Enerpac Tool Group Corp Q1 FY2025 Earnings Call

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 headquarters 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. 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, Tom.

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?

Thanks for the question, Tom. As we mentioned during the call, things unfolded pretty much as we anticipated. We knew it would be a tougher comparison, especially given that we were lapping Q1 of fiscal '24 and the current environment we’re facing. So, we figured it would be a bit more challenging, particularly in Q1. Our expectations are incorporated into our guidance for the rest of the year for improved top-line performance. We're feeling optimistic due to the potential new policies from the new administration and the positive feedback we've received recently from our customers and channel partners. There's a noticeable sense of optimism, and while that needs to translate into demand and orders, people are generally hopeful about what lies ahead in calendar '25. Overall, Q1 pretty much played out as we expected.

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?

Yes, we are a global manufacturer, with our largest facility located in the U.S., specifically in Wisconsin. Generally speaking, I believe Enerpac is in a relatively favorable position regarding the potential impact of any new tariffs. To give you some context, imports from Canada and Mexico into the U.S. are minimal for us. From the perspective of China, I would estimate that the value of our products and components imported from China into the U.S. is less than $20 million. While it is not insignificant, it is manageable, and we successfully navigated similar challenges during the first Trump administration. We have a solid strategy in place for handling costs, dual sourcing, and potentially adjusting pricing if necessary. Therefore, while it is not negligible, I wouldn't describe it as having a major impact given that dollar amount for us.

I appreciate it. Perhaps one or two more questions. Shifting gears a bit to the geographic perspective, I'm pleased to see the slight growth in EMEA. I was curious about the ongoing challenging business conditions, particularly in Germany, which you've mentioned as one of your key segments. Could you provide any additional insights? It seems like you're performing better than the market there. What are your thoughts on your EMEA performance?

We are pleased with our performance in EMEA, especially in Q4 and the start of Q1, where we have seen stronger results compared to the Americas. Although the market conditions have become more challenging, particularly in Germany and France, we believe we are successfully gaining market share due to our effective commercial and growth strategies. The leadership changes and process improvements we've implemented are having a positive impact, and we are also seeing success with our new product rollout in the region. Overall, we are satisfied with our progress in EMEA despite the tougher economic 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 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 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 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 digit, 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 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 a more inflationary environment taken to 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?

We do subscribe to some proprietary databases that provide a good indication of what's ahead, and the outlook is positive. We've noticed an increase in activity, although it hasn't yet translated into significant results for us. Enerpac typically engages at the later stages of the project lifecycle, once materials are on-site and assembly begins. However, we have observed projects being put out for bids and the commencement of design and civil engineering work, which are early signs of procurement processes. This trend suggests a positive future, and we believe it will create a solid advantage for Enerpac in the coming years. Although we haven't experienced a significant impact in the U.S. just yet, we've seen favorable infrastructure projects outside the U.S., particularly in Europe and parts of Asia-Pacific. Regarding lead times, we are well-positioned and competitive overall, especially for our standard, high-demand products. We maintain appropriate levels of finished goods at Enerpac and across our distribution channels and monitor this closely. Given lead times associated with these projects, we have enough runway to manage any potential demands effectively at this 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?

Thanks, Ross. That's a great question. It's been a strong start, and I've been meeting with many investors, shareholders, and the broader leadership team in Milwaukee. In just the first six weeks, I've gained a solid understanding of Enerpac's culture. The emphasis on continuous improvement is deeply embedded in the organization. Another key observation is the strength of the Enerpac brand. I see how that influences our market presence and the pricing we can achieve, which is a significant advantage for the company. Lastly, as Paul mentioned, we have a strong team. We believe we can succeed in any market, and our goal is to operate effectively and 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?

I believe it was a combination of several factors. The market in Australia remains weak primarily due to the mining sector. However, outside of that, we experienced broad-based growth in the Asia Pacific region. Most of the other countries where we have a significant presence showed strong year-over-year growth. This was evident in both our core products and the performance of our HLT business. Overall, this gives us increased confidence as we progress through the fiscal year. We're continuing to focus on our second brand, with added emphasis from our team. We have made good strides in expanding our distributor network in the region for the second brand. This is definitely a multi-year initiative to establish strong channel partnerships and enhance marketing and brand awareness, but we feel positive about our current progress.

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?

It's really a continuous process for us. PEP essentially continues the efforts we started with ASCEND. While ASCEND has officially concluded and we’re not adjusting for one-time costs, the framework we developed during ASCEND is still very much in use within PEP. We have a transformation office that oversees the program daily, tracking initiatives using the same methods and language we established internally to ensure they create lasting impact on our profit and loss. We believe this will lead to greater efficiency and productivity, fostering organic growth in our business. Thanks to ASCEND, we've reached our adjusted EBITDA margin target of 25% ahead of schedule for fiscal '24, and we see further opportunities for growth. This year, even at the midpoint of our guidance—excluding DTA— we achieved an additional 50 basis points of margin expansion, which aligns with our long-term financial goals. We anticipate ongoing benefits from implementing PEP and are also extending it to commercial tools such as ECX. We rolled that out in the Americas region through fiscal '24 and are now implementing ECX in the EMEA region in fiscal '25. This reflects our ongoing commitment to improvement 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.

This concludes today's conference call. You may now disconnect.