarter. In addition, orders in our Engineered Solutions segment increased by a high single-digit percent year-over-year during the quarter, adding to the positive inflection we've seen in recent quarters. This includes positive growth in industrial and mobile OEM fluid power orders, an encouraging sign following notable headwinds in this area of our business over the past year. During fiscal 2025, reduced sales from industrial and mobile OEM fluid power customers negatively impacted our consolidated organic year-over-year sales growth rate by approximately 100 basis points, as well as the Engineered Solutions segment organic growth rate by over 400 basis points. Overall, while end market visibility remains limited and mixed, we believe the underlying backdrop improved modestly from last quarter. In addition, based on our core indicators, including order momentum, business funnels and what we're hearing from our customers, we believe industrial activity and customer spending behavior are starting to pick up to some degree. It's also important to highlight the positive impact of our own initiatives and ongoing evolution are having. While our overall organic sales trends in fiscal 2025 were muted, average daily sales finished the full year down a modest 2%. This was directionally in line with the midpoint of our initial guidance despite a more challenging end market backdrop that was highly influenced by persistent uncertainty tied to the U.S. election, interest rates, and eventually shifts in trade policy. The negative impact to many of our legacy manufacturing end markets was evident as reflected in the ISM hitting one of the longest contractionary stretches as well as notable pressure we experienced in OEM and machine-related verticals. This also followed double-digit organic compounded sales growth in the prior three-year period. Considering this context, we believe our fiscal 2025 performance showcases the more durable and differentiated growth profile we continue to shape across Applied. Of note, our Service Center segment benefited from ongoing sales force productivity initiatives, technology investments, and increased cross-selling momentum, which helped balance softer MRO customer spending during the year. In addition, growth investments across our flow control and fluid power operations, as well as the ongoing expansion of our automation platform, have diversified our end market exposure and supported our Engineered Solutions segment. In particular, we benefited from encouraging growth tied to data centers, semiconductor manufacturing, new process infrastructure, advanced robotic solutions, and calibration services as the year played out. This helped offset acute weakness in our legacy off-highway mobile markets and drove a return to positive segment organic growth during the fourth quarter. At the same time, we continue to expand gross margins while maintaining cost discipline in fiscal 2025, which helped drive modest EBITDA and EPS growth for the year. When excluding the impact from acquisitions, we achieved 10% decremental margins on low single-digit organic sales decline. This is inclusive of ongoing growth investment and inflationary pressures throughout the year. During the fourth quarter, gross margins increased sequentially and were in line with our guidance. As previously highlighted, year-over-year gross margin trends were impacted by a difficult prior year comparison, partially reflecting a LIFO layer liquidation benefit last fourth quarter. This fourth quarter also included higher-than-expected AR provisioning, which held back EBITDA margins to some degree but is expected to normalize moving forward. Fiscal 2025 was also a year showcasing our cash generation and capital deployment capacity. We generated over $465 million of free cash, up 34% to a new record on both an absolute basis and as a percent of sales. Over the past three years, our business has generated a 40% compounded annual free cash growth, which has culminated in meaningful capital deployment, including over $560 million deployed in fiscal 2025. We accelerated capital deployment on M&A, closing four transactions in fiscal 2025, including the strategic acquisition of Hydradyne. Sales from acquisitions contributed over 400 basis points of inorganic growth in fiscal 2025, up 100 basis points from the prior year. At the same time, we were more active with share buybacks, repurchasing a total of 656,000 shares for $153 million, as well as increasing our quarterly dividend by 24%. We also continued to invest in technology platforms, distribution centers, and growth capacity. Overall, very compelling numbers that highlight the powerful flywheel effect of our operating model and strategy, including our consistency in generating elite levels of cash and shareholder returns long-term. As it relates to the evolving tariff backdrop, we continue to work closely with our suppliers as they manage through the dynamic backdrop and the impact on supply chains. As expected, we received a greater level of price increase notifications from our suppliers during the fourth quarter. Our teams are proactively and effectively managing through this, and in short, we remain highly confident in our ability to execute as the tariff backdrop continues to evolve. As a reminder, we have limited direct exposure to procuring products outside the U.S. We also have a strong track record of effectively managing inflation given our technical industry position, while structural mixed tailwinds in various self-help gross margin initiatives provide strong countermeasures. The overall price impact to our sales was limited in the fourth quarter, but we expect it to slowly increase moving forward as supplier price increases take effect. Next, I'd like to take a moment to provide some initial thoughts on our outlook as we enter fiscal 2026. First, we're highly focused on accelerating growth. We remain mindful of ongoing trade and interest rate policy uncertainty, which continues to impact broader demand visibility and could remain a gating factor to growth near-term. That said, when we consider the underlying fundamentals beneath this on both a secular and structural basis, we believe a productive demand environment should develop as policy clarity continues to emerge. Recent U.S. trade agreements with several primary trading partners are a welcome development. In addition, the recent passage of tax reform legislation, including accelerated depreciation incentives and the potential for a more favorable U.S. interest rate policy could recatalyze U.S. business sentiment and capital investment. While it remains early, we're encouraged to see positive sales momentum continue into early fiscal 2026 with first quarter organic sales to date up by an estimated 4% compared to prior year levels. Secular growth tailwinds also remain on firm footing. Our related exposure is high given our industry position, supporting U.S. manufacturing and deep technical knowledge of our customers' facilities. As macro and trade policy dynamics stabilize, we believe our customers' capital investment decisions will be active, given heightened considerations around reshoring. Technical service requirements will increase as break-fix MRO activity supports aged manufacturing equipment and as customers expand industrial production infrastructure across North America. Our service center segment is favorably positioned to benefit from these positive tailwinds. This could be particularly evident across heavy manufacturing, machinery, mining, metals, and aggregates given their break-fix intensive nature as well as potential incremental demand from U.S. trade and pro-growth policies. In addition, we expect additional benefits from technology investments, optimizing sales force productivity, and new business sourcing. We're also focused on increasing our growth with local customers through greater sales of ancillary products such as seals, material handling, fluid conveyance, chemicals, lubricants, and safety, as well as providing comprehensive service and repair solutions for their production assets. In addition, we're constructive on the growth opportunities developing across our Engineered Solutions segment considering ongoing positive order momentum and investments made in recent years. Underlying demand fundamentals are notable across key growth verticals including technology and discrete automation, which combined represent more than 25% of segment sales today. The ongoing build-out of data center and semiconductor infrastructure is expanding the addressable market for our fluid conveyance, flow control, and robotic solutions. We have a growing business pipeline tied to the emerging transition to electric-powered fluid power systems, where we expect to play a significant role given our leading engineering capabilities and supplier relationships. Combined with the required flow control infrastructure investments across the U.S., our Engineered Solutions segment is in a strong position to drive above-market organic sales growth moving forward. We also expect acquisitions to remain an important element of our growth potential, and we look to build on the M&A momentum we achieved in fiscal 2025. Our pipeline is developing nicely, and we expect to be active in fiscal 2026 as we continue our strategic expansion. The value of our scale, broad technical solution portfolio, engineering capabilities, strategic supplier relationships, and balance sheet capacity has never been stronger in our marketplace. Lastly, we're in a strong position to further expand margins as these growth tailwinds play out. Of note, structural mixed tailwinds should strengthen as sales recover across our Engineered Solutions segment and local customer accounts. We also have ongoing opportunities tied to pricing analytics, optimizing sales processes, utilizing AI, and expanding shared services while synergy benefits from our Hydradyne acquisition should ramp moving forward. Combined with leveraging recent growth investments and our scaling automation platform, we remain constructive on the EBITDA margin potential developing beyond our current intermediate target of 13%. At this time, I'll turn the call over to Dave for additional detail on our results and outlook.
Thanks, Neil. As a reminder, we have posted a supplemental presentation on our investor site for your reference. We hope you find it useful as we summarize our recent quarterly performance and provide initial fiscal 2026 guidance. Now, turning to our financial performance details for the quarter, consolidated sales rose 5.5% compared to the same quarter last year. Acquisitions added 6.5 points of growth, though this was partially offset by a negative impact of 40 basis points from foreign currency translation and 80 basis points from the difference in selling days. When accounting for these factors, sales increased by 20 basis points year-over-year on an organic daily basis, in contrast to a 3.1% decline in the third quarter. Regarding pricing, we estimate that product pricing positively affected year-over-year sales growth by over 100 basis points for the quarter, a slight increase from last quarter. Looking at consolidated gross margin performance, as noted in our presentation, the gross margin of 30.6% was down 9 basis points from last year's 30.7%, aligning with our guidance but up 15 basis points sequentially. We recognized LIFO expense of $2.9 million this quarter, a slight increase from the third quarter. In last year's fourth quarter, we had only $0.3 million in LIFO expense, which was positively impacted by a later liquidation benefit. Consequently, this resulted in an unfavorable 21 basis point year-over-year impact on gross margins this quarter, which was in line with our guidance. Excluding the negative effect of LIFO, gross margins improved compared to the previous year due to a favorable mix from our recent Hydradyne acquisition, ongoing channel execution, and benefits from our margin initiatives. However, this was tempered by mix challenges from reduced sales in local accounts and tougher comparisons against last year's higher-margin solution sales. The price-cost trends were relatively neutral in the quarter. In terms of operating costs, selling, distribution, and administrative expenses rose 10.5% compared to the prior year. On an organic constant currency basis, SD&A expense was up a modest 0.3% year-over-year. This included an unfavorable $4 million impact from higher accounts receivable provisioning, which we believe is more timing-related and expected to normalize moving forward. Our requirements for provisioning can vary by quarter based on several factors. Additionally, last year's fourth quarter benefited from an AR provision tied to recoveries achieved, reflecting our working capital initiatives and collection efforts. Our days sales outstanding trends remain favorable and stable compared to last year. The accounts receivable provision as a percentage of sales for fiscal 2025 was at the midpoint of our historical range. SD&A expense this quarter faced an unfavorable 80 basis point impact from increased deferred compensation costs year-over-year. It's important to note that changes in deferred compensation costs are primarily influenced by market values of related investments. There is a corresponding offset to these fluctuations reported below net interest and income. Excluding the AR provision impact and higher deferred compensation costs, we estimate SD&A expense on an organic constant currency basis declined by over 2% year-over-year due to efficiency gains and effective cost control. Encouraging sales growth trends and stable underlying gross margin performance were somewhat overshadowed by the unfavorable prior year LIFO comparison and increased AR provisioning this quarter, resulting in an EBITDA margin of 12.5%, which declined 73 basis points from the prior year level of 13.2%. This was modestly below our fourth quarter guidance of $12.6 million to $12.8 million, primarily due to the higher-than-expected AR provisioning, which was 20 to 30 basis points unfavorable to our guidance. Normalizing for the AR provision and excluding the LIFO impact, EBITDA margins would have remained largely unchanged year-over-year. Reported EBITDA of $153 million was at the high end of our guidance range, reflecting stronger sales trends in the quarter. Our reported earnings per share of $2.80 increased by 5.9% from last year's EPS of $2.64 and exceeded the high end of our guidance by nearly 5%. The year-over-year increase in EPS was helped by a lower effective tax rate and a reduced share count due to our buyback activity, though this was partially offset by higher interest and other expenses. Now, turning to segment performance, sales in our Service Center segment decreased 0.4% year-over-year on an organic daily basis. This excludes a 30 basis point contribution from acquisitions, an 80 basis point negative impact from the difference in selling days, and a 60 basis point negative impact from foreign currency translation. The organic sales decline was mainly due to subdued maintenance, repair, and operations spending, especially in international markets. However, the trend improved from last quarter's 1.6% organic decline. Sequentially, segment sales per day grew 1.5% from the third quarter, exceeding normal seasonal patterns for the second consecutive quarter. Growth remained positive across our national accounts, reflecting benefits from our internal initiatives such as sales force investments and cross-selling efforts. Segment trends were also buoyed by growth in Fluid Power MRO sales, particularly in our consumable vending and VMI offerings. Segment EBITDA declined 8.3% compared to last year, while segment EBITDA margin of 13.6% fell by 100 basis points. The year-over-year decline was mainly due to unfavorable AR provisioning, which negatively impacted segment EBITDA growth by approximately 300 basis points and segment EBITDA margin by 50 basis points for the quarter. Additionally, LIFO expense was approximately 100 basis points unfavorable to segment EBITDA growth or 15 basis points to EBITDA margin, largely due to the prior year's liquidation benefit. Also, higher deferred compensation costs reported in the Service Center segment caused an unfavorable 20 basis point year-over-year impact on segment EBITDA margin. On an annual basis, our Service Center segment demonstrated solid margin and cost control performance, with operating expenses per day declining 1% on an organic basis and EBITDA margins slightly up against a low single-digit sales decline. In our Engineered Solutions segment, sales rose 20.7% year-over-year, with acquisitions contributing 19.7 points to this increase. On an organic daily basis, after adjusting for the difference in selling days, segment sales increased by 1.8% year-over-year. The year-over-year growth was primarily driven by strong growth in our Fluid Power pneumatic and conveyance solutions for technology verticals, as well as growth in our flow control business. Organic sales in our automation operations saw mid-single-digit increases over the prior year, benefiting from easier comparisons. The section’s sales performance improved significantly, with two-year trends enhancing across all primary business units, reflecting strong execution along with recent order demand. However, the improved automation growth performance was partially offset by ongoing weakness in mobile fluid power OEM markets, although the year-over-year decline eased from the previous quarter. Segment EBITDA grew 13.5% over the prior year due to effects from the Hydradyne acquisition and effective cost management. However, segment EBITDA margin of 14.8% was roughly 90 basis points lower than last year's levels, impacted by several dynamics. Notably, the previous year's fourth quarter segment EBITDA margin of nearly 16% was elevated, benefiting from strong mix tailwinds from higher Engineered Solutions sales. It's worth noting that Hydradyne's impact flows through at a lower EBITDA margin than the segment's average, creating a 60 basis point year-over-year headwind this quarter, while LIFO negatively impacted by 30 basis points from last year. The Hydradyne EBITDA margin mix impact improved compared to last quarter with expectations for further positive trends moving forward as we continue with our integration and synergy plans. Additionally, Hydradyne’s EBITDA contribution this quarter rose by over 30% sequentially from the third quarter, contrasting with a 12% sequential increase in sales contribution. Annually, our Engineered Solutions segment showed solid underlying margin and cost control performance for fiscal 2025, with segment operating expenses per day down 5% and segment EBITDA margins up roughly 40 basis points against a 4% organic decline in average daily sales. Regarding cash flow, operating activities generated $147 million in the fourth quarter, while free cash flow amounted to $138.2 million or 128% of net income. For the full year, we achieved free cash flow of $465.2 million or 118% of net income, up 34% due to more moderate working capital investment compared to the prior year, along with ongoing progress in internal initiatives and an enhanced margin profile. On the balance sheet front, we ended June with about $388 million in cash and a net leverage ratio of 0.3x EBITDA, which is up from 0.2x the previous year but down slightly from last quarter. In summary, our balance sheet remains strong, able to support our capital deployment plans moving forward. Turning to our outlook detailed in the presentation, we are setting full-year fiscal 2026 guidance with an EPS range of $10 to $10.75 based on assumptions for total sales to rise by 4% to 7%, which includes 1% to 4% growth on an organic basis, along with EBITDA margins expected to be between 12.2% to 12.5%. Our outlook considers sales trends through mid-August and incorporates ongoing economic uncertainty. At the midpoint of guidance, we anticipate that tariff and interest rate uncertainties will continue to influence end market demand in the first half of the year, followed by more favorable trends in the second half. This guidance also assumes 150 to 200 basis points of year-over-year sales growth contribution from pricing, alongside ongoing inflationary pressures and growth investments. We expect growth from previously completed acquisitions to add about 300 basis points to sales growth in fiscal 2026, including around 600 basis points in the first half, largely driven by two quarters of contributions from Hydradyne, which closed at the end of December 2025. This guidance does not factor in contributions from future acquisitions or share buybacks. Based on quarter-to-date sales trends through mid-August and prior year comparisons, we currently project that fiscal first quarter organic daily sales will increase by a low single-digit percentage compared to the same period last year. Our guidance also projects fiscal first quarter EBITDA margins to be between 11.9% to 12.1%. Margin and cost assumptions include ongoing inflationary pressures and growth investments, along with $14 million to $18 million in LIFO expenses. We anticipate stronger year-over-year EBITDA margin trends in the second half of the year as expenses leverage more effectively, driven by Hydradyne synergies and easier year-over-year comparisons. Finally, we expect free cash generation to remain robust in fiscal 2026, but potentially trend lower year-over-year due to increased working capital investment associated with enhanced demand and growth opportunities. We also foresee continued organic investments aligning with our strategic initiatives and technology investments, with capital expenditures projected between $30 million and $35 million for fiscal 2026. With that, I will turn the call back over to Neil for closing remarks.
So to wrap up, fiscal 2025 was another meaningful year for Applied. We executed well in a slower demand environment while positioning the company for long-term success through several acquisitions and internal growth investments. The year culminated in significant capital deployment, enhancing our long-term earnings power while continuing to drive strong shareholder returns. Our market cap today exceeds $10 billion and we've delivered total shareholder returns that have more than doubled primary market benchmarks over the past 3 and 5 years. A strong testament to the power of the Applied team and our differentiated strategy. Moving into fiscal 2026, we're encouraged by recent sales momentum, which could accelerate given the underpinnings of various secular tailwinds and deferred customer spending over the past 18 months. That said, we're taking a prudent approach to our initial outlook pending greater clarity on trade policy, interest rates, and broader macro conditions. Our track record shows we can manage through various macro and trade scenarios as they develop and have company-specific growth and margin tailwinds that could strengthen into fiscal 2026. In addition, we expect to remain active in M&A, share buybacks, and dividend growth. And lastly, our technical industry position, manufacturing domain expertise, and aligned strategy provide a compelling long-term growth and margin expansion opportunity as various secular and structural tailwinds continue to develop across the U.S. industrial economy. We believe this backdrop, combined with our compounding cash generation algorithm and balance sheet capacity, supports double-digit compounded earnings and dividend growth long-term. We look forward to building on our performance in fiscal 2026 and beyond as our evolution continues to unfold. With that, we'll open up the lines for your questions.
分析師問答
Your first question comes from the line of Christopher Glynn with Oppenheimer.
I had a couple. Just first on Hydradyne, you talked about 12% sequential sales growth and 30% EBITDA. I don't know if that reflected integration costs that you incurred in the third quarter that diminished in the fourth? Or just wanted to dimensionalize that a little bit.
I think it's a combination. Relatively similar integration costs, if I think about Q3 versus Q4, Chris. So what it really points to is the leverage that we saw on the SD&A falling through to EBITDA. The stronger margin performance is obviously a contributing factor there, as well as very pleased with the progress we've made to date in terms of quicker realization of synergy benefits. So we're actually ahead of where we anticipated at this point in terms of synergy realization and continue to work that angle. So really all those factors combined, I'd say the integration costs quarter-over-quarter didn't play heavily into that improvement.
I would say, as we thought about synergies going in, we said roughly 80% from cost and margin and as well as 20% sales opportunity. And to Dave's point, we're pleased on both, including the interaction with the teams and the cross-selling opportunities, especially in service and repair opportunities throughout that Southeast geography as well as things that we can do in key growth verticals around data centers and the technology segment. So pleased about the performance and our start, and look forward to continuing that momentum.
Great. And then just on the market for kind of break-fix MRO and idea of any kind of pent-up coming through. It sounds like you might be starting to see some of that with the national accounts, but not so much with the locals. So another thing just asking to dimensionalize a bit.
Yes. So as we look at breakdown the sales, we were pleased in the last month on local accounts being positive as well as SA in the month of July. So I think that's a good indicator that things could be firming and build from here.
Okay. Great. And then just the midpoint of the year doesn't have any acceleration versus the first quarter at all, but you do have easy comps. I know there's a little shift when you get to the fourth quarter. And then the ADS halfway through the quarter, really outpacing the outlook. You referenced comps. I don't know if there's a major kind of hockey stick in the September comp a little bit. But is there just a couple of layers of prophylactic caution in there with potential month-to-month volatility around behaviors? Is that how we should think about the guide?
Yes, there was an increase in the previous September. Overall, Chris, we believe it’s wise to adopt a prudent approach given the macroeconomic factors, and we expect some stability as we progress through the summer months. This influences our strategy to be cautious in our guidance and in the details we share regarding the first quarter.
My first question is related to pricing. I think you mentioned 100 basis points for the quarter and an expectation that it would gradually increase. If you could clarify, could you provide more specific details about what portion of the price benefit is included in the first quarter guidance and the overall outlook for 2026?
Yes. I would say, Dave, for the first quarter, I would say, to be similar, and we talked about a little over 100 basis points in the quarter. So in the first quarter, similar. But with the expectations that it ramps as we move through the year in the perhaps 150 to 200 basis points as we look at all of fiscal '26. And if the demand environment is strong and there's additional supplier inflation and increases of that, perhaps it will be higher than that number for '26.
Okay. Got it. And second, ES trends looking really good. You mentioned technology and automation. First question, and then I've got one after that. But could you give us examples of when you say technology as a vertical, can you talk about what you mean by that as an area you're seeing growth today?
Yes. So that would include the data center. It would include semiconductor manufacturing in the side. So I think those would be the most significant components of that tech vertical. And we're broadening our participation. And so we've historically had a strong presence with Fluid Power. But today, we're doing more with fluid conveyance and also our automation business participates in that vertical well.
Okay. Regarding automation, which you mentioned grew in the mid-single digits, you noted an increase in applications within data centers and technology sectors. In relation to the overall ES, are you perceiving any benefits? Is the discussion around the bonus depreciation primarily concerning flow control, which appears to be on the higher end? Any insights you can share about this would be valuable, especially since you've mentioned some growth tailwinds, and I'm curious if this is one of them being discussed.
And so as we think about where the businesses participate even in automation doing well in some other segments, be it food and beverage, life science, and pharma, I would say, yes. We have a full pipeline of projects with customers. They have great return profiles. We've talked about in prior quarters, perhaps the approval process of those had elongated while still strong returns. And our view of customers are in a very good cash position. I think the opportunity for accelerated depreciation on those will be a further stimulus of those projects being acted and converted. So as we look out over '26, that could be a positive development for our pipeline.
So maybe the first one, Neil, I just wanted to go back to the low end of the full year organic sales growth guide. I think it kind of implies that volumes at the low end are kind of assuming down 50 basis points year-over-year organic on what's a pretty easy comp throughout the entire year. I guess the question is you're assuming 1% to 2% of price contribution outside of maybe the timing of comps in the first quarter that you talked about, is there anything else structural that's kind of assumed within that low end of the guide or anything that we should kind of be aware of?
I think, again, Ken, as we think about the full range of the guide, including the low end, we just want to be prudent in the approach given still some of the uncertainty that would be out. If we think about more the midpoint, that's going to assume some headwinds continue on the macro and the tariff environment and some of that uncertainty in the first half and then with those headwinds abating somewhat into the second half. And so that's when more of the approach and the consideration going in.
And then for my follow-up, maybe just help us fine-tune the comments about normalizing LIFO and AR provisioning through the year by segment. Obviously, ES EBIT margins kind of took a bigger hit sequentially year-over-year. I think part of that was the AR provisioning and Hydradyne mix. How should we think about segment margins implied at the midpoint of the 1Q guide and how that trends through the rest of the year?
Yes, I want to clarify our Q4. Most of the accounts receivable provisioning was more focused on the U.S. service centers rather than the engineered solutions. This is a systematic process influenced by various factors like credit ratings and aging balances. I don't see any serious issues here. We had a few customers who were delayed in their payments. Looking back, our days sales outstanding have remained stable, and our provisioning as a percentage of sales this year was right around the average of the past five years. We've made good progress in our initiatives that have improved past dues, although some of those delays were concentrated in the first couple of weeks of July, so we expect things to normalize. Regarding EBITDA margins, the service centers were affected last quarter due to deferred compensation mark-to-market adjustments, which were offset in other income and expenses, distorting the figures. I expect margins to stabilize as we approach 2026, and the LIFO adjustments will proportionately reflect in our results. We'll also continue to benefit from improvements in the Hydradyne mix and reduce the drag on the Engineered Solutions segment's EBITDA margins as we realize synergies that are coming faster than we expected, showing positive progress.
Yes. Ken, I'd just add, if we think about the quarter-over-quarter comparison, I mean if we reflect back last fourth quarter in Engineered Solutions, I mean, it was really strong, 16% record high. We benefited from strong mix of solutions going across. So I think that demonstrates the strong potential to Dave's point on Hydradyne. We're pleased with the progress but he touched on or talked about the 60 basis point headwind in EBITDA margins there. So if we think about the potential around Engineered Solutions on the full year, we were very cost accountable and OpEx and expense down 5% into that side, but with EBITDA margins up on lower organic daily sales of 4% in that side. So as we see an inflection coming in growth and that opportunity, we feel like, hey, we're well positioned.
The noise from Q4 really skewed some of the stronger underlying performance, particularly regarding AR provisioning, which I believe will improve as we move into 2026, along with the deferred compensation impact. If we look at last year's performance, Q4 was the only quarter that started with gross margins in the 30s; all others began below 30%. Last year, we had a comp of 30.7% for that quarter, which was quite challenging. Even considering the LIFO adjustments we made this quarter compared to the favorable conditions last year, being just 9 basis points off that was a solid outcome.
Your next question comes from Sabrina Abrams with Bank of America.
You guys have given some helpful color on Hydradyne but maybe I guess what I'm just going to ask, could you disclose, I guess, Hydradyne contribution in dollars to EBITDA in the quarter? And maybe any color from either an EBITDA or EPS standpoint, what's in fiscal '26 guide?
In Q4, Hydradyne contributed just over $7 million of EBITDA, just to help frame it up. If we all-in factor and some lost interest income from financing that deal with cash on hand, about $0.03 contribution. We had said at the time of announcing the deal, we would expect to be $0.15 accretive to EPS in the first 12 months. So really right on track there when you think about still some integration costs at play. We have not framed up necessarily kind of that impact on '26. But here again, like the traction in terms of running ahead on expectations on the cost synergies as well as the kind of the traction that we are seeing on cross-selling. So I would expect it to certainly meet those first 12 months expectations as kind of frame it up as at least a guide for you, if not potentially beat that initial expectation we set for the first 12 months.
That's very helpful. For my second question, could you provide some details? I know there was some mention of LIFO in 2026, but could you share the amount of LIFO expense included in your guidance, either in dollars or basis points? Additionally, are there any other factors we should consider aside from organic increments as we examine the fiscal 2026 margin guidance?
We estimate LIFO between $14 million and $18 million in our guidance. This figure is influenced by inflationary increases affecting indices and inventory levels, which ties in with the pricing and inflationary impacts we are observing.
And then, Sabrina, I'd say on incrementals, at the midpoint, which would be 2.5% growth, we talked about low teens incrementals that includes M&A mix coming in lower in the side, some ongoing growth investments that we'll make into the business. And to Dave's point, that range of LIFO that we laid out. More at the higher end, we'd expect mid-teen incrementals of EBITDA margin on that. So when we think about the outlook, again, we just want to be prudent in the approach. But if we consider the business incrementals ex-M&A and ex-LIFO at the midpoint of our guidance, that's a high-teen incremental, which I think talks to our views, our outlook as we think about year ahead and ongoing business capabilities.
Your next question comes from Chris Dankert with Loop Capital Markets.
I guess just to hold on ES for a second here, fourth quarter, as you mentioned in the remarks, up well ahead of typical seasonality in the fourth quarter. Just wanted to ask, do you feel like there was anything pulled forward or anything one-time in nature that came in, in the fourth quarter? Or is that a fairly clean kind of growth figure you think?
Chris, I would say, hey, no big pull forward, did a nice job recognizing some of that order conversion that we had in doing it. I think is kind of normal as we move through to close the fourth quarter. Sequentially, backlog would be down a little bit. Book-to-bill slightly below 1 into the side, but this year is higher than the prior year in that. And then as we look forward at the start of the year, we're encouraged by the order rates around engineered solutions. So we feel like we've got a very good pipeline to work on and execute across fluid power, flow control, and our automation businesses.
Got it. Super, super helpful there. And I guess just as a follow-up, you mentioned some softness in the international markets. Is that principally the Mexico market? Is it the domestic headwinds we've heard about there? Or is it something else going on? And I guess, does that impact kind of what you're seeing at the Grupo Kopar? Any color there would be great.
Yes, Chris, I'd say more related maybe in Canada. And I think there's just a settling out of some tariff impact and what it means for flows of products but also in-country Canadian business industry of that. We feel like business is doing a very nice job. We're well diversified into that segment. But I'd say a little more in Canada than the other geographies.
Those headwinds did lessen as we moved across the quarter, which was encouraging.
I just had one quick follow-up, more higher level. Neil and Dave, just curious, what's the thought on potentially kind of maybe adding back some of this intangible amort to the earnings power? It seems like obviously, Hydradyne was pretty solid for EBITDA and despite some of the negative mix in this part of the cycle. But I wonder how much you are maybe getting negatively comped just because some of your peers do add that back and your thoughts on potentially kind of normalizing that to make the earnings power apples-to-apples.
I'd say I think we're pretty transparent in terms of the way we break it out. And I'd prefer to kind of maintain the approach of being consistent there and just continue to break it out so you've got that visibility. I mean, to your point, a headline read would maybe skew things. But our focus is on continuing to improve it and make it not a talking point, right? And I think we're hard at work at that with the synergy realization we've seen and driving that cross-selling.
At this time, I'm showing we have no further questions. I'll now turn the call back over to Mr. Schrimsher for any closing remarks.
I just want to thank everyone for being with us today. We look forward to talking with you throughout the quarter. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.