EPAC - NYSE

Ladies and gentlemen, thank you for standing by. Welcome to Enerpac Tool Group's First Quarter Fiscal 2025 Earnings Conference Call. As a reminder, this conference is being recorded December 19, 2024. It is now my pleasure to turn the conference over to Travis Williams, Senior Director of Investor Relations. Please go ahead, Mr. Williams.

Thank you, operator. Good morning, and thank you for joining us for Enerpac Tool Group's first quarter fiscal 2025 earnings call. On the call today to present the company's results are Paul Sternlieb, President and Chief Executive Officer; and Darren Kozik, Chief Financial Officer. The slides referenced on today's call are available on the Investor Relations section of the company's website, which you can download and follow along. A recording of today's call will also be made available on our website. Today's call will reference non-GAAP measures. You can find a reconciliation of GAAP to non-GAAP measures in the press release issued yesterday. Our comments will also include forward-looking statements that are subject to business risks that could cause actual results to be materially different. Those risks include matters noted in our latest SEC filings. Now, I will turn it over to Paul.

Thanks, Travis, and good morning. I'd like to welcome Darren to his first Enerpac earnings call. He's been on Board as our CFO for nearly two months and he's coming up to speed very quickly. We're thrilled to have him on the team. And now, switching to the quarter and beyond. We enter fiscal 2025 mindful of a continued sluggish industrial macro environment as evidenced by persistently weak manufacturing PMI and industrial production trends you can see on Slide 3. While we saw a decline in the Americas region of our Industrial Tools & Services business due to these challenging market conditions, we were pleased to report sales growth across Enerpac's two other geographic regions and at Cortland Biomedical. Overall, we believe Enerpac can continue to outperform the market given our global brand leadership, targeted growth strategy, customer-driven innovation and continuous improvement process to enhance operational efficiency and productivity. In light of the global macro situation, we are actively monitoring costs in the short term to ensure our cost structure aligns with business conditions. We also have a detailed strategy that will enable us to continue to enhance profitability on a longer-term basis, which I will speak to in a moment. In the meantime, I'll turn the call over to Darren to elaborate on our financial performance in the quarter.

Thanks, Paul. As seen on Slide 4, Enerpac's total revenue increased 2.3% in the first quarter of 2025. At our IT&S business, revenue increased 2.3% year-over-year with a 1% decline in organic sales. The slight decline in organic sales was comprised of a 5.6% increase in service revenue, offset by a 3% decrease in product sales. Paul will speak about the regional performance later in the call. Results for the first quarter included nearly a full quarter of revenue from DTA, an acquisition we closed on September 4th. In the quarter, we made solid progress in integration and delivered more than $3 million in revenue and $5 million in order volume. We are excited about the combination of DTA with our Heavy Lifting Technology, or HLT, business, and expect growth benefits as we expand DTA sales beyond Europe by leveraging Enerpac's global commercial network. Therefore, we are maintaining our expectation of a full year 2025 sales of €20 million from DTA. At Cortland Biomedical, reported in our other segment, we generated another quarter of growth with a year-over-year revenue increase of 2.6%. Turning to Slide 5. Gross profit margin declined 90 basis points year-over-year to 51.4%. This was primarily due to lower sales in the Americas, a higher percentage of service revenue, and a return to normalized margins at Cortland, which remains accretive to Enerpac's overall performance. Adjusted SG&A held flat at 29% of revenue despite the inclusion of DTA, reflecting our ability to manage our cost base. We will continue to monitor costs closely in the second quarter given the environment. Adjusted EBITDA margins declined 100 basis points in the first quarter of 2025 due to the gross margin discussed and the inclusion of DTA. Adjusted earnings per share were $0.40 for the first quarter of 2025 compared with $0.39 in the year-ago period, a 3% increase. The effective tax rate was nearly flat at 22% compared with 21.9% in the year-ago period. Turning to the balance sheet, shown on Slide 6, Enerpac's position remains extremely strong. Net debt was $63 million, resulting in net-debt leverage of 0.5 times adjusted EBITDA at the end of the first quarter. Total liquidity was $529 million. In the quarter, free cash flow improved $11 million from the prior-year period as a result of higher net earnings and lower annual incentive compensation payments, which more than offset the increased CapEx related to our upcoming headquarter relocation. We remain very excited about the move and the benefits it will have for the company. As we continue to generate cash, coupled with our current leverage, we have the needed capacity to deploy capital for a disciplined M&A strategy as well as internal investments and continued opportunistic share repurchases. With that, let me turn it back to Paul to discuss our commercial performance by region.

Thanks, Darren. On a geographic basis, as seen on Slide 7, we were encouraged by our performance in the EMEA region, which continued to generate positive year-over-year growth against tough comparisons despite the macro pressures in Germany and France, which are two of our largest economies in the region. We enjoyed particular strength in the wind market with a bright outlook given an array of projects in the pipeline. Service revenue also remained strong, driven by petrochemical markets and power generation, particularly in nuclear. In the Asia Pacific region, we were pleased to see a return to year-over-year growth with a sales gain in the mid-single-digits. While Australia continues to be soft, mainly due to depressed conditions in the mining industry, the rest of the region is experiencing solid trends. For the full year, we continue to anticipate growth in the Asia Pacific region. In our largest market, the Americas, the environment remains cautious, which is reflected in our results this quarter. While we are seeing gains in Heavy Lifting Technology, or HLT, and services, sales of our standard industrial tool products were weaker in the quarter with many customers sticking to a wait-and-see posture. With inventories in line, we are cautiously optimistic that clarity on the direction of interest rates and policies from the new administration will create a more positive demand environment in the coming months. In the meantime, we are enjoying a favorable market response to our new products, including our line of battery torque wrenches, battery-powered pumps and hydraulic pullers. In addition, we continue to focus on our sales funnel management utilizing Enerpac Commercial Excellence, or ECX. For the second consecutive quarter, Cortland posted year-over-year revenue growth and remains on track to generate growth for the full year with the benefit of several new products. Turning to Slide 8, last quarter, we introduced Powering Enerpac Performance, or PEP, our continuous improvement program which will propel our goal of capturing further profitable growth and margin improvement. Overall, we're focused on continued standardization and simplification of processes, ensuring best practices are consistently applied across the organization. Let me drill down on some specific opportunities. On the gross profit line, we have several levers, including increasing lean conversion and kaizen activity in our facilities, value engineering and ongoing SKU rationalization, just to name a few. But perhaps our most significant near-term opportunity is on the sourcing side. Under our new Vice President of Sourcing and our Strategic Sourcing initiative, we are optimizing and rationalizing our supply base. At the start of the ASCEND program in 2022, Enerpac was sourcing from more than 6,000 suppliers. Through the application of 80/20, we've been able to reduce that to fewer than 5,000 today, and our goal is to drive further reductions in the supply base to leverage our buying power and focus our spend with supply partners who can support our needs most effectively and provide the best cost, quality and delivery. On the SG&A expense line, we've already made tremendous progress toward our goal of being best-in-class as a percent of revenue. Over the past three fiscal years, we've reduced adjusted SG&A as a percent of sales by approximately 650 basis points. For example, we have derived a significant benefit from offshoring of transactional processing and certain finance, IT and human resource functions. But moving labor to lower-cost regions is just the start. We're now embarking on the next phase, which is to simplify, standardize and ultimately automate key processes. And Darren's experience in managing shared service center operations will be a tremendous asset as we add additional functions and optimize the performance of our offshore operations. Since we announced the rounding out of Enerpac's leadership, including the recent additions of Darren and Eric Chack, our Executive Vice President of Operations, we have held our Annual Global Leadership Conference. This was a great opportunity to conduct a deep review of our growth strategy, evaluate challenges and opportunities and generate key action plans to pursue in fiscal 2025 and beyond. I believe we have the right people and strategy to succeed in any environment. Moreover, we were pleased to see yet another year of improving employee engagement scores, which I believe is a reflection of our winning culture that has been embraced across the organization. With that, we'd be happy to take questions.

Thank you. The floor is now open for questions. [Operator Instructions] Your first question comes from the line of Tom Hayes of CL King. Your line is open.

Good morning, guys.

Good morning, Tom.

Good morning.

Hey, Paul, I was just wondering, I think when we spoke on the fourth quarter and you called it out today, obviously, the industrial environment is a little bit weaker and continues to be weaker. I was just wondering, obviously you guys don't provide quarterly guidance, but did 1Q play out generally as you had expected. Is there anything maybe positive that you saw in the quarter besides pretty strong results?

Yeah, thanks for the question, Tom. I think as we mentioned in our remarks on the call, it played out pretty much as we expected, frankly. I mean, we knew it was a tougher comp lapping Q1 of fiscal '24, and obviously just the environment that we're seeing. So, we suspected it was going to be a little bit more challenging here, certainly in Q1, our expectations are, at this point, built into our guidance essentially for the rest of the year for better top-line performance. And I think we're optimistic just given the things that we referenced on the call around some of the potential new policies from new administration, and also just frankly, what we hear in terms of latest, I'll call it, voice of customer research from our customers and our channel partners even over the last week or two. There's, I'd say, a fair amount of optimism. I mean, certainly that has to ultimately translate into demand and orders, but I think people are relatively hopeful about what to expect in calendar '25. So -- but yeah, really, Q1 played out essentially as expected for us.

Great. And kind of an offshoot that you mentioned a little bit of that. With the change in administration and the talk of tariffs, I think you make a good percentage of products here in the U.S., but any early thoughts on the talk of tariffs with China and Mexico and any potential impact for you guys?

Yeah, sure. We do make -- we are global manufacturer, but our largest facility is here in the U.S., actually in Wisconsin. So, I think generally speaking, I'd say, Enerpac is probably in a relatively favorable position when it comes to the impact of -- or potential impact of any new tariffs. Just for reference, imports from Canada and Mexico into the U.S. for us are negligible. And then, from a China perspective, on a direct basis, I would estimate that our products and components imported from China into the U.S. represents less than $20 million of value. So certainly, not zero, but something we're able to deal with effectively, something we did deal with in the first Trump administration years ago. I think we've got a good playbook to work with that from a cost perspective, from a dual-sourcing perspective and also certainly price if that's needed. So, it's not nothing, but I wouldn't say it's hugely impactful given that dollar value for us.

Okay. Appreciate it. Maybe one or two more. Kind of shifting gears a little bit on the geographic front. Happy to see that the up low-single-digits on the EMEA. I was just wondering -- I mean, we continue to hear about challenging business environments, especially in Germany. I think you called out as one of your larger segments. Just any other color? You seem to be kind of outperforming the market there. Just any thoughts on your EMEA performance?

Yeah. I mean, we do continue to be pleased. We had good performance in Q4 in EMEA and even here in Q1, relatively stronger performance certainly versus the Americas. And I think the market conditions have been more challenging more recently. I mean, we can see that in the macro data, as we referenced, particularly in Germany and France. But I think we are -- we believe with a good degree of confidence, we are continuing to gain share there just based on the execution of our commercial strategies, our growth strategies in the region, some of the key leadership and people changes we've made, which are having great effect there, some of the process changes again we've made commercially, and I think some of the success, frankly, that we're seeing with our new product rollout in the region. So, we're pleased again with the progress that we're seeing in EMEA, even I'd say in a tougher macro environment.

Okay. Appreciate that. Maybe just lastly on the services business, kind of a two-part question. You continue to kind of call out or put up good year-over-year organic growth in the services business. I guess, one, what do you attribute those drivers to? And two, I think you called it out as maybe a drag on overall margins. I apologize if I got that wrong, but just, is there a pathway to get that to more of a company-wide or a products margin? Just any thoughts on that? Appreciate it. Thank you.

Yeah. No, absolutely. So, yeah, I think we have seen certainly services here in the short-term outperforming from a growth perspective. And probably not hugely surprising. I mean, service revenue can outpace product because it is in service more or tied, I would say, to regularly scheduled maintenance as opposed to kind of some of our product business that can be more linked to project work or sometimes CapEx investments. So, I think the service business does tend to be a bit more steady and helps offset some of the weaknesses we see from time to time in the product business. Over the longer term, however, I'd say we'd expect to see product growth outpace service just as we continue to execute on our four-pillar growth strategy that is still primarily focused on share gains on the product side of the business. From a margin perspective in service, you may recall, service is about 20% of our revenue. About half of the service business is our rental business where we have a fleet of assets that we rent out to customers. And that is pretty good margin for us. But the other half of it is essentially a labor or manpower business, where we're performing specialty work for customers at their sites utilizing our tools and assets. And while we tend to be a premium player under the hydro-type brand in that space, there still are ceilings on labor rates, just practically speaking. So that part of our service business does tend to be generally margin dilutive. But having said that, we do continue to see a path to continue to improve margins overall on service, certainly through continued operational execution and efficiency gains, but also I'd say, continued focus on more differentiation on the kinds of service lines that we offer and the kinds of project business that we pursue in that region. And as you may recall, probably a year or so ago, we did make an active choice through 80/20 to actually walk away effectively from some relatively lower-quality, lower-margin service business, particularly in the Middle East region, and we'll continue to look at that opportunistically. But I think we still see levers of opportunity for margin improvement in service.

Great. Appreciate the color. Thank you.

Thanks, Tom.

Your next question comes from the line of Ross Sparenblek of William Blair. Your line is open. Ross, your line is on mute.

Good morning, guys. Can you hear me?

Good morning, Ross.

Good morning, Ross.

Apologies. Yeah, I was on mute. Forgive me, maybe I missed it, but anything on pricing within the U.S. in the quarter and kind of what you're seeing more globally?

Sure. Yeah, so as a general rule of thumb, I mean, we're always evaluating our price positioning. As you know, we tend to be the a premium or the premium player in our space for most of where we're positioned. And generally speaking, we would look to take price increases either one to two times a year to at least recover or at least -- recover, over recover from any inflationary costs that we see. And we are still, I remind folks, in an inflationary environment as we can see in the data. And in fact, we actually just announced around the price increases in both the Americas and our EMEA region that will be effective at the beginning of January. It's a very low-single-digits, but that's pretty typical in the norm for us. And certainly, we monitor what's happening in the marketplace. I'd say, generally, what we see as a behaved -- observer -- behavioral kind of aspect of the market is that we typically see competitors follow within a period of time, and we'll continue to monitor that, but we typically tend to be the price leader in our space.

Okay. Do you guys give in your intra-year price increases if it's warranted? I can't remember.

Yeah. I mean, we certainly have in the past where we've seen more inflationary environment taken more than one price increase, and we certainly would look at that if warranted. Clearly, if tariffs or incremental tariffs do come into play, if we don't feel that we can effectively mitigate those appropriately through other actions, we certainly would evaluate other pricing actions as we go into 2025.

Okay. A couple more here. Seems like there's early chatter about the infrastructure spending in the U.S. picking up. A lot of companies are calling for second-half project activity timing dependent. So, just anything you're hearing from your distributors, and maybe expectations on what the lead times look like for restocking if we were to start to see acceleration in greenfield activity?

Yeah. I mean, I think we subscribe to some proprietary databases. They give us sort of pretty good indication of kind of what's coming down the pipe, and that is favorable. I mean, we certainly see a fair amount of activity picking up. I'd say it hasn't necessarily materialized for us in meaningful ways yet. As you know, Enerpac really participates kind of on the back-end of the life cycle once materials show up at the job site and they really need to start putting the pieces together. But the indications we do see are projects being bidded out and kind of the design and civil engineering work underway, et cetera, some of the early sort of indications of procurement processes. So, I think that does bode well and we think will be favorable. We do continue to believe that will be a nice tailwind for Enerpac over the next several years. Again, we haven't seen that materialize so much yet here in the U.S., although I'd say we have seen actually relatively decent infrastructure projects outside of the U.S., including in Europe and parts of Asia Pac. So, that's what we've seen to date. From a lead time perspective, I think we're well-positioned. We're pretty competitive there overall. Certainly for our kind of standard products, high runners, we do typically maintain finished goods here at Enerpac as well as in our channel. We think those are largely at appropriate levels, but we monitor that closely. And I think we -- given the lead times in these projects, I mean you get pretty good runway and indications. And I think we wouldn't have an issue being able to address any of that at this point in time.

Awesome. That's great to hear. And then, just maybe lastly for Darren, two months into the role, but any initial impressions? And can you give us a sense of what your priorities are in the coming six, 12 months?

Yeah. No, thanks, Ross. It's a great question. Yeah, it's been a great start. Started, obviously, meeting a significant amount of investors, shareholders, as well as the extended leadership team in Milwaukee. So, over the first six weeks, it's been -- I've got a great feel, especially for the culture of Enerpac. As I've been here, kind of the culture of continuous improvement that mindset embeds itself in the organization. And I would say second observation and a big one is the power of the Enerpac brand. Seeing that at play in the markets, the pricing we can drive, it's a fantastic benefit for the company. And finally, it's -- as Paul alluded to in his comments, it's just the team we have. It's a team we can win. We think we can win in any market. So, we're going to operate and we're going to win.

Okay. Welcome to the team. We look forward to working with you. Thanks, guys.

Thanks, Ross.

Your next question comes from the line of Steve Silver of Argus Research. Your line is open.

Thanks, operator. And good morning, everybody.

Good morning, Steve.

So, great to see the return to growth in APAC this quarter. I'm curious whether you could provide some context in terms of what drove that return to growth given the continued softness in mining. Whether it was just a return to growth among the core products or whether there was some benefit of the implementation of the second brand strategy?

Yeah, I think it actually was all of the above, Steve. I mean, certainly, the more challenging areas we referenced is Australia, and that market is still soft just due to the mining sector. But beyond that, it was pretty broad-based in Asia Pac. Most of the other countries where we operate with scale, we saw good growth year-over-year. It was in both our core product and we saw some good performance on our HLT business as well. So, overall, I think it was pretty broad-based that gives us some increasing confidence as we go into the rest of the fiscal year here. Certainly, on second brand, we continue to execute that. We've got increased commercial focus on our team behind that, and we have made some incremental progress -- good progress, I think, on adding additional distributors in the region to cover second brand. Obviously, that is definitely a multi-year effort to get the channel partners, the network built up for the second brand, and also to continue to drive overall marketing and brand awareness, but we feel good about where we are with that to date.

Great. And so, you guys have a lot of programs going on at the same time, all working towards improving the efficiency of the business, whether it be PEP or ECX or the digital transformation strategies, a lot of those like investing in yourself kind of strategies. Can you put any context around where you guys see yourselves within this goal? I know it's probably early-stage overall, but just in terms of where you guys are within these initiatives?

Yeah. I mean, it's really evergreen for us, Steve. As we talked about, PEP is essentially the continuation of ASCEND. And although ASCEND is formally over and we're not adjusting out one-time costs, really the mechanism, I call the machine that we built through ASCEND, is effective day-to-day in PEP. In fact, we have a transformation office that staff that drives the program day-to-day for us, all the same tracking of the initiatives, et cetera, same language that we use internally to track these initiatives and categorize them and to make sure they're driving sustainable impact to the P&L. Ultimately, we see this driving more efficiency and productivity and enabling more organic growth in the business. Certainly, from a margin perspective, through ASCEND effectively, we got to our target margin of 25% adjusted EBITDA margin essentially a year ahead of plan into fiscal '24, but we do see continued opportunity. And we did say even this year, effectively at the midpoint of our guidance, if you exclude DTA, essentially we built another 50 bps of margin expansion in there, and that's kind of our framework under our current multi-year financial guidance going forward. So, we do continue to see -- or expect to see benefits from the implementation of PEP. And we're also extending that, right? I mean, we're extending it into commercial tools like ECX or Enerpac Commercial Excellence. As we previously mentioned, we rolled that out here in the Americas region through fiscal '24 and we're now in the process of rolling out ECX in the EMEA region in fiscal '25. So, that's just again part of our continuous improvement process and ethos here at Enerpac.

Great. And then, one last one, if I may. The integration of the DTA acquisition, just curious as to how that's going in terms of, I guess, the reception from the marketplace around the combined capabilities now, combining both the vertical and horizontal lifting technologies. Just curious as to how the messaging is being received in the early days of the integration.

Yeah, I'll take both parts of that. From an integration perspective, performing well, we've got the back office functioning, working as a team together. And then, commercially, that promise holds. And now, we can move things vertically, we can move things horizontally, taking that business from its roots in Europe. We're excited about the future, and this year, taking some of our commercial wherewithal moving that outside of Europe where they've been a big, big player in the last couple of years. So, it is holding to the promise. We're holding to the expectation, and it's performing very, very well for us. Orders were very strong in the quarter, which is a great sign for the future.

Yeah. And I would just add, I agree with Darren's points, also, we have built a commercial growth playbook. We've rolled that out across our Enerpac commercial network and they're very clear on how to identify and qualify initial leads for DTA. So, I'm really encouraged by the progress we've made there, the initial lead generation that's happening through the Enerpac commercial network, which that was certainly a big part of the premise of our investment thesis behind the acquisition. Early days seems to be playing out well.

Great. Thanks for all the color, and congratulations on the execution in some challenging markets.

Thank you.

Thank you.

That concludes our Q&A session. I will now turn the conference back over to the CEO, Paul, for closing remarks.

Okay. Well, thanks again for joining us this morning. Enerpac will be presenting at the upcoming CJS Securities Annual Investor Conference on January 14, and the Gabelli Annual Pump, Valve and Water Symposium on February 27th in New York. We hope to see you there. Thank you, and best wishes for a wonderful holiday season, and a Happy New Year.