Enerpac Tool Group Q1 2024 Earnings Call Transcript

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Provided by Quartr
December 20, 2023

There are 8 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Enerpac Tool Group's First Quarter Fiscal 20 24 Earnings Conference Call. As a reminder, this conference is being recorded December 20, 2023. It's now my pleasure to turn the conference over to Travis Williams, Director of Investor Relations. Mr.

Operator

Williams, please go ahead.

Speaker 1

Thank you, operator. Good morning and thank you for joining us Enerpac Tool Group's Q1 fiscal 2024 earnings call. On the call today to present the company's results are Paul Sternleby, President and Chief Executive Officer and Tony Colucci, Chief Financial Officer. Our slides and a recording of today's call will be available on the Enerpac website in the Investors section. Today's call will reference non GAAP measures.

Speaker 1

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 the call over to Paul.

Speaker 2

Thanks, Travis, and good morning, all. Following on the heels of Enerpac's strong financial performance in fiscal 2023, We started fiscal 2024 with another solid quarter. While we remain cautious as to how the full year will unfold, Given the economic and geopolitical uncertainty, we are affirming our full year fiscal 2024 guidance. Our results clearly reflect the continued benefits of our Ascend transformation program, our 4 pillar growth strategy and the changes across the organization that are making Enerpac more efficient, more productive and easier to do business with. As you can see on Slide 3, 1st quarter organic revenue, what we previously referred to as core revenue, was up 5.5% from the year ago period to $142,000,000 Moreover, We captured significant improvement in operating and SG and A efficiency.

Speaker 2

With that, adjusted EBITDA expanded 31% to $35,000,000 in the Q1 fiscal 2024, enabling us to achieve an adjusted EBITDA margin of 24.6%. I'll let Tony review our Q1 performance and fill in the details

Speaker 3

Thanks and good morning. We are now on Slide 4. As Paul said, Enerpek enjoyed solid top line growth and outstanding EBIT In the Q1 of fiscal 2024. Reported revenue growth of 2% year over year reflected the sale of the Cortland Industrial Business in the Q4 of fiscal 2023. On an organic basis, which excludes divestitures and the impact of foreign exchange, Revenue expanded 5.5%.

Speaker 3

For the Industrial Tools and Service segment, organic revenue growth was 5.8%, comprised of a 4.5% increase in product revenue and a 10.1% expansion in services. The segment enjoyed a positive contribution from price as well as volume and mix. Overall Enerpac revenue growth was Slightly offset by 2.3% decline in Cortland Biomedical. The expected decline was primarily a timing issue related to some specific customer programs. On Slide 5, from a profitability standpoint, gross margins expanded 360 basis points to 52 3% in the Q1 of fiscal 2024.

Speaker 3

This was driven by the continued success of our lean initiatives, Focus on operational excellence and price benefits. Among our initiatives, we improved freight expense by optimizing routes and renegotiating rates. Gross margins also benefited from the divestiture of the Cortland Industrial Business. Similarly, we continue to benefit from initiatives that improved our SG and A efficiency. SG and A expense declined 21% year over year, primarily due to lower Ascend charges.

Speaker 3

Adjusted SG and A expense, which excludes Ascend and other one time charges from both periods declined 5%. This benefit was achieved by streamlining our organizational structure and offshoring certain finance and IT functions, along with further optimization of all back office functions. On an adjusted basis, SG and A was 29% of sales, down from 31.2 percent of sales in the year ago period. As we have said, our financial framework goal is to bring our SG and A spend in line with best in class And we continue to move in that direction. Turning to slide 6, with both top line growth and margin expansion, Adjusted EBITDA increased 31% year over year.

Speaker 3

Adjusted EBITDA margins expanded 5.50 basis points from 19.1% in the Q1 of fiscal 2023 to 24.6% in the most recent period. On a GAAP basis, diluted earnings per share from continuing operations totaled $0.33 in the quarter. Adjusted EPS increased 34% year over year to $0.39 compared with $0.29 in the prior year. This increase was primarily the result of EBITDA expansion along with a lower share count and despite a higher The more normalized adjusted effective tax rate of 21.9% in the Q1 of 2024 compared with a 15.6% rate in the year ago period. We continue to expect our adjusted effective tax rate for the full year to be in the 20% to 25% range.

Speaker 3

In the Q1 of fiscal 2024, Operating cash was a use of $7,000,000 resulting from higher Ascend related cash payments and the timing of the cash bonus payment. In fiscal 2023, the bonus was paid out in the Q2. On Slide 7, as we have discussed, Enerpac's strong liquidity and balance sheet support our capital allocation priorities, including internal investments to drive organic growth, Strategic acquisitions and opportunistic share repurchases. At the end of the Q1, net debt was $97,000,000 resulting in a net debt leverage ratio of 0.9x adjusted EBITDA. Total liquidity was approximately $500,000,000 Additionally, we have the option in the credit facility to request an M and A accordion up to $300,000,000 As previously mentioned, with a full time corporate development leader in place, we are actively exploring acquisition targets while adhering to our disciplined financial and strategic criteria.

Speaker 3

During the quarter, we returned $26,000,000 to Shareholders through the repurchase of approximately 1,000,000 shares. At quarter's end, we had about 3,000,000 shares remaining against the 10,000,000 share Board repurchase authorization. With that, let me turn the call back to Paul.

Speaker 2

Thanks, Tony. As we discussed on our year end fiscal 2023 call, we streamlined our organization into 3 geographic regions: Americas, EMEA, which includes Europe, Middle East and Africa and Asia Pacific. The realignment has enabled some early cost synergies. We anticipate additional cost savings as well as revenue synergies going forward. In the Americas, we continue to see a neutral to cautious sentiment among our channel partners, we are generally expecting low single digit growth in calendar 2024.

Speaker 2

The mid single digit organic growth experienced in the Q1 was broad based across our verticals With strength in construction, wind and rail, overall, we believe channel inventory is appropriate with perhaps a few exceptions. In our newly combined geographic region, EMEA, we had solid top line growth in products and services, This is yielding organic growth in the high single digits. While as previously discussed, we exited certain low margin service business in the Middle East, We more than offset that with new projects. Looking forward, overall dealer sentiment is neutral to cautious. The Asia Pacific region saw low single digit organic growth in the quarter, but strong order growth, which should translate to solid revenue growth in subsequent periods.

Speaker 2

We're encouraged by the pace of investment activity and inquiries associated with infrastructure spend in Japan, power plant investment in China and win opportunities, especially in India. Switching gears, as you know, Enerpac's highly diversified end market participation As stability and provides growth opportunities, we know that investors are interested in greater insight into our end market mix. To that end, we've developed our best estimate of Enerpac's revenue by vertical market, which we show on Slide 9. As you can see, oil and gas, which is primarily downstream, along with the general industrial sector, are our 2 largest end markets. As it relates to our targeted verticals, rail is included in the infrastructure category, which totaled about 9% of sales in fiscal 2023.

Speaker 2

Wind is included in the power generation sector, a 10% category. The other category includes the company's exposure to shipbuilding, Automotive, Aerospace, Off Highway Vehicle Repair, Military, Paper and Wood, Marine and Rescue. Finally, I'd like to provide some color on 2 of our growth pillars, innovation and expansion in Asia Pacific. On the innovation front, as we've mentioned, over the past 2 years, we have reconfigured our new product development program with a disciplined process and roadmap focused on customer needs and aligned with our 4 key vertical markets. For example, we recently launched 2 new battery powered portable pumps, rounding out Enerpac's best in class cordless pump portfolio.

Speaker 2

These pumps have competitive advantages in terms of speed, run time and oil capacity. They are capable of serving applications across a wide array of end markets with clear advantages within the MRO, rail and wind sectors. And we believe these battery pumps can take share from competitors and applications where small electric or air pumps are currently being used. Moreover, these products are equipped with Enerpac Connect, allowing customers to receive detailed product information, perform firmware updates and track service records. In Asia Pacific, as I mentioned, we're excited about infrastructure, power plant and wind projects in the region.

Speaker 2

One of the images on the slide shows the critical role of Enerpac equipment in use at the Narita International Airport in Japan, where a 450 ton overpass road bridge was removed ahead of a planned runway extension. Lack of space prevented the use of a crane for the bridge removal. Instead, our customer used Enerpac JS500 jackup units Mounted on self propelled modular transporters to remove the entire bridge overnight, thus minimizing traffic disruption on the Expressway. We're also advancing the rollout of our 2nd brand, Larzep, a mid tier offering targeting a relatively untapped market segment, which we believe could be roughly on par with the size of the premium segment on a dollar basis. To date, we've signed up several new distributors and are pleased with early order activity.

Speaker 2

We've also added new commercial leaders in Southeast Asia to help accelerate growth. And we're leveraging our Enerpac Academy in Singapore to train new distributors and customers in the region, Drive demand and build brand loyalty. As we know from our experience in other regions, providing training on our equipment is a critical component of customer engagement and penetration. As you can see from our performance, This quarter and over the past few years, Enerpac is capturing consistent benefits from our Ascend transformation initiatives, our growth strategy and the programs we have implemented to enhance operating efficiencies. We are confident that there is more to come as we work to achieve our long term financial framework.

Speaker 2

Before we open the call to questions, I'd like to extend my sincere thanks to our global workforce for their deep commitment to our customers and for advancing the initiatives that are making Enerpac a premier industrial tools and Service Business. Now we'd be happy to take any questions.

Operator

Thank you. We'll now be conducting a question and answer session. Our first question today is coming from Tom Hayes from CLK. Your line is now live.

Speaker 4

Hey, good morning guys. Thanks for taking my call and Congratulations on the start to the year.

Speaker 2

Thanks, Tom. Good morning. Hi, Tom. Good

Speaker 4

morning. Hey, Paul, I was wondering if you could give us a little bit more color or detail on The market conditions in the Americas, it sounds like you were up mid single digits for the quarter. It sounds like maybe you outperformed The market a little bit, I think you mentioned that the expectations from some of your customers were low single digit growth for the year. I was just wondering any other color you can give us as your market conditions as it's your largest region there?

Speaker 2

Sure. Yes, I think as I mentioned in my prepared remarks, What we hear from channel partners is probably more of a neutral to cautious sentiment and that's really not new. We've been talking about that for several quarters And we referenced that they are for their business overall generally expecting kind of low single digit growth Calendar 'twenty four, we did outperform that. I think the strength of our business globally and certainly in Americas is that It's very broad based. We are quite diversified in terms of end markets.

Speaker 2

And I think we're still quite bullish about what's to come yet from the infrastructure bill, Still early days here in the U. S. I wouldn't say we've seen any significantly meaningful impact, but our expectations are that that will become a Tailwind for us in the coming quarters years. So I think we remain optimistic despite some of the cautious Sentiment that we hear from our channel partners.

Speaker 4

Okay, fabulous. And then, Tony, maybe on the strong gross Margin performance certainly outpaced what I was expecting. Any granularity that you can provide as far as you called out several drivers Of that and just any color there and then maybe just touch on the sustainability of that margin rate. Is that something that We should start thinking about for the balance of the year as far as margin trends, certainly probably not that much of a quarter over quarter Improvement, just any thoughts you can give us on gross margin rates as they trend through the year?

Speaker 3

Sure. Yes, I mean first of all, we're very happy with the Performance on gross margin, 3 60 basis points improvement there. I would say that pertains to several factors. We Certainly have the operational efficiencies that we're seeing to come through via Ascend and other initiatives. I'd also say that stronger mix of more profitable products that we saw here in Q1.

Speaker 3

Gross profit will fluctuate throughout the year with different regional growth rates and mix and We but we'll also continue to see benefits through our initiatives, while we still have some investments coming through here in automation and other capacity So I mean it will fluctuate up and down here throughout the year is what I would say.

Speaker 4

Okay. Maybe 2 more if I could. 1, as I'm still kind of getting a little bit up to speed on the story, is there anything that we need to kind of think about as far Seasonality as we go through the year, has anything changed versus previous years?

Speaker 5

No, no changes.

Speaker 3

Still kind of first half versus second half dynamic that we'll continue to see.

Speaker 4

Okay. Maybe just last one for me. I appreciate it. As far as wind projects, I think you called out that That area seems to be okay, but we've seen some news stories lately pertaining specifically to offshore wind projects. I was just wondering could maybe talk about your exposure to offshore wind, it sounds like maybe some of those projects may be slowing or moving to kind of a pause.

Speaker 4

Is that an issue or just any color you can provide on that would be great?

Speaker 2

Yes, sure. So as I mentioned, we broke down and provided a bit more Color in terms of our exposure that we estimate by end market. We show power gen is roughly 10% category for us, so wind is part of that. So today, wind is still relatively small part of overall Enerpac revenue, but it is obviously a meaningful and growing market in our view that Still has very significant potential and we are still bullish on the sector. We still see plenty of demand for installations.

Speaker 2

If it's not offshore, it's onshore. We have good, I would say, connectivity to both. So we are not overly reliant on 1 or the other onshore versus The expectation is offshore wind will ramp up again. In fact, there was a recent article published Citing some statistics from the Bureau of Labor Statistics that employment of wind turbine service technicians is going to increase 45% Over the next decade and that will be the fastest growing occupation in the U. S.

Speaker 2

So I think just another data point That gives us increasing confidence over the short, medium and long term about the growth in that sector, just given the dynamics around the need for the shift to clean energy. And I think we're incredibly well positioned to play a meaningful part in that.

Speaker 4

Great. Appreciate the color. I'll jump back in the

Operator

queue. Thank you. Next question is coming from Larry De Maria from William Blair. Your line is now live.

Speaker 5

Thanks. Good morning. Good

Speaker 2

morning, Larry.

Speaker 5

Hi, Larry. Okay. Hey, just to maybe follow-up on that and the wind, can you maybe talk about the geographical opportunities? I think you mostly were referencing Domestic opportunities, but are there what does it look like outside of the U. S?

Speaker 2

Yes. No, thanks for the question, Larry. I think a Few points I would make there. So first off, we have broad exposure across the whole, what I would call, lifecycle on wind. So we have established good relationships with OEM wind turbine manufacturers and some of their key suppliers As well as folks that are doing installation and commissioning as well as O and M or operations and maintenance work and ultimately even decommissioning So I think we have broad exposure.

Speaker 2

We are not overly reliant on any single part of that market. And I would say similarly from a geographic standpoint, earlier in my comments were about the U. S, but we have significant pipeline of activity that we are looking at in other markets including in Europe and parts of Asia. So I think we have really good broad based exposure geographically and we see increasing interest in investment activity in different parts of the world for wind, again just given the shift to clean energy.

Speaker 5

Okay, thanks. That makes sense. Second question, you talked about your growth outlook where well, you talked about the orders and sort of how to think about, I guess, Europe is most cautious and there's some optimism brewing in APAC. Can you maybe drill down and give some order of magnitude in terms of regional growth for the year?

Speaker 2

Yes. I mean we haven't broken it out by region. I mean you can see what the actuals are. I would say, I mean, the sentiment is probably similar across Americas and Europe, sort of neutral to cautious, I think we said in terms of the channel. So I think ultimately we have affirmed our full year guidance at We don't have any reason to believe differently 1 quarter in.

Speaker 2

I mean we are pleased that this quarter we delivered 5.5 Percent of organic growth above our 2% to 4% expectation for the year, but we still have 3 quarters to go. So We will see where the dynamics take us in 2024, but I think we are just being mindful of some of that neutral to cautious sentiment That we hear from the channel.

Speaker 5

Okay, makes sense. Last question, you're obviously Good start to the year. We were 24.6 percent adjusted EBITDA margins. We're tracking in on that Ascend targets. So can you just Update, how do we think about Ascend in 'twenty four and beyond and updates to update when might we get an update, I guess?

Speaker 3

Yes. So again, we're really pleased with the performance that we have here in EBITDA margins in Q1 of the 24.6%. And it's we're tracking well in line with what we guided to for the full year, perhaps A bit ahead of schedule from that perspective. Again, we'll have some fluctuations here through the rest of the year in both Gross margins and EBITDA percentages with various timings that we have with benefits coming through and investments We're making here as well. But I would say at least on track with where we're expected to be if not a bit ahead.

Speaker 3

So Really happy to see that. From an Ascent perspective, there are still more initiatives that are coming through. As we mentioned last year, As we ended fiscal 'twenty three, we achieved our Ascent benefits a year ahead of schedule. So we're really excited about that. Still getting not only the tailwinds from that here in FY 'twenty four, but new initiatives that we're executing against.

Speaker 3

And as we said in our last call, we're going to we're not breaking out the Ascend benefits from just natural benefits As really the business has migrated into just a comprehensive view at this point. So, but still improvements to come is what I'll say. And We are on track with Doug, but we got it.

Speaker 2

Yes. And my only comments I would add to what Tony said is, yes, we are continuing to execute Ascend, but I think he is right. It evolves much more into our continuous improvement program and framework. We are pleased with the progress But we still got a very active funnel of initiatives that were at various stages of maturity. So we feel good about that.

Speaker 2

And I would say likewise, our guidance on or our financial framework around targeting an adjusted EBITDA margin of 25% by fiscal 2025, That remains at this point. We have not revised that. But certainly given what we are able to deliver in Q4 last year And this Q1 gives us increasing confidence about our ability to meet or beat that framework for fiscal 'twenty five.

Speaker 5

Okay. Sounds good. Thank you very much and good luck this year.

Speaker 3

Thanks, Larry. Thank

Operator

you. Thank you. Next question is coming from Steve Silber from Argus Research. Your line is now live.

Speaker 6

Good morning and thanks for taking my questions. So the earnings presentation sites oil and gas and petrochemical as the largest areas of end market Exposure for the company. I was just wondering if you could expand a little bit more on this as you mentioned that the business Upgrades primarily downstream compared to up in mid. I'm just curious also in terms of that market's exposure to new builds versus maintenance markets. Just trying to get a sense as to how we should think about the growth in that end market broadly?

Speaker 2

Yes. Good morning, Steve. Thanks for the question. Yes, I think certainly it is our largest market. That has come down, I would say considerably from the highs of Actuant Day is our predecessor company.

Speaker 2

Our expectation is that will likely come down further not on an absolute dollar basis, but as a percentage Over the coming years as we drive accelerated growth in our more focused verticals like infrastructure, rail, industrial on our own wind. But in the oil and gas sector today, the majority of what we do is largely in the downstream area of that and a little bit of midstream. It's also largely tied to maintenance. So I would say the exposure to new build out in CapEx is relatively Minimal there. It's not 0 obviously, but most of what we do is tied to maintenance on existing assets.

Speaker 2

So certainly, oil and gas is a cyclical sector. But by and large, I would say that we our exposure is the less cyclical part of that overall sector. And so we will continue to see some fluctuations, obviously given the market dynamics, but we think we are well positioned with what we do in that space.

Speaker 6

That's helpful. Thanks. And one more if I may. Regarding the recently announced Track Tools Rail acquisition, Can you speak to your views on the growth opportunity there and maybe perhaps what synergies you see with the core business?

Speaker 2

Yes, absolutely. We are really excited to complete that acquisition. And although it was small, not material for us, it is very Certainly, it's the first of our acquisitions that are linked towards what we're doing in our focused verticals, in this case rail. And the exciting part for us about Trac Tools is, 1st and most importantly, it's very differentiated technology for the marketplace That really creates some significant benefits and functionality for end users in that space, Which obviously was our key interest in the acquisition. I think secondly, although it's a very relatively small brand and business today Essentially only focused in the U.

Speaker 2

S. What we are excited about is our ability to scale that globally Given our presence really in all major markets and our existing customer relationships in the rail sector in many of those markets and we're actively As we speak, so we are excited about the commercial growth potential and frankly over time some of the cost synergies as we can Drive out some of the overall cost of the product and improve the production And efficiencies over time. So it was a really exciting acquisition, early days, but we're pleased with the progress we're making.

Speaker 6

Great. Thank you so much and my congratulations on the quarter as well.

Speaker 2

Thank you very much, Steve. Thanks, Steve.

Operator

Thank you. Your next question today is coming from Gary Prestopino from Barrington Research. Your line is now live.

Speaker 7

Hi, good morning everyone. Just a quick question on You're building an acquisition pipeline. Would it be safe to say that a lot of these acquisitions are small Private companies that are very product specific to your markets or are they really across the board in terms of the Kind of things you're looking at?

Speaker 3

Yes. Hi, Gary. So from a size perspective, I would say it's A bit across the board in terms of what our funnel has. I'll go back and just say from what the types of companies that we're looking For our we're really just trying to stay close to our knitting here is what I would say. We're looking for product tuck ins.

Speaker 3

We're looking for targets that would help us expand in our key vertical markets that we've been discussing. And then the targets that help us expand our technology or innovation here as well. So I mean, that's what we're focused on in terms of our targets, and that's what we have in our funnel.

Speaker 2

Yes. And I would add to that, Carey. Our current funnel, I would say both quality and quantity has significantly improved as we brought on a full time corporate development leader about half a year ago now Who is fully dedicated to that. I would say the second thing is we have what I would classify as both small or medium and larger size Kind of deals in that funnel. So many of them, yes, could be characterized as more privately held kinds of businesses.

Speaker 2

But We have got all different kinds in there and we continue to have good meaningful conversations. As we know, these things tend to be episodic and depend On asset availability, so we've got a pretty disciplined process from early stage target identification through to Outreach and cultivation ultimately transacting and integrating deals.

Speaker 7

Okay. And then just lastly on the Ascend program, I think it was a prior question, I think you hit at least this quarter close to your adjusted EBITDA margin target. Going forward as you move from Ascend to maybe just continual cost control, Productivity Improvement, whatever. What are you targeting areas That would help to drive the margin even further. I mean, assume that a lot of the lower hanging fruit on Ascend has been taken care of.

Speaker 7

So What do you bank on to grow the margins going forward? Is it products, higher margin products? Are you still able you're going to go through a program where you're going to really tightly control SG and A expenses? Any Vision, you can give us on that, that would be helpful.

Speaker 2

Yes, sure. I think there are a few things. From a cost of goods perspective, we still believe we have ample opportunities is to drive more manufacturing productivity and efficiencies somewhat through investment as Tony referenced earlier in automation, Other capital investments and we're actively exploring those. I would say secondarily, we still believe we have opportunities in sourcing. We still have a relatively complex supply chain and there are definitely opportunities to drive more best cost country sourcing, more vendor consolidation, More value engineering work.

Speaker 2

We continue to evaluate our footprint and look for opportunities there. And then on the SG and A side, as Tony referenced in his I mean, we are pleased with the progress we have made and yet I would say we are still high relative to what we see as best in class industrials and think there is more Opportunities over time to drive greater efficiencies there as we've been doing. So and then of course there will be some pricing and ultimately mix benefits, Especially driven, I would say, particularly by our focus on our core verticals and the work that we do in innovation. I would say, Generally speaking, most of our innovation, we would expect to be margin accretive, especially if it is truly Differentiated product in the marketplace, which is really what's in our funnel. So all that should be favorable over time.

Speaker 2

Of course, some of that we may choose to reinvest to drive accelerated organic growth. So Not all of that will drop to the bottom line, but on balance, we still see opportunities for margin expansion.

Speaker 3

Yes, agreed. I would just add that we have A lot of opportunities and initiatives in our pipeline here across the board. We did a lot of work in over the last 2 years, But there's still more opportunities that are there that we are driving. And we really are taking this to the next level here as well in terms of the ideation that we have and just really moving to

Operator

Thank you. That does conclude our question and answer session. Do you have any further closing comments?

Speaker 2

I would just like to say thanks again for joining us this morning. As always, Travis will be available to take any follow-up questions. Best wishes to everyone for a wonderful holiday season and a Happy New Year.

Operator

Thank you. That does conclude today's teleconference webcast.

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Enerpac Tool Group Q1 2024
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