Earnings Call Transcript - EPAC Q2 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Enerpac Tool Group's Second Quarter Earnings Conference Call. As a reminder, this conference is being recorded March 24, 2021. It is now my pleasure to turn the conference over to Bobbi Belstner, Director of Investor Relations and Strategy. Please go ahead, Ms. Belstner.

Bobbi Belstner, Director of Investor Relations and Strategy

Thank you, Operator. Good morning, and thank you for joining us for Enerpac Tool Group's Second 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 enerpactoolgroup.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're going to start today on Slide 3. Before we review the details on the quarter, I'd like to provide an overview of Enerpac's progress and our recovery from the global pandemic. As always, safety is our number one concern for our employees worldwide, and as of today, we still have approximately 40% working from home offices. In the quarter, we were affected by regional spikes in the infection, resulting in full border closures in the Middle East. We responded by returning to the broad lockdown processes we've been using throughout the pandemic. Unfortunately, this did have an impact on our sales and slowed our recovery progress. Despite these factors, we were able to improve the performance in the quarter to near parity with our first quarter results. This is not our typical cycle within a fiscal year as the second quarter is normally a low point for both sales and profit. Our cost efforts continue to support very positive decremental margins, which are in line with our expectations of 35% to 45%. As I discussed in prior quarters, we have protected our ability to execute the long-term strategy, including new product development, sales coverage and our capital allocation priorities. Our focus on the balance sheet has enabled us to pay down an additional $45 million in debt in the quarter, which further enhances the long-term performance of Enerpac. And lastly, as we emerge from the pandemic, Enerpac is focusing on developing and improving our company. We firmly believe without engaged, well-trained employees, we cannot successfully execute our strategy. With that in mind, we have launched programs to recruit, develop and retain team members and ensure everyone is proud to be part of Enerpac. Moving over to Slide 4, our weekly and monthly sales is our most monitored metric we use to understand the progression towards full recovery. This chart provides a graphical representation of our normal operating range and the actual results experienced in the quarter. The second quarter was firmly back within the operating range of a normal year with the upward trend we expect. We believe this progress will continue through the balance of the fiscal year and position Enerpac at near normal levels as we progress through the third and fourth quarters. Flipping over to Slide 5, I mentioned earlier, the second quarter was essentially flat with our first quarter results. Core sales declined by 11% in the quarter, with a decline of 11% in products and 12% in service. The increase in infection rate experienced in the quarter resulted in border closures in several Middle Eastern countries, which slowed our recovery. Absent these factors, the top line would have been very close to achieving our prior year sales. Our adjusted EBITDA decremental margin was 29% or at the low end of our expected range. Year-to-date, we have achieved a 21% decremental result. Our focus on cost controls continues to pay dividends and help protect our ability to execute this strategy. Free cash flow in the quarter was positive, which is not the typical result for our second quarter. And on a year-to-date basis, we have improved our free cash flow by more than $40 million year-over-year. This enabled Enerpac to pay down an additional $45 million in debt and exit the quarter with a leverage of 2.1. Sales results varied by region but were consistent with prior quarters. Europe and Asia Pacific have been our best-performing regions in terms of consistency and progress towards normal sales volume. The Americas improved sequentially during the quarter but are still in the mid-teens decline versus the prior year. As earlier mentioned, Mid East operations were affected by border closures, resulting in a decline year-over-year in the low double-digit range. Overall, we are progressing towards normal sales operating ranges and delivering increasing profitability. Now I'm going to turn the call over to Jeff and Rick to review the details on the quarter, and then I'll come back with the market projection and some forward guidance. Jeff, over to you.

Jeff Schmaling, Chief Operating Officer

Thanks, Randy. I'll add some detail on Q2 from a regional perspective as well as touch on some of our key verticals and distribution. I think you'll see that this past quarter continues to confirm the significant differences in how our global markets are recovering as well as how the various countries and regions we serve are responding to the continued challenges of this pandemic. Starting on Slide 6. In total, we're pleased to see continued sequential year-over-year improvement in both product and service sales in the second quarter. Despite still being down year-over-year, we're encouraged by the feedback from our distributors about their businesses and the strong quoting activity that we're seeing in our primary markets. We'll start with the Americas. Dealer sentiment has turned noticeably more positive, and there's a general consensus that most will be getting back to pre-COVID activity levels in the coming months. We saw an increase in overall in-stocking orders in both January and February and another decline in our drop ship rates, which further confirms that our dealers' confidence is improving. We're also seeing some positive indicators from our OEMs and national account business, and we did see a sequential increase in our backlog for these accounts in the quarter, which is starting to look more like our normal pre-COVID levels. The severe weather that caught Texas by surprise in February also contributed to some missed product and service revenues around the Gulf. Some issues, however, coupled with the continuing strength in oil prices may offer opportunities to recover some of this as we move into the third quarter. Looking at our vertical markets, general construction and power generation, specifically wind, continue to improve in the U.S. as well as growing demand in mining in Western Canada and with our oil sands customers. Strong copper and iron ore pricing and demand continue to give our mining distributors opportunities in Chile, Peru, and Brazil. However, we continue to struggle a bit with COVID restrictions in Mexico. Our ability to visit customer sites and dealers is slowly improving, and we're anxious to continue to ramp up once vaccination efforts and reopenings continue to gain traction. Moving on to Europe. Coming off a strong first quarter in Europe, we were off slightly year-over-year in the second quarter. Still, the region turned in a solid performance, driven by both general distribution of core products as well as some nice project wins in heavy lifting and machining. Various headwinds from continued COVID restrictions and some challenges related to Brexit did cause some minor delays in late quarter shipments, but we expect these to ease as various countries sort through these new regulations. Taking a look at our key markets in Europe, we continue to see strong quoting and wins in wind and infrastructure projects, especially in bridge construction and repair. Government spending in this sector is expected to remain robust, and we are well-positioned to capture more of this work in the back half, primarily in our lifting, torque, and tension products. I'd normally not go into too much detail on this call about specific wins in the quarter, but I've included a picture here on the Dardanelles bridge project near Istanbul to give you a glimpse of the kind of project that gets us really excited. Enerpac's supply of heavy cylinders, pumps, and controls will enable the construction of what will be the longest suspension bridge in the world, connecting both sides of the Dardanelles Strait. The bridge will carry three lanes of highway traffic in each direction and is slated to open in late 2023. While this project is not really material from the total company sales perspective, it does show our strong capabilities with unique customer solutions to challenging problems and is really a good example of the type of work that an increase in infrastructure spending could bring for us. Moving on to APAC, this region has faced multiple stops and starts as it relates to market recovery due to ongoing border lockdowns. China remains fairly stable, and Australia, along with New Zealand, are showing signs of improvement due to their quick response to infection flare-ups. Conversely, Southeast Asia continues to struggle and be a challenge, particularly in Malaysia and Thailand with lockdowns that just recently started to lift. I previously mentioned strong iron ore pricing, and that's also driving some strength for us in mining in Australia. Investments in wind and power generation are providing tailwinds as well for us, as are oil prices driving some improving sales and quoting on both products and services in this region. Moving on to Slide 7, turning to our MENAC region, we did see sequential improvement for the quarter. We had a pretty strong quarter going until early February when, as Randy mentioned, COVID spikes forced several border closings into some key areas of the Middle East. This caused several projects to be suspended and pushed out some meaningful service and product revenue from our quarter. Despite the efforts of our team to utilize resources, we also saw a drop-off of our quick turn work as well, which led to some unexpected underutilization. This has moved some projects to the right into the back half of the year and other projects completely out of the fiscal year. That being said, improved oil prices and the continuation of OPEC's January production cuts may offer us some opportunities to supply crews at relatively short notice. So we're staying close to our customers to take advantage of any emergent work as it comes up. From a product perspective in this region, we've been working hard on diversifying our exposure beyond oil and gas and are really heartened by some recent success related to both product and service work in the power generation phase, as well as improved quoting in construction, rail, and aerospace. As we've progressed through the early part of Q3 here, we have begun to see some meaningful year-over-year improvement in our product order rates. Switching from regions to new products, we had another strong quarter for new product development, launching several products while maintaining our NPVI metric at our 10% target for the sixth consecutive quarter. Our Q2 launch event included several marketing programs and collateral to get our customers and dealers engaged, and we're continuing to increase the number of languages and translations that we can leverage to provide common materials in more parts of the world to drive pre-orders and get our partners trained on our new offerings. Just a few comments on our global operations: all of our sites continue to navigate the complexities of operating during a pandemic really well, continuing to deliver on our commitments to safety, quality, and on-time delivery, all of which were positive for the quarter. As volume returns to a normalized level, we remain focused on utilization, which improved as we progressed through the quarter. On our earnings call back in December, we talked about the fact that we did not roll out our typical September 1 price increases last year. Given the steady increase in both commodities and our freight costs, we will be taking pricing in Q3 across all our regions. Speaking on our supply chain and inventory, as we enter the latter half of the year, we're anticipating increased demand for our core products. Just as we did at the start of the pandemic, our supply chain and operations teams are working hard to ensure our inventories match our outlook. We're staying ahead of lead times with our main suppliers to ensure we can continue to support our customers and win orders. In this tightening supply chain environment, we are again threading the needle a bit to ensure we have the right products on the shelves while also avoiding excessive inventory where it's not needed.

Ricky Dillon, Chief Financial Officer

Thanks, Jeff. Good morning, everyone. I'll start with a quick recap here on Slide 8. Fiscal 2021 second quarter sales increased slightly when compared to the first quarter and were down 11% from the prior year. Core tools product sales were down 10%, an improvement from down 14% in the first quarter. Service was down 12% compared to down 24% in the first quarter. Cortland sales were down 21% or $2 million, versus down 35% in the first quarter. We had an approximately $3 million impact from our acquisition of HTL. The adjusted EBITDA margin for the quarter was 10%, down from 12% reported in the first quarter and in the prior year. The adjusted tax rate for the quarter was 16%, which is up slightly from the prior year. We expect our full year adjusted effective tax rate to be in the range of 20% to 25%. Let's turn to Slide 9. Jeff already covered what we're seeing by region, and I'll just add a few additional comments here. We had a favorable $3 million impact from foreign currency, with the continued weakening of the dollar during the quarter. If current FX rates hold, we would expect to see continued tailwinds from currency in the back half of the year as well. As Jeff discussed, our service sales were impacted by border closings in our MENAC region. These closings impacted the region by about $5 million, which includes $3 million from the delay of service project revenue in the quarter. It's important to note that without this impact, we would have reported service revenues on parity with our 2020 results. This is a good indicator of recovery as the second quarter revenues in both fiscal '21 and fiscal '20 exclude the large projects that were included in '19. As a reminder, Q2 is historically our lowest quarter, and Q3 is usually our strongest quarter. Q3 2020 was also the trough in terms of COVID impact on our results, with core sales down 38% year-over-year. As we look at the pace of recovery going forward, we would expect to see accelerated sequential quarterly and year-over-year growth in the back half of the year as we anniversary our worst two COVID-impacted quarters. Moving on to adjusted EBITDA in the waterfall on Slide 10, our decremental margin, excluding the impact of currency, was 29%, reflecting the improved leverage that our lower cost structure provides as sequential volumes increase. We anticipate incremental margins in the back half to be at the high end of our stated range of 35% to 45%. As we've seen through the pandemic, lower product sales volume continues to weigh heavily on our adjusted EBITDA margins. The impact of service sales was offset by a favorable mix, with service margins up about 400 basis points year-over-year as we continue to focus globally on higher value-added and more profitable service work. Manufacturing variances this quarter totaled approximately $1 million, down from the $6 million reported in Q1. This is comprised of three elements: service utilization, increased freight costs, and under-absorption at our Cortland facilities on the lower sales volume that Jeff just discussed. We've worked to stabilize our tools manufacturing facilities with minimal COVID disruptions in the quarter, and as a result, we did not see the $3 million of under-absorption reflected in the first quarter. Our service underutilization is about $500,000, down from the $2 million in our first quarter and consistent with expectations on service coming into the quarter. Our Q2 air freight spend was about $1 million, up from $800,000 incurred in the first quarter on both volume and rates. With our increasing demand, we had more air freight in the quarter. Air freight rates remain at double normal levels, and we expect this to continue through our fiscal year-end. We continue to see rising commodity costs, particularly in steel and aluminum. With rising demand, suppliers are now seeking price increases, and we expect to see a 2% to 3% increase in steel machine parts, or an increase in costs of $200,000 to $600,000. Although aluminum prices have increased approximately 60% since the beginning of our fiscal year, we have negotiated aluminum-driven cost increases in the 3% to 6% range with our suppliers, which will limit the impact on our spend in the back half of the year. As Jeff noted, we are moving ahead with targeted pricing actions in all regions that will pass through these inflationary costs. As we discussed last quarter, we are winding down our temporary COVID cost actions with savings of approximately $1 million in the quarter, split evenly between international government stimulus funds and remaining international furloughs. SG&A favorability includes both reduced travel costs and outside consulting. We expect travel costs to continue to fluctuate as sales and commercial activities expand or retract by region. Our EBITDA margins also reflect the reinstatement of our bonus plan and 401(k) match this quarter. The combined impact resulted in an increase of about $3 million in expense year-over-year. While the bonus impact is oversized in terms of historical expense at this level of EBITDA, it's important for us to recognize the tremendous commitment of our employees during the crisis. Our previously announced restructuring actions resulted in approximately $3 million in savings for the second quarter. Turning now to liquidity on Slide 11. We generated just over $1 million in free cash flow during the quarter, marking the first time we generated free cash flow in our second quarter in over five years. A $4 million increase due to timing and receivables was offset by an increase in payables. We were able to hold inventories flat, striking a balance between increasing demand and working capital management. As we look to the back half of the year, we will continue to monitor inventory levels but do anticipate increased levels in the third quarter in conjunction with the increasing demand. We ended the quarter with $115 million in cash on hand, after paying down $45 million of our borrowings under the revolving credit agreement. Our leverage is at 2.1, up from 1.9 at the end of the first quarter. We're pleased with our cash and liquidity position. As we progress through the back half of the year, our leverage should improve significantly as we drop off our worst two COVID-impacted quarters from our trailing 12-month EBITDA, positioning us well as we look to continue our strategy execution and disciplined capital allocation. Randy, I'll turn it back over to you now.

Randy Baker, President and CEO

Thanks, Rick. Let's turn over to Slide 12. As we think about the balance of the year and our progress towards normal sales volumes and profitability, we conclude that both economics and the sequential improvement will position Enerpac at near parity with our 2019 core sales levels as we exit the fiscal year. We fully expect incremental margins to be in the range of 35% to 45% on core sales. We will continue to focus on cost control and executing our margin expansion strategy. Current economic outlooks are pointing towards full recovery as we exit the fiscal year and support our forward projections. This is further supported by our booked orders, which have increased sequentially and are up 15% in the first few weeks of March. As always, we are cautious concerning the potential resurgence of the virus. However, the advent of a wide distribution of vaccines is creating a sense of optimism. Moving over to Slide 13, this brings us to our projections for the remainder of fiscal 2021. We are projecting sales to be in the range of $280 million to $290 million, with accelerating sequential improvement. We project growth rates in the back half of the year as follows: products should be up in the mid-20% range; service is projected to be up in the low to high 40% range; and Cortland is projected to improve by 20% to the low 30%. Additionally, incremental margins should be at the high end of our normal range of 35% to 45%, benefiting from cost actions and high gross profit generated from tool sales. Our assumptions remain consistent with our objectives to reduce interest expenses and maximize earnings. As with many companies, the road to recovery has been long, but our team has performed extraordinarily well under difficult conditions. We have proven the strength and vitality of the Enerpac Tool Group and our ability to remain profitable even under the most challenging conditions. Enerpac remains an industrial leader in high-precision and quality tools with best-in-class operating results. As you can see from our final slide, the four basic strategic objectives remain consistent, and we are highly committed to their achievement. Operator, with that, that concludes today's prepared remarks. Let's open it up for questions.

Operator, Operator

Our first question comes from Mig Dobre with Baird.

Joseph Grabowski, Analyst

Yes. It's Joe Grabowski on for Mig this morning. Thanks so much for the guidance. Very helpful and a lot of color around it, too. It's difficult looking at year-over-year right now because we're about to go against the toughest of the COVID shutdown. I was looking at your guidance for the second half '21 versus the first half '21. At the midpoint, it implies a 19% improvement second half versus first half. The chart on Slide 4 shows that there is seasonality in the sales to improve in a normal year from the second half to first half, maybe 5% or 6%. When you think about your business as your end markets geography in the second half versus the first half, what are the key drivers for that 19% sequential second half improvement?

Randy Baker, President and CEO

Let me cover the broad side. Then, Jeff, why don't you jump in on some specifics? If you think about the percentage that I discussed of the back half growth rates of tool sales across the various vertical markets we serve, those are key to our profitability because that's where the high gross profit comes from. Furthermore, the overarching recovery of our service business, which includes the service rental, is critical. We're looking at all our major vertical markets. As Jeff mentioned, we're seeing great activity in civil construction, which includes bridge activity and maintenance. We're witnessing solid activity in alternative energy markets. We also see a very strong commodity market. If you think about when the last times we saw commodity prices at this level, not specifically the oil and gas markets, which are trending well, but also the base metals and agricultural products, it's all pointing in the right direction. That's probably one of the macro drivers that I consider. Jeff, do you want to jump in with more specific details?

Jeff Schmaling, Chief Operating Officer

Yes, I would like to build on the commodity story. Normally, as we enter Q3, we see a ramp-up in construction, especially infrastructure-type work, which is a normal sequential thing for us. But we're seeing increased activity after a quiet period caused by the pandemic. In addition, many of our OEMs servicing a variety of verticals are witnessing increased activity, which I spoke to in my previous comments. Infrastructure spending in the U.S. is improving, and we look forward to it growing. Overall, we're seeing an uptick in virtually all the prime verticals we serve.

Joseph Grabowski, Analyst

Great. That's really helpful color. My follow-up question continues with the same math. If I look at EBITDA for the second half versus the first half, rough math implies about a 17% EBITDA margin in the second half versus an 11% EBITDA in the first half, suggesting pretty healthy incremental margin improvement. Could you discuss some of the cost headwinds and tailwinds that are helping or hurting the second half versus first half to drive that EBITDA margin improvement?

Ricky Dillon, Chief Financial Officer

Sure. As we've been saying, the biggest tailwind will be improving product volume, which will be the major driver of improvement from the first half to the second half. You'll see some incremental bonus expense at some level, along with a little incremental savings. We hope to get the benefit of continued improved utilization and reduce under-absorption from what you saw in Q2. Hence, the biggest factor will remain product volume. We have a favorable mix that will contribute as product volume increases, and that will be our primary driver of improvement.

Jeffrey Hammond, Analyst

On the pricing side, I think you previously talked about airfreight and manufacturing variances in the first half. Could you elaborate on your expectations for manufacturing variance in the second half? Additionally, are you planning to adjust your airfreight strategy over time?

Ricky Dillon, Chief Financial Officer

Well, a couple of things. Airfreight is a more significant factor now due to the increase in demand. This scenario is not unique to our business; it's a global characteristic. As previously noted, you noticed more airfreight in Q2. We are balancing inventory levels and, going forward, minimizing airfreight where possible while also ensuring supply for our customers. Utilization and absorption in the back half are expected to be neutral to favorable compared to the front half. Additionally, as we manage service recovery through the pandemic, we closely monitor project timing and labor mobilization, allowing us to adjust our permanent and temporary labor resources according to existing demand.

Jeffrey Hammond, Analyst

As we consider your structural cost base post-COVID, how do you perceive your readiness to achieve higher long-term margin targets?

Ricky Dillon, Chief Financial Officer

We have taken out $33 million in costs, and we feel good about that. There's always room for driving efficiencies, and we continually seek those opportunities. Regarding margins, achieving higher margins is fundamentally about volume. Reaching that normal flow returns us to the $600 million in top line revenue, which is critical for margin growth. We view this as a two-step process: firstly, recovering to that normal flow, which takes us back to the margin target we set, and secondly, leveraging growth from new product development and focusing on value-added services and rentals. These will help us reach and possibly exceed 25% margins as we rebound from the downturn.

Brendan Popson, Analyst

Regarding your commentary on the back half of the year, it seems like Q3 is typically the strongest. Do you also expect a sequential growth improvement in Q4, and does that suggest we should think about revenue potential exiting FY '21 moving forward?

Randy Baker, President and CEO

Yes, that's exactly what we meant. We expect sequential improvement to accelerate. We are pleased with the inbound orders we've seen to date in March. Notably, the significant drop in activity last year didn't occur until the last week of March. The fact that we are currently up 15% year-over-year this March bolsters our projections for acceleration. We foresee an off-cycle year where Q3 is our peak, followed by Q4, contrary to typical trends.

Ricky Dillon, Chief Financial Officer

Regarding the pressure wave on Slide 4, we traditionally experience peak demand in Q3. Still, the dotted line indicates that order rates could return to normal by the end of Q4. So yes, we anticipate continued sequential improvement as we approach year-end.

Ann Duignan, Analyst

Could you provide details on the pricing adjustments you mentioned? Are these increases applicable to products distributed or all products and services, and by how much?

Ricky Dillon, Chief Financial Officer

These targeted pricing adjustments principally pertain to specific products influenced by increased costs, not an across-the-board increase. We anticipate variations in pricing from 1% to 4%. Pricing will offset costs as we proceed into the back half of the year, and we will continue to monitor and potentially implement further price adjustments where necessary.

Ann Duignan, Analyst

Considering your procurement patterns, have you secured material pricing that protects you for the next couple of quarters?

Ricky Dillon, Chief Financial Officer

Unlike prior years, our inventory levels are not high, meaning we're closely managing costs. We have secured price agreements to offset anticipated increases, but that will require us to balance low inventory levels against incoming demand as we progress.

Deane Dray, Analyst

Could you detail the impact of the extreme weather in Texas? Can you provide some quantitative context regarding business interruptions or unrecovered revenue, along with potential upcoming construction opportunities stemming from that?

Ricky Dillon, Chief Financial Officer

In terms of the quarter's impact, I'd estimate around $1 million in missed top-line revenue due to weather, primarily contributing to Q3 recovery. While not a massive impact, it nonetheless affects our numbers. The margin flow-through related to those products remains strong. In terms of upcoming projects, Jeff, do you wish to discuss opportunities?

Jeff Schmaling, Chief Operating Officer

Most of the impact was due to scheduled jobs and labor that we weren't able to manage because of the weather. The biggest impacts were from missed rental opportunities. We normally rent a fair amount of equipment out of our Deer Park facility, which obviously didn't occur. However, we are starting to see these opportunities emerge. We anticipate a marked uptick in demand for rental equipment and opportunities to strengthen the grid down there.

Deane Dray, Analyst

Could you provide a breakdown of the impressive 15% uptick in orders for March based on geography and business verticals?

Randy Baker, President and CEO

That uptick is very broad, which is what we needed to see. Good regional improvement across various sectors. We're encouraged and view this as a positive sign of widespread recovery. This includes orders from distribution and reflects an overall positive uptick.

Michael McGinn, Analyst

Regarding potential growth, do you still see opportunities for regional expansion within your tooling business moving forward?

Randy Baker, President and CEO

The primary focus has been on vertical markets along with expanding the associated tool platforms. Our last acquisition, concerning torque and tension markets, showcases that. We see strong prospects in related areas and would consider enhancements in the Asia Pacific market as the last major geographic move.

Michael McGinn, Analyst

On the subject of margins, I’ve noticed that a margin exceeding 20% seems plausible moving into the fourth quarter. I want to ensure this aligns with similar historical peaks and gain insight into the margin impacts from your new product development under the 80/20 simplification efforts.

Ricky Dillon, Chief Financial Officer

Regarding the Q3-Q4 margin outlook, we anticipate a 20% margin run rate by the end of Q4. This aligns with previous peaks. New products are projected to meet or exceed the average margins, and historically, we’ve had success in bringing them to par quickly.

Jeff Schmaling, Chief Operating Officer

Most of our rail activity pertains to maintenance in that sector. We have specialized products for maintaining and installing rail. Our competitors are typically hydraulic competitors. Our primary suppliers target the main rail operators, and we're seeing new product introductions with promising order upticks this year.

Operator, Operator

Our next question comes from Justin Bergner with G Research.

Justin Bergner, Analyst

In the context of achieving that 20% EBITDA margin with anticipated $525 million of revenue, could you clarify the drivers contributing to an incremental $45 million to $50 million of EBITDA on additional revenue, which translates to growth beyond a normal incremental rate?

Ricky Dillon, Chief Financial Officer

When discussing revenues approaching $600 million, we consider improvements stemming from cost reductions and leverage while maintaining a robust EBITDA margin. Product volume growth is essential, paired with enhancements from our value-added services. Overall, we believe we've executed on several self-help actions needed to return towards 20% margins, targeting further advancements towards 25% through growth initiatives.

Justin Bergner, Analyst

What trends underlie the increased infrastructure demand observed in Europe? Is this opportunity sustainable, and what percentage of European revenue stems from infrastructure-related projects?

Jeff Schmaling, Chief Operating Officer

There has been a significant volume of quotes for infrastructure projects, particularly bridge-related jobs, which indicates economic growth in that realm. These projects are now moving to the award stage, and our team is optimistic about forthcoming increased spending in this sector, translating into a meaningful portion of our European business.

Operator, Operator

That's all the questions today. I'll now turn it back to management for closing remarks.

Randy Baker, President and CEO

Thank you very much, everybody, for joining us today, and we'll look forward to follow-ups.

Operator, Operator

Thank you. This concludes today's conference. All parties can now disconnect. Have a great day.