Earnings Call Transcript - EPAC Q3 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Enerpac Tool Group's Third Quarter Earnings Conference Call. As a reminder, this conference is being recorded June 29, 2021. It is now my pleasure to turn the conference over to Bobbi Belstner, Senior Director of Investor Relations and Strategy. Thank you. Ms. Belstner, please go ahead.

Bobbi Belstner, Senior Director of Investor Relations and Strategy

Thank you, Operator. Good morning, and thank you for joining us for Enerpac Tool Group's third quarter Fiscal '21 earnings conference call. On the call today to present the company's results are Randy Baker, President and Chief Executive Officer; Rick Dillon, Chief Financial Officer; and Jeff Schmaling, Chief Operating Officer. Also with us are Barb Bolens, Chief Strategy Officer; Fab Rasetti, General Counsel; and Bryan Johnson, Chief Accounting Officer. Our earnings release and slide presentation for today's call are available on our website at enerpacoolgroup.com in the Investors section. We are also recording this call and will archive it on our website. During today's call, we will reference non-GAAP measures such as adjusted profit margins and adjusted earnings. You can find a reconciliation of non-GAAP to GAAP measures in the schedules to this morning's release. We also would like to remind you that we will be making statements in today's call and presentation that are not historical facts and are considered forward-looking statements. We are making those statements pursuant to the Safe Harbor provisions of federal securities law. Please see our SEC filings for the risks and other factors that may cause actual results to differ materially from forecasts, anticipated results or other forward-looking statements. Consistent with how we've conducted prior calls, we ask that you follow our one question, one follow-up practice in order to keep today's call to an hour and also allow us to address questions from as many participants as possible. Thank you in advance for your cooperation. Now, I will turn the call over to Randy.

Randy Baker, President and CEO

Thanks, Bobbi, and good morning, everybody. We are going to start over on Slide 3 today. Enerpac's third quarter developed largely as we expected. As we discussed last quarter, we could see that all our global markets were showing signs of recovery and returning to a normal scenario. Before I go through the details on the quarter, I would like to provide some insights into how we performed and what lies ahead for Enerpac. First of all, I can't say enough about the commitment from all of our employees worldwide to maintain a high level of service and quality our customers demand, especially our production and service employees who have stayed on the job throughout the pandemic and were able to work safely and continue to deliver our products. We'll cover the regional details later on in the call. But clearly, most of the world has returned to normal with a few hotspots in the Middle East and Southeast Asia. Financial results met our expectations in the quarter and further supported our long-term objectives in sales growth, margin expansion, and cash. These factors have given us the confidence to reinvigorate our view of new product development as well as potential acquisitions to expand the Enerpac product line. New product launches in the quarter have delivered outstanding results and helped capture the attention of our distributors and drive additional sales growth. And lastly, we've spoken at length about our commitment to the environment, social, and governance objectives of Enerpac, and I'm proud of the team's effort to improve in all areas. Over the coming quarters, you'll see additional commitments to environmental sustainability, which will help significantly lower our production and office facilities’ need for external power sources. Let's flip over to Slide 4. As you can see from the chart, the third quarter experienced sequential and significant sales growth which firmly placed us back within our normal operating bandwidth. We exited the quarter with monthly sales in the normal range with EBITDA margin closing in on our 20% target. We believe this trend will continue through the balance of the year and absent any major resurgence in virus activity or supply chain constraints. Let's move over to Slide 5. As I mentioned earlier, the third quarter met our financial expectations. Core sales grew by 36%, comprised of 40% growth on products and 23% on service. Jeff is going to cover the regions later on, but I'm very pleased with the broad expansion in sales across many vertical markets. EBITDA margins expanded significantly in the quarter, and we're on track to achieve our 20% sustainable level. Incremental margins reflected the strength of the Enerpac product line and exceeded our target of 35% to 45%. This was a direct result of our cost control activities which ensured our outstanding margins were reflected in earnings. As a result, EPS grew significantly in the quarter as well as free cash flow. Regionally, two areas were firmly back in the double-digit growth range led by the Americas and Europe, with slower growth rates in Asia Pacific and the Middle East. Overall, we're very pleased with the results in the quarter, and the progression towards our strategic goals in growth and profitability. Enerpac is now well-positioned to accelerate our growth strategy, which we outlined prior to the start of the pandemic, and deliver superior shareholder returns. I'm going to turn the call over to Jeff and Rick now to go through the details on the quarter, and then I'm going to come back with some market outlook and guidance for the remainder of fiscal 2021. Jeff, over to you.

Jeff Schmaling, Chief Operating Officer

Thanks, Randy. It's great to be talking to you about a quarter largely full of positives and not just one about recovering from the effects of the pandemic but also about our return to growth and to our strategy. Starting off with some regional comments. As Randy mentioned, we're really pleased to report all of our regions were in positive territory for the quarter compared to fiscal '20. Given the impact we saw from COVID last year, I guess it doesn't surprise me, but even more gratifying is that the order rates in this quarter exceeded those from our Q3 2019 levels as well. To remind you all, Q3 2019 was a high watermark for Enerpac, so we take this as another solid indicator we are back in growth mode. Moving on to Slide 6 to dive into some more details on the regions, both the Americas and Europe experienced significant year-over-year core growth, and momentum continued to build as we progress through the quarter. In the Americas, we saw improvement across all of our sub-regions and end markets, and our dealer confidence continues to improve both with general distribution and our national partners. The region delivered nearly 40% year-over-year core sales growth, which counters the mid-30 decline we saw this time last year. The recovery this quarter was due entirely to improved product sales. While service has been a bit slower to recover to date, strengthening oil prices and delayed maintenance spending are resulting in more quoting activity, which we do believe will generate orders here in the fourth quarter as well as drive some pickup in our dry rental business. Dealer stocking orders continue to return to normalized levels and retail sell-through improved throughout the quarter as evidenced by our lower drop ship rates. We saw a nice uptick in orders from national distribution as well as our OEM partners, which again, we take as a signal of demand recovery. As I mentioned, we saw broad-based improvement across most geographies in the Americas as well as most verticals but continued to see strength particularly from our wind, nuclear, and general construction customers. In Latin America, they also delivered a solid quarter driven by the strength in copper and iron ore mining as well as from projects in power generation, and all this comes despite continued COVID-related challenges throughout the region. Moving on to Europe, which is our best-performing sales region posted nearly a 70% year-over-year core growth and nearly 10% improvement against 2019. Again, despite continued travel restrictions in many countries, our dealers covering multiple verticals like wind, infrastructure, and general torque intention had a very good quarter, and both general and specialty distribution showed strength. We anticipate these verticals will continue to be positive throughout the remainder of the fiscal year due to continued government spending on infrastructure improvements as well as emphasis on clean energy. Globally, we had a nice quarter in our heavy lift business but especially in Europe as we delivered several key projects late in the quarter. I'm pleased to see our Asia Pacific region delivered nearly 20% year-over-year core sales growth, despite continued challenges with ongoing COVID-related restrictions and lockdowns, particularly in Southeast Asia. We continue to track these countries closely and work with our distribution to stay engaged with customers as they slowly return to in-person customer visits. Mining continues to be a bright spot in the region due to favorable iron ore pricing, and power generation and infrastructure continued to be positive as well. We have begun to see progress within oil and gas in Australia, in particular, with increased activity to support some of the large maintenance projects coming back online. Overall, we are pleased with what we’re seeing in China and Australia, but we'll continue to use caution as we forecast recovery in Southeast Asia until we see sustained improvement in vaccinations and the relaxation of the travel restrictions still imposed there. Moving on to Slide 7 and turning to our MENAC region, we're glad to return to year-over-year growth in total revenue, again headlined by very strong growth in our product sales. We continue to make good progress diversifying our product penetration beyond oil and gas, and we picked up some nice wins in mining and infrastructure. Another really positive note was many of our dealers are starting to take on some inventory after several months of drawdown, indicating to us that some of the delayed projects are going to start coming back online later in our Q4 and into Q1 of '22. On the service side in MENAC, COVID-related border lockdowns and restrictions still present significant challenges in this part of the world. Service work remains volatile, but as we exited the quarter, we're seeing signs projects are starting to come back online despite several being pushed out of Q3. As I've talked about for the last few quarters, the travel restrictions for our workers coming out of India, Nepal, and other areas has been a continuing challenge, but we are leveraging the crews we do have already in the country to pick up work and get started on some of the delayed projects that still remain in our backlog. Switching from the regions to new products, I continue to be really pleased with our efforts around new product development. Q3 delivered the seventh consecutive quarter of new product vitality in excess of our 10% target as we launched four new product families, including some additional battery-powered hand tools, some torque calibration tools, and the launch of our new RC TRIO cylinder line. Our operations and supply chain team again navigated a very challenging quarter as volume is returning, and we deal with tightening supply chain and logistic constraints. I'm pleased that our on-time delivery remains strong throughout the quarter despite these issues, but it remains an ongoing challenge into the fourth quarter. Utilization improved along with the returning volumes and our quality remained on target. The tightening labor situation continues to be a headwind, but was not really a major factor in the quarter. We are, however, looking at our wage structure at our key facilities to try to stay ahead of any competitive pressures and help backfill the open positions with the best candidates we can find. Reiterating my comments from last quarter, the inventory bets we made earlier in the year paid off in Q3 and now into Q4, and we're continuing this approach by working closely with our key suppliers to ensure we continue to have the right mix of components and finished products to support our improving outlook. We did take a price increase in May and June as I talked about on the last call, which was aimed at neutralizing the known impacts from commodities and freight, which we think should see us through Q4. That being said, it's clear that these headwinds as well as increasing labor costs will be with us into fiscal '22. So we're preparing now for additional pricing actions early in the new fiscal year. We're also looking at actions specific to freight in the form of potential surcharges that we could launch regionally here in Q4 as needed if we see that we're not fully covered from the recent price actions I discussed. To finish up here with a few comments around Cortland, the business experienced core growth of 8% year-over-year in the third quarter compared to a 21% decline in the second. As it relates to the industrial side of the business, we are encouraged by the uptick in order rates, which is consistent with the overall increase in marine and general industrial activity. We're entering the fourth quarter with a pretty healthy backlog, but like many others, we're faced with labor challenges to meet this increasing demand. As for the medical portion of the business, we exited the quarter with volumes returning to pre-COVID levels on the running business. We've also seen new product development execution speed up as our customers' engineering teams start to return to their offices and labs. With that, I'll turn the call over to Rick for the financials. But I want to reiterate Randy's comment, my thanks to our team around the world, who continue to perform exceptionally well delivering on our commitments to our customers in the face of numerous challenges this quarter. Thanks and Rick, over to you.

Rick Dillon, Chief Financial Officer

Thanks, Jeff, and good morning, everyone. I'm going to start on Slide 8 with a recap of the results. Fiscal 2021 third quarter sales increased 19% when compared to the second quarter, and 41% when compared to the third quarter of the prior year, which was the trough of the pandemic for us. Core tool product sales were up 44%, a significant improvement from down 10% in the second quarter, and service was up 23% compared to down 12% in the second quarter. Cortland sales were up 8% versus down 21% in the second quarter. The adjusted EBITDA margin for the quarter was 17%, and that's up from 10% reported in the second quarter and 6.5% recorded in the prior year. The adjusted tax rate for the quarter was 3%, and that's up from the negative 7% reported in the prior year. We still expect our full-year adjusted effective tax rate to be approximately 20%. Moving on to Slide 9 and the sales waterfalls. I'll just make a few additional comments here given Jeff's discussion of regional performance. We had a $4 million favorable impact from foreign currency with the continued weakening of the dollar. That's a slight increase from the second quarter, but it is consistent with our expectation of continued tailwinds in the back half of the year. Our third quarter results marked the fourth consecutive quarter of sequential improvement continuing our break from normal seasonality. We expect this to continue in the fourth quarter. As a reminder, Q3 is historically our strongest seasonal quarter, followed by Q4. So moving on to our adjusted EBITDA waterfall on Slide 10. This time last year, we implemented several temporary cost savings actions in response to COVID that yielded $12 million in savings. These actions are behind us and the return of product volume is having the impact we expected on both EBITDA margin and dollars with a 61% flow through on the year-over-year product volume improvement. The increased volume is also driving $3 million in favorable manufacturing variances this quarter versus a negative $1 million in the second quarter. We saw improved labor productivity and fixed cost absorption as our facilities scaled up to normal run rates. So let's move forward to Slide 11. As Jeff mentioned, the bets we made on purchasing inventory in anticipation of back half demand increases have all paid off, allowing us to minimize the impact of commodities and material pricing while meeting customer delivery expectations in our third quarter. Steel and aluminum pricing has remained at all-time highs, with steel prices continuing to accelerate rapidly. We are seeing supplier price increase requests in all regions, in all categories, but remain in active discussions with our suppliers to minimize or mitigate these requests and the impact on our results. We have continued our approach to expanding lead times, placing the appropriate POs with suppliers to secure inventory in line with anticipated demand. Our targeted pricing actions, largely effective June 1, will offset approximately $2 million in material and labor cost inflation in the fourth quarter. We believe surging demand and resulting shortages will ultimately keep costs high for the foreseeable future. As Jeff noted, we are actively planning additional targeted pricing actions early in our fiscal 2022. Freight cost and availability also remain a challenge with costs shooting back up as we headed into our fourth quarter. Results have been fluctuating wildly in recent weeks and months. If rates continue to climb, we may need to move into a surcharge scenario within the next month or so. So clearly, we're in a very dynamic environment and we are taking the necessary steps to manage through an unsettled and evolving supply chain. We are leveraging our supplier relationships, bringing on second suppliers in some cases and third suppliers to navigate through capacity constraints and allocations. We have qualified alternative materials and components to address shortages and ensure that we meet demand without sacrificing quality. As noted earlier, we have been respectful of the new and ever-expanding lead times and put our sales and operations planning into overdrive. Actions like these and the seamless coordination with our internal teams have allowed us to execute with minimal disruptions as we navigate through what is a very challenging environment. We are pleased with the outcomes and the work we've done thus far, and we'll continue our efforts seizing opportunities to drive sustainable solutions where possible. As noted earlier, our EBITDA margin for the quarter was 17%, leveraging a leaner cost structure. We saw the margin expand as our product sales grew during the quarter, reporting margins in excess of 20% for the month of May. Our incremental margin for the quarter was 47%. Our structural cost moves are clearly paying off, and we will continuously look for structural and operating efficiencies going forward. As illustrated by our results, product sales, and that's the recovery to pre-pandemic levels and continued core growth beyond that is the biggest driver of EBITDA margin expansion in the future. So turning now to liquidity on Slide 12. We generated just over $35 million in free cash flow during the quarter. This includes proceeds from the sale of a manufacturing facility in China as part of our efforts to right-size our manufacturing footprint post sale of EC&S. The facility was occupied by our Enerpac business and the divested EC&S business through the Transition Services Agreement. From a working capital perspective, a $17 million increase in receivables during the quarter due to timing was partially offset by increased payables. Our inventories increased only $2 million, striking a balance between increasing demand and working capital and supply chain management. As we look to the fourth quarter, we will continue to monitor inventory levels but do anticipate increased levels in the fourth quarter in conjunction with the increased demand and the expanding lead times we just discussed. We ended the quarter with $136 million in cash and net debt of $59 million. This is a comparison to a net debt of $123 million in the third quarter of 2020 as we anniversary the pandemic. Our leverage is at 1.1. That's down from 2.1 at the end of the second quarter and 1.8 in the prior year. We remain pleased with where we sit from a cash and liquidity perspective. Our leverage will continue to improve as we continue to show sequential growth. This should position us well as we look to continue our strategy execution and disciplined capital allocation. With that, Randy, I'll turn the call back to you.

Randy Baker, President and CEO

Thanks, Rick. So let's flip over to Slide 13. As we think about the remainder of fiscal 2021, we've assessed the probability for continued growth as well as the potential market headwinds in the form of cost and supply chain constraints. These factors have been well publicized by many reporting companies and we believe our actions to mitigate the impact have been successful thus far. As we discussed in our second quarter, we expect Enerpac to continue sequential growth for the balance of the fiscal year, which is not typical for Enerpac. Additionally, product orders continue to grow. In June, we were up 35% versus 2020 and 10% versus 2019. Secondly, we believe our incremental margins remain valid at between 35% and 45%, which are supported by cost actions and margin protection activities. Now the industrial growth expectations further support sustained recovery through the remainder of the year, enabling Enerpac to exit fiscal 2021 with normalized sales levels. Let's turn over to Slide 14. For the remainder of fiscal 2021, we expect sales to continue to grow, which has facilitated the increase of our second-half guide range for between $290 million and $295 million. Core sales growth for products is projected to be in the low 30% range and service is projected to grow at the high 40% level. Cortland will also experience normalized growth rates in the low to high 20% range. We expect that our incremental EBITDA margins to continue to be at the high-end of our stated 35% to 45% range, excluding the impact of currency. And our assumptions for fiscal 2021 have not changed and are consistent with prior quarters. Now the road to recovery just hasn't been easy, but we believe we're now coming back to normal and are well-positioned to execute our strategy. As Rick reviewed, our margins have continued to accelerate and in the month of May, we exceeded a 20% EBITDA. Our financial leverage continues to strengthen which gives Enerpac the flexibility to execute our capital allocation strategy. Our long-range vision, as shown on the last page of today's presentation, is fully aligned with today's results, and we see great progress towards our growth, increase in profitability, consistent cash conversion, and ultimately best-in-class returns to our shareholders. Lastly, I'm very proud of the performance of all the Enerpac employees globally, which have endured the past year, improving the strength and quality of our company. Operator, that concludes today's prepared remarks. Let's open it up for questions.

Operator, Operator

Thank you. Our first question is from Jeff Hammond of KeyBanc Capital Markets. Please go ahead.

David Tarantino, Analyst

Hey, good morning. This is David Tarantino on for Jeff. Maybe to start out, could you dig a little bit more into what you've seen from service momentum and trends in oil and gas markets more broadly? These two seem to be the laggards and could gain more momentum moving forward.

Jeff Schmaling, Chief Operating Officer

Yes, good morning, David. This is Jeff. I want to make a few regional observations. Our MENAC region, which is our largest service area, has been facing challenges due to lockdowns and COVID restrictions, as I previously mentioned. The main issue has not been the lack of work, but rather the inability to deploy our teams where they are needed. We are starting to see improvements in that area. As I noted last quarter, we have a solid backlog of work that we need to commence. In the Gulf, considering the Americas, service recovery has been slow. However, we are beginning to observe increased quoting activity in the fourth quarter, indicating pent-up demand. We are prepared to move forward in both regions. Based on Randy's and Rick's outlook for service growth in the fourth quarter compared to the same time last year, we expect significant growth as the work starts to come back. It ultimately depends on our readiness and having enough personnel to execute the projects.

David Tarantino, Analyst

And then just as a quick follow-up, you kind of touched a bit on this in the prepared remarks, but most of our companies are seeing demand that outpaced the ability to ramp production and restock inventories. So, how would you characterize inventories and restocking efforts to date?

Randy Baker, President and CEO

Well, as you saw from what Rick said, we've increased inventory strategically to make sure that we could cover our top products, and we've been running a very robust supply chain operation meeting or exceeding sales order forecast for well over a year now that I think has helped us anticipate these increases and has enabled us to get through it without any major disruption. So, we know that this situation will never go away. There's always a potential for an impact. But when you make smart bets on inventory, you can definitely mitigate most of it and ensure that your sales volume is maximized in the quarter to prevent constraints on your distributors who start searching elsewhere for compatible products.

Operator, Operator

Thank you. Our next question is coming from Ann Duignan of JPMorgan. Please go ahead.

Ann Duignan, Analyst

Can we revisit the last question? I think there may have been a misunderstanding, either on my part or yours. Could you elaborate on channel inventories and how they affect your ability to increase them? What are your thoughts on the current state of OEM inventories and the inventories held by dealer distributors?

Jeff Schmaling, Chief Operating Officer

Yes, good morning, Ann. It's Jeff. We've observed a significant increase in what I would characterize as a return to more typical dealer stocking orders. I mentioned that we are continuing to experience a decline in drop ship rates alongside an increase in dealer stocking orders. This indicates to us that sell-through is occurring, and dealers are ordering appropriately. Regarding our OEM business, I want to note that we have observed an uptick from some of our major OEMs that utilize our components in their finished products. They are clearly beginning to view us as just another supplier within the tightening global supply chain. We've seen a couple of our OEMs place larger orders, likely due to concerns about potential future supply chain constraints. It's encouraging to see that. Many of these orders will be released in phases over the coming quarters, but it's beneficial to have them in our backlog for effective planning. Both the Americas and MENAC have seen a resurgence in stocking orders from distributors, which had been scarce over several quarters. Overall, we are facing challenges in our supply chain, but it's reassuring that our distribution partners are stepping up to help maintain high availability for our customers, which remained consistent throughout the quarter.

Ann Duignan, Analyst

Yes, that wasn't the question. The question is whether you believe that the dealers and distributors now have sufficient inventory and if they are still restocking.

Randy Baker, President and CEO

So, Ann, I think what a lot of us have seen in the past is that certain types of products are simply stocking out, which means the dealers are reporting in availability to supply retail demand. What Jeff mentioned is that we haven't had that issue yet for Enerpac. Our ability to ship out of our facilities is still quite high. We have an OTD rate that is still very good. We track our past dues at a high level so that we know exactly if that is climbing or shrinking, and that's still in good shape. Quite honestly, our dealer councils will speak to us loudly if they're trying to get retail orders, and we're saying, well, we will talk to you in six months. So, I think in our case, the channel has healthy inventory that's moving through. They're not experiencing stockouts that are resulting in them going someplace else, like we see with a lot of other products and read about where there simply isn't availability of certain products in dealer channels of all types, and that hasn't been the case for Enerpac. I hope that answers your question more clearly.

Ann Duignan, Analyst

Yes, I have a better understanding of your inventory status with the dealers being more balanced, indicating there isn't significant pent-up demand. That seems to be the point we are all trying to address. Regarding costs, could you clarify something? I believe you mentioned that the price increases implemented mostly from June 1 will lead to a $2 million offset in Q4. However, you also indicated last quarter that rising fuel prices could result in increased costs of $200 million to $600 million on an annual basis. How do we reconcile the $2 million for a quarter with the much larger annualized increase in steel prices? Can you provide insights on what we should anticipate for fiscal '22?

Ricky Dillon, Chief Financial Officer

The $200 million to $600 million figure referred to the latter half of the year, not an annual basis. We mentioned the increases in aluminum, which we estimated would be between 3% and 6%. In the previous quarter, we noted that air freight costs were at twice the normal levels. Overall, our cost increases, including some labor costs and other anticipated challenges like plastic, led us to implement certain actions. The $2 million is intended to help offset the $200 million to $600 million increase, and we feel optimistic about that. This was our understanding at that time. We've secured negotiated pricing with steel suppliers that should support us through the third quarter and likely into the fourth quarter, including aluminum. Therefore, we are confident that the $2 million will carry us into the fourth quarter. However, freight costs are still rising, and steel prices are also increasing, which suggests that we may have to consider surcharges or additional pricing adjustments early in 2022.

Ann Duignan, Analyst

And you'd expect those additional price increases and surcharges to fully offset the anticipated costs in FY '22?

Ricky Dillon, Chief Financial Officer

At this point, again, we're going to do what we did in early Q3, we're going to put in the pricing to offset known costs or our estimate of the impact here in early 2022. As we said before, if we fall short there, we're demonstrating that we have the ability to go and do incremental pricing as necessary.

Operator, Operator

Thank you. Our next question is coming from Deane Dray of RBC Capital Markets. Please go ahead.

Dean Dray, Analyst

Thank you. Good morning, everyone.

Randy Baker, President and CEO

Good morning.

Jeff Schmaling, Chief Operating Officer

Good morning.

Dean Dray, Analyst

I would like to stay on this topic, and I think a couple of additional data points would be helpful. I appreciate the insights you’ve shared about raw material costs and freight. I am curious, if freight is trending higher, why are you hesitant to implement the surcharges? I believe you have enough justification to do so, and you can always reverse them if necessary. What is causing the hesitation?

Jeff Schmaling, Chief Operating Officer

There’s no real hesitation. As I mentioned earlier, we did implement some pricing adjustments that account for anticipated freight costs. We had factored some of these costs into our projections as we approached the year and in our guidance for the latter half. If freight costs exceed our expectations, we will definitely apply a surcharge. The nature of freight costs has been fluctuating; they’ve gone up and down, and currently, it seems to be on a steady increase, though it is starting to stabilize a bit. We are monitoring the situation closely, and if we determine that freight has settled on an upward trend, we will implement a surcharge. You are correct, we can take that step, and it’s not a matter of hesitating to do so. We will proceed with it if necessary to cover costs.

Dean Dray, Analyst

That's really helpful. Could you elaborate on the issue of labor shortages? We're hearing about this everywhere, and for you, it seems to be more about wage pressure. Do you have unfilled positions? Are you facing difficulties in hiring for the factories? Additionally, do you anticipate any pull-in for the fourth quarter? When you announced the price increase for June, did you see any benefit from customers trying to avoid the next price hike?

Ricky Dillon, Chief Financial Officer

I'll start with the comment about pulling in. Typically, we don't see and didn't observe a significant impact from pulling in. I believe there are several factors at play. There is demand related to recovery and the need for inventory, but people are also being cautious and monitoring demand. As a result, we experienced the expected pull-through in an environment of rising demand and pricing. We don't think our pricing caused a substantial pull forward that would affect us in Q4. To Jeff's point, our distributors are placing their orders and staggering delivery dates, providing us with early insights due to the current demand and supply chain situation, which affects others as well. We're optimistic about this feedback from our distributors, but we don't see a large pull ahead of orders that would impact the sequential growth we're discussing. Regarding labor...

Randy Baker, President and CEO

Dean, on the labor side, that's mainly an issue in North America. We definitely have some open positions for various reasons, and we are experiencing some wage pressures. The positive aspect is that we've been able to assess market conditions and make necessary wage adjustments, which we have implemented in Q3. However, there are certainly shortages, and our main goal is to attract the right talent. As long as we're offering competitive salaries, we've taken the necessary steps. We made some progress last week in filling some of the open positions, but we still have a bit of work to do. Nevertheless, this situation did not significantly affect our performance in the quarter, and we don't anticipate it being a major issue for the fourth quarter either.

Dean Dray, Analyst

Good. I have one last question. There have been a few versions of the infrastructure bill, and each time we've heard mentions about bridge repair and building. This makes me think of Enerpac, as this usually presents a great opportunity for you. Do you see any upcoming projects that are ready to go related to the most promising initiatives from the infrastructure bill?

Jeff Schmaling, Chief Operating Officer

Once the bill is released, states will prioritize their Department of Transportation projects. Our distributors will know which bridges or facilities need work, especially suspension bridges that require lifting. A lot of cylinder work is involved in new developments. After the bill is signed, there will likely be a couple of months' delay before the actual DOT bids are issued. The infrastructure bill will have an impact late in our fiscal year, probably affecting sales of lifting equipment and torque tension equipment significantly in late 2022. Overall, this is very positive for us, though there are many developments happening right now.

Randy Baker, President and CEO

And you know, the knock-on effect is not just the actual work being done, but the folks that are actually doing the work, the major construction companies and equipment manufacturers, equipment rental houses, a lot of our tools are used on the maintenance and upkeep of those heavy excavating machines like bulldozers and excavators. So that's really the second line of offense for us as well, and our dealers really participate a lot in those sales as well.

Brendan Popson, Analyst

Good morning. Great results. I want to ask first on Europe. You talked about last quarter some challenges with the infrastructure and bridgework. Numbers were great this quarter. So it seems like a lot of that cleared up, but is there still any headwinds there in Europe? Or is it all pretty normal now compared to where we sat last quarter?

Jeff Schmaling, Chief Operating Officer

Actually, infrastructure has been a fairly solid story in Europe for the last several quarters. I'm not exactly sure if we talked about headwinds there, but yes, again, strong quarter. The bridge work and civil construction have really been a nice story in Q3, and we don't see that letting up.

Brendan Popson, Analyst

Great. Regarding your long-term goals, exiting the year at pre-pandemic levels would suggest your adjusted EBITDA could approach 21% to 22% following your cost optimizations. However, that would represent significant growth. Additionally, you are currently facing increased costs. Considering all these factors, do you believe that maintaining a structural margin at pre-pandemic levels is still feasible with the current pricing? Can you clarify how you see the structural margin evolving given these circumstances?

Jeff Schmaling, Chief Operating Officer

I think it's important to note that in May, we surpassed the 20% margin level, which was a significant milestone. Although we saw good sales in May, our performance was right in line with expectations for a typical core month. Looking ahead, we are very confident that maintaining the 20% margin level is achievable. The incremental margins we usually discuss, ranging from 35% to 45%, are expected to continue, thanks to our strong underlying gross margin and gross profit. With costs adjusted to match the size of our business and improved productivity from our facilities, those margins will flow through effectively. All these factors reinforce our long-term strategy for margin expansion, making it not just aspirational but highly feasible. As we consider our outlook for the fourth quarter, we anticipate staying at the upper end of our incremental range, suggesting we will be close to the 20% level by the end of this quarter. I am very confident about this. The business has certainly recovered to pre-pandemic levels, and our management team is now focused on sustaining growth and executing our strategy. This is a crucial aspect moving forward.

Brendan Popson, Analyst

Great. Thank you.

Ricky Dillon, Chief Financial Officer

I'll add a couple of other comments to that. When you talk about pre-pandemic, just to be clear, we're referring to pre-pandemic sales levels. Prior to the pandemic, we were well below 20% from an EBITDA margin perspective. As you've seen throughout 2020, we've been delivering incremental margins outside the top end of our normalized incremental margin range. As we continue to grow and increase that mix of products, just as you saw in the quarter, you should consider this as a continuation of strong incremental margins. This incremental product growth will drive those margins to be at the top end, if not better than what you're seeing right now. This is really part of how we achieve that plus 20% and beyond. To Randy's point, we're confident that we're observing sales levels similar to those pre-pandemic. We are also confident in our ability to continue growing according to our strategic plan.

Brendan Popson, Analyst

Great. Thank you. I will just quickly follow up on my first question. I exactly misread my notes, the delays, infrastructure bridge delays were in the U.S. So if you could just follow up on anything there with the infrastructure work?

Randy Baker, President and CEO

Yes. Thank you for the clarification. We're beginning to see some progress. While we discussed the infrastructure bill, what's most important is that people are returning to work, and the easing of COVID restrictions is certainly contributing to this. We experienced a significant increase in general construction along with some infrastructure projects in Q3. We anticipate that this trend will continue as things get back on track.

Operator, Operator

Thank you. Our next question is coming from Justin Bergner of G. Research. Please go ahead.

Justin Bergner, Analyst

Good morning, Randy, Rick, Jeff, and the rest of the team.

Ricky Dillon, Chief Financial Officer

Good morning.

Randy Baker, President and CEO

Good morning.

Bobbi Belstner, Senior Director of Investor Relations and Strategy

Good morning.

Justin Bergner, Analyst

Had sort of a three-part question. So you mentioned that in the fourth quarter on-time delivery could be challenged. Is that mainly a function of freight uncertainty? And then, I guess the second part of the question, is the revenue range for the fourth quarter, is that more tied to supply chain issues and is to demand from your vantage point? And then, I guess the third part of the question is given that you've been able to deliver at least so far to your customers and distributors, do you see yourselves as gaining share because you were able to meet demand where some of your competitors are not? Thank you for taking the various parts.

Jeff Schmaling, Chief Operating Officer

Maybe I'll start with the freight question. I don't see any particular constraints from our capacity point of view. Certainly, freight has been a bit of a wild card, delays and we're getting everything. We're ordering sometimes a container or two shows up late, which means we have to scramble out of one of our plants to assemble and get the stuff back out the door. But, generally speaking, yes, that is the variable in the quarter. We're making certain assumptions around order rates going through the quarter, which we see as strong in June. We don't see any reason to believe they're not going to continue to be strong for the rest of the quarter. We came into the quarter with a fairly healthy backlog, which we like and we're working hard to get that out the door. But, yes, a little bit of delay in a container or something coming out of another part of the world causes us to scramble, but it's not going to be particularly catastrophic. We don't think in the quarter.

Randy Baker, President and CEO

So Jeff touched on the Q4 revenue outlook and the reason why I made mention to the June inbound order results is they're positive. And we've tried to give some clarity into that on prior quarters, because when we are reporting our earnings, essentially as we wrap up June, we have pretty good line of sight to what occurred. And 35% up versus 2020, that's a good number. And 10% up versus 2019 is even more encouraging number because in 2019 that was a decent quarter. And so the orders certainly support continued revenue growth, and which gave us the confidence that the $290 million to $295 million level was the right thing to do to reflect it. Number one, sequentially, our typical Q3 being the strongest quarter, it's probably not going to occur this year. It means that sequentially we're continuing to strengthen and we'll exit the year in pretty good shape. So we've given you enough clarity in terms of guiding out for the full year of the $290 million, $295 million number. To give you further clarity that our inbound orders are better than '20 and also better than '19. And we expect the typical sequential effect of Enerpac to be a little not being the normal, which is that Q3 is stronger than Q4. So we've given you some data points to help guide you towards where we think we'll land for our fourth quarter and setting the stage for 2022.

Jeff Schmaling, Chief Operating Officer

And maybe I'll follow-up on your share question. So many of the things that we sell, it's a little difficult to give you an exact share. But I will tell you anecdotally, we're hearing from some of our customers and distributors that some of our competitors are having a hard time delivering on-time delivering all the products in their line. And the fact that we think that we're doing a better job there, I would say the optimist in me says that we are picking up share. Again, little hard to measure that, but what we're hearing from the marketplace is that we're doing well on delivering on our commitments, and there's some folks out there that aren't so. That's about as granular as I can give you on that question.

Justin Bergner, Analyst

Okay. Thank you for taking that multipart question. Appreciate it.

Ricky Dillon, Chief Financial Officer

Thank you.

Operator, Operator

Thank you. Our last question today is coming from Michael McGinn of Wells Fargo. Please go ahead with your question.

Michael McGinn, Analyst

Thank you. Can you explain the timing and reasons behind the closure of the China facility considering the demand is increasing and lead times are getting longer? Also, are there any other similar actions planned like the closure of the China facility or the consolidation of the Cortland facility?

Ricky Dillon, Chief Financial Officer

We mentioned that we are actively seeking to optimize our footprint. Even with increasing demand, we are not planning to reduce our capacity. Our goal is to ensure that we maintain the most efficient footprint possible, which is reflected in our margin improvement plans. We see potential for savings through this approach. Recently, we sold a large facility in China that was housing both of our businesses, as we found ourselves with excess capacity. Following the separation of EC&S, we realized we no longer needed that facility in China, so we sold it as part of the exit from EC&S. We still have other locations in China and are leasing a small portion of the building—less than a third—for our ongoing operations. Ultimately, we will decide on our long-term presence there based on our needs, but currently, we are left with a reduced footprint. We no longer own the building since we don't require that capacity in China. Everything related to facility and footprint optimization is part of our planned efforts to achieve our strategic goals.

Michael McGinn, Analyst

Got it. Understood. And then can you walk me through the tax rate? It just looks like tax is payable on your balance sheet, double sequentially. Your EBITDA was up for 4x sequentially. Just walk me through the mechanics of that and what your normalized tax rate on a long-term basis is?

Ricky Dillon, Chief Financial Officer

Sure. Regarding your question on tax rates, for modeling purposes, you should use a range of 20% to 25% for taxes. Historically, we have moved into that range due to tax reforms. This hasn't changed in our discussions. Our tax rate tends to be variable because of the seasonality of our business, with the first half generally being the lowest and the second half the strongest. In this quarter, we had several factors at play, including the release of some valuation reserves related to uncertain tax positions that were audited, and we also benefited from a favorable tax law change. All these factors are accounted for in our overall tax rate, which is why we haven't adjusted our expectations for 2021. You can expect to see fluctuations in our tax rate on a quarterly basis, but we aim to provide guidance on the full-year rate.

Michael McGinn, Analyst

Got it. Can you describe the length of the incoming blanket purchase orders from your large national account customers and distributors in relation to your average lead time?

Ricky Dillon, Chief Financial Officer

Two things and then I'll let Jeff talk. We really don't have blanket P&Ls. So I just want to correct that. But we do have what I will call some forward ordering from our nationals. And relative to how that matches up with our lead time, I think as we've been talking about, so far we've been able to navigate that and deliver. It's on us to do the things that we've been doing in terms of getting out ahead, managing our inventory in anticipation of demand. And thus far we've not had issues meeting any of our customer demands nor as we sit here today, do we have concerns going forward.

Michael McGinn, Analyst

Got it. I appreciate the time.

Operator, Operator

Thank you. At this time, I'd like to turn the floor back over to Mr. Baker for closing comments.

Randy Baker, President and CEO

Great. Thanks very much, operator. So as we wrap up today, clearly, we've had a very good quarter. The business is on very solid ground as we go into our fourth quarter and get prepared for 2022. I'm very proud of the team. I think that we've done a lot to improve the margins in the business to realize our goals at 20%. We've been able to unlock the margin value of this company. And most importantly for me as CEO, we're now at a level where we can start executing our strategy to the fullest extent that we had planned pre-pandemic. We now have the margin capability, the cash flow, and liquidity. As Rick mentioned, this company is in one of the best positions liquidity-wise that we've seen in a long, long time. So our capital allocation strategies are very well within our grasp, and we're able to start moving hard on that. So I can't say enough for the effort from this team. It has been a great time watching us come through this and successfully navigate probably one of the most difficult times any company has seen in their history, and we've done it successfully. So I just want to thank all of our team worldwide and look forward to the next quarter and continuing on. So, operator, thank you, and thank you everybody for joining us today.

Operator, Operator

Ladies and gentlemen, thank you for your participation and interest in Enerpac Tool Group's conference. You may disconnect your lines at this time, and have a wonderful day.