Enerpac Tool Group Corp. (NYSE:EPAC) Q1 2024 Earnings Call Transcript

Enerpac Tool Group Corp. (NYSE:EPAC) Q1 2024 Earnings Call Transcript December 20, 2023

Enerpac Tool Group Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Enerpac Tool Group’s First Quarter Fiscal 2024 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. Williams, please go ahead.

Travis Williams: Thank you, operator. Good morning, and thank you for joining us for Enerpac Tool Group’s first quarter fiscal 2024 earnings call. On the call today to present the company’s results are Paul Sternlieb, President and Chief Executive Officer, and Tony Colucci, Chief Financial Officer. Our slides and recording of today’s call will be available on the Enerpac website in the Investors section. Today’s call, we’ll reference non-GAAP measures. You can find a reconciliation of GAAP to non-GAAP measures in the press release issued yesterday. Our comments will also include forward-looking statements that are subject to business risks that could cause actual results to be materially different. Those risks include matters noted in our latest SEC filings. Now I will turn the call over to Paul.

Paul Sternlieb: 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 four-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, first quarter organic revenue what we previously referred to as core revenue was up 5.5% from the year ago period to $142 million.

Moreover, we captured significant improvement in operating and SG&A efficiency, with that adjusted EBITDA expanded 31% to $35 million in the first quarter of fiscal 2024, enabling us to achieve an adjusted EBITDA margin of 24.6%. I’ll let Tony review our first quarter performance and fill in the details about the positive year-over-year gains. Then I will speak about geographic trends, provide some details about a few exciting areas of our growth strategy, and introduce our estimates of revenue breakdown by end market. Tony?

Anthony Colucci: Thanks, and good morning. We are now on Slide 4. As Paul said, Enerpac enjoyed solid top-line growth and outstanding EBITDA expansion in the first quarter of fiscal 2024. Reported revenue growth of 2% year-over-year reflected the sale of the Cortland Industrial business in the fourth quarter of fiscal 2023. On an organic basis, which excludes divestitures and the impact of foreign exchange, revenue expanded 5.5%. For the Industrial Tools & Services segment, organic revenue growth was 5.8% comprised of a 4.5% increase in product revenue and a 10.1% expansion in services. This segment enjoyed a positive contribution from price as well as volume and mix. Overall, Enerpac revenue growth was slightly offset by a 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 first quarter of fiscal 2024. This was driven by the continued success of our lean initiatives focused 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&A efficiency. SG&A expense declined 21% year-over-year primarily due to lower ASCEND charges. Adjusted SG&A expense, which excludes ASCEND and other one-time charges for 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&A was 29% of sales, down from 31.2% of sales in the year ago period. As we have said, our financial framework goal is to bring our SG&A spend in line with best-in-class industrials 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. Adjusted EBITDA margins expanded 550 basis points from 19.1% in the first quarter 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 but more normalized adjusted effective tax rate of 21.9% in the first quarter 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. In the first quarter of fiscal 2024, operating cash was at use of $7 million, resulting from higher ASCEND-related cash payments and the timing of the cash bonus payments. In fiscal 2023, the bonus was paid out in the second quarter. 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 first quarter, net debt was $97 million, resulting in a net debt leverage ratio of 0.9 times adjusted EBITDA. Total liquidity was approximately $500 million. Additionally, we have the option in the credit facility to request an M&A accordion up to $300 million. 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. During the quarter, we returned $26 million to shareholders through the repurchase of approximately one million shares. At quarter’s end, we had about three million shares remaining against the 10 million share Board repurchase authorization. With that, let me turn the call back to Paul.

Paul Sternlieb: Thanks, Tony. As we discussed on our year-end fiscal 2023 call, we streamlined our organization into three 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’re generally expecting low-single-digit growth in calendar 2024. The mid-single-digit organic growth experienced in the first quarter 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, 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. We’re encouraged by the pace of investment activity and inquiries associated with infrastructure spend in Japan, power plant investment in China, and wind opportunities, especially in India. Switching gears, as you know, Enerpac’s highly diversified end-market participation and 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 & gas, which is primarily downstream along with the general industrial sector, are our two 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. 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 two of our growth pillars; innovation and expansion in Asia Pacific. On the innovation front, as we’ve mentioned, over the past two years, we have reconfigured our new product development program with a disciplined process and roadmap focused on customer needs and aligned with our four key vertical markets.

For example, we recently launched two new battery-powered portable pumps, rounding out Enerpac’s best-in-class cordless pump portfolio. These pumps have competitive advantages in terms of speed, runtime, 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 in 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 service records. In Asia Pacific, as I mentioned, we’re excited about infrastructure, power plant, and wind projects in the region.

One of the images on the slide shows the critical role of Enerpac equipment being used at the Narita International Airport in Japan, where a 450-ton Overcast 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 jack-up 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 second brand, Larzep, in 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.

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 two years, Enerpac is capturing consistent benefits from our ASCEND Transformation initiatives, our growth strategy, and the programs we’ve implemented to enhance operating efficiencies. We are confident that there is more to come as we work to achieve our long-term financial framework. 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: [Operator Instructions] Our first question today is coming from Tom Hayes from CLK. Your line is now live.

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Q&A Session

TomHayes: Hi, good morning, guys. Thanks for taking my call and congratulations on the start to the year.

Paul Sternlieb: Thanks, Tom, and good morning.

Anthony Colucci: Hi, Tom.

TomHayes: Good morning. Hi – 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 know, you’re 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 of your market conditions as it’s your largest region there.

Paul Sternlieb: Sure. Yes, I think, as I mentioned in my prepared remarks, you know, 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 – you know, for their business overall generally expecting kind of low-single-digit growth in calendar ’24, 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 and I think, you know, we’re still quite bullish about what’s to come yet from the infrastructure bill, still early days here in the U.S. Wouldn’t say we’ve seen any significantly meaningful impact, but our expectations are that that will become a nice tailwind for us in the coming quarters and years.

So I think we’re – we remain optimistic despite some of the cautious sentiment that we hear from our channel partners.

TomHayes: 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 a trend through the year?

Anthony Colucci: Sure. Yes, I mean first of all, we’re very happy with the performance on gross margin, you know, 360 basis points improvement there. I would say that pertains to several factors. We certainly have the operational efficiencies that we’re seeing that come through, be it ASCEND and other initiatives. I would also say that stronger mix of more profitable products that we saw here in Q1. Gross profit will fluctuate throughout the year with different regional growth rates and mix, but we will also continue to see benefits through our initiatives, while we still have some investments coming through here and automation and other capacity needs as well. So I mean it will fluctuate up and down here throughout the years what I would say.

TomHayes: Okay. Maybe two more if I could. One, 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 as seasonality as we go through the year? Has anything changed versus previous years?

Anthony Colucci: No, no changes, still kind of first half versus second half dynamic that we will continue to see.

TomHayes: 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 new stories lately, pertaining specifically to offshore wind projects, I was just wondering if you 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, is that an issue or just any color you can provide on that would be great?

Paul Sternlieb: Yes, sure. So as I mentioned, we’ve broken out 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’re still bullish on the sector. We still see plenty of demand for installations. If it’s not offshore it’s onshore. We have good, I would say, connectivity to both. So we’re not overly relying on one or the other onshore versus offshore. In fact, onshore makes up the bulk of the U.S. wind power market today. And, you know, based on what we see from industry research and experts, 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. 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 of that.

TomHayes: Great. Appreciate the color. I will jump back in the queue.

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

Larry De Maria: Thanks, good morning.