Q1 2024 Enerpac Tool Group Corp Earnings Call

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Enerpac Tool Group's First Quarter Fiscal 2024 earnings conference call. As a reminder, this conference is being recorded December 20th, 2020.
It's now my pleasure to turn the conference over to Travis Williams, Director of Investor Relations. Mr. Williams, please go ahead.

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 Stanley, President and Chief Executive Officer, and Tony Trilogy, 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 you can find the 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'll turn the call over to Paul.

Thanks, Travis, and good morning all. Following on the heels of Airpax strong financial performance in fiscal 2023, we started in 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 to review our first quarter performance and fill in the details about the positive year-over-year gains that 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 totally.

Thanks and good morning, we are now on slide 4. As Paul said, InterSpect enjoyed solid top line growth and outstanding EBITDA expansion in the first quarter of fiscal 2020 for reported revenue growth of 2% year over year reflected the sale of the Cortland industrial business in the fourth quarter of fiscal 2023 on a organic basis, which excludes divestitures and the impact of foreign exchange revenue expanded by 5.5%.
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 interconnect 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 first quarter of fiscal 2024. 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 continued to benefit from initiatives that improved our SG&A efficiency. SG&A expense declined 21% year over year, primarily due to lower asset charges.
Adjusted SG&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 off-shoring, 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 for operating cash was a use of $7 million, resulting from higher US and related cash payments and the timing of the cash bonus payments in fiscal 2023 bonuses paid out in the second quarter.
On slide 7, as we have discussed, Enerpac strong liquidity and balance sheet supports 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 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 1 million shares. At quarter's end, we had about 3 million shares remaining against the 10 million share Board repurchase authorization.
With that, let me turn the call back to Paul.

Thanks, Tony. And we discussed on our year end fiscal 2023 call, we streamlined our organization into three geographic regions, Americas Amea, 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 were generally expecting low single digit growth in calendar 2020 for 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.
In media, 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 are encouraged by the pace of investment activity and increase associated with infrastructure spend in Japan, power plant investment in China and wind opportunities, especially in India.
Switching gears, as you know, Enerpac, highly diversified end market participation at 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 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, 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 align with our four key vertical markets.
For example, we recently launched two new battery-powered portable pumps, rounding out Airpax, best-in-class cordless pump portfolio. These pumps have competitive advantages in terms of speed, runtime and oil capacity. They're 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 for firm, 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. One of the images on the slide shows the critical role of Enerpac equipment used at the Narita International Airport in Japan, where a 450 ton overpass road bridge was removed and have a plan runway extension, lack of space prevented the use of a crane for the bridge removal. Instead, our customer used Enerpac JS. 500 jack-up units mounted on self-propelled module transporters to remove the entire bridge overnight, thus minimizing traffic disruption on the Expressway, we're also advancing the rollout of our second brand large 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 canopy 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 engagements and penetration.
And you can see from our performance this quarter and over the past few years, Enerpac is capturing consistent benefits from our Scent 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.
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. Thank you.

Question and Answer Session

Operator

(Operator Instructions) Tom Hayes, CLK.

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

Good morning, Tom.

Morning, Paul.

I was wondering if you give us a little bit more color 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 market conditions as it's your largest region there for 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 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 in calendar 24. We did outperform that. I
think the strength of our business and globally and certainly in Americas is that it's very broad-based. We are quite diversified in terms of end markets, and I think we're still quite bullish about what's to come yet from the infrastructure bill, still early days here in the US, I 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 of despite some of the cautious sentiment that we hear from our channel partners.

Okay. Fabulous. And then, Tony, maybe on the strong gross margin performance certainly outpaced what I was expecting integrated delivery 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 just start thinking about for the balance of the year as far as your 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?

Sure. Yes. I mean, first of all, we're very happy with the performance on gross margin, 300 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 BS. and in other initiatives, I should also say that a stronger mix of more profitable products that we have that we saw here in Q1 and in gross gross profit will fluctuate throughout the year with different regional growth rates and mix.
And we will also continue to see benefits through our initiatives. While we still have some investments coming through here in automation and other capacity needs as well. So I mean, it will fluctuate up and down here throughout the years is what I would say. 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?

No, no changes. I mean, no, still kind of first half versus second half dynamic that we will continue to see.

Okay. Maybe just last one for me. I appreciate it on 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 that pertains 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 could provide on that would be great.

Yes, sure. So as I mentioned, we broke down provided a bit more color in terms of our exposure that we estimate by end market we show Powergen is at roughly 10% category for us to wind as 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 or onshore, we have a good I would say connectivity to both.
So we're not overly reliant on one or the other onshore versus offshore. In fact, onshore makes up the bulk of the US wind power market today. And based on what we see from industry research and experts on that, 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 athat will be the fastest growing occupation in the US.
So I think just another data point that gives us increasing confidence over the 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.

Operator

Larry De Maria, William Blair.

Thanks. Good morning.

Good morning, Larry.

Just to maybe follow up on that and the wind maybe talk about the geographic opportunities now, I think mostly we're referencing domestic opportunities, but other orders look like outside of the US?

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 life cycle on win. 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&M or operations and maintenance work and ultimately even decommissioning of older turbines. So I think we have broad exposure.
We're not overly reliant on a single part of that market. And I would say similarly from a geographic standpoint, you earlier in my comments, were about the US, but we have significant pipeline of activity that we're 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 and investment activity in different parts of the world for wind again, just given the shift to clean energy.

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

I mean, we we haven't broken it out by 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. The cautious I think we said in terms of the channel. So, you know, I think ultimately, we've affirmed our full year guidance at this point.
We don't have any reason to believe differently. One quarter in. I mean, we're pleased that this quarter we delivered 5.5% organic growth above our 2% to 4% expectation for the year, but we still have three quarters to go. So we'll see where it dynamics take us in 2024. But I think we're just being mindful of some of that neutral, the cautious sentiment that we that we hear from the channel.

Okay, makes sense. Last question, you're obviously good start to the year, we were at 24.6% adjusted EBITDA margins were tracking in on that on the Ascend targets. So can you just and update had added, we think about extended 24 and beyond and updates to update when might we get an update, I guess.

So again, we're really pleased with the performance that we have here and EBITDA margins in Q1 of 24.6%. And you know, it's we're tracking well in line with what we guided to for the full year up 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 with the benefits coming through and investments that we're making here as well.
But, you know, I would say, at least on track with that, we are expected to be, if not a bit ahead. So I'm really happy to see that from an Essent perspective, there are still more initiatives that are that are coming through. As we mentioned last year. As we ended fiscal 23, we achieved our Ascend benefits a year ahead of schedule. So we're really excited about that and still getting not only the tailwinds from that here in FY 24, but new initiatives that are that we're executing against.
And as we as we said in our last call, we're going to we're not breaking out the Ascend benefits from just natural benefits as as that really the business has migrated into. I'd just like kind of comprehensive view at this point. And so but it's still still improvements to come is what I'll say and in where we're on track with what we got it.

And I my only comments I would add to what Tony said is yes, we're continuing to execute as soon, but I think it's right to evolve with much more into our continuous improvement program and framework. We're pleased with the progress we made, but we still got a very active funnel of initiatives that were at various stages of maturity. So we feel good about that. And I would say, likewise, you know, our guidance on our financial framework around targeting an adjusted EBITDA margin of 25% by fiscal 25. That remains at this point. We've not revised that, but certainly given what we're able to deliver in Q4 last year in this Q1 gives us increasing confidence about our ability to meet or beat that framework for fiscal 25.

Operator

Steve Silver, Argus Research.

Paul, 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 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 exposure to new builds versus maintenance markets. I'm just trying to get a sense as to how we should think about the growth in that end market broadly.

Yes, good morning, Steve. Thanks for the question. Yes, I think certainly it is our largest market that has come down considerably from the highs of Actuant days, our predecessor company. And 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 Road, wind but any 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 zero, obviously, but most of what we do is tied to maintenance on existing assets. 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'll continue to see some fluctuations have, obviously, given the market dynamics, but we think we're well positioned with what we do in that space.

That's helpful. Thanks. And then one more, if I may. Regarding your 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?

Yes, absolutely. We are really excited to complete that acquisition, although it was small enough, not material for us. It is very strategic. Certainly it's the first of our acquisitions that are linked towards what we're doing in our focused verticals. And in this case, rail and the exciting part for us about track tools is First and most importantly, it's very differentiated technology for the marketplace. And it 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 branded business today and essentially only focus in the US, what we're 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 working on that as we speak. So we're excited about the commercial growth potential. And frankly, over time, some of the cost synergies as we can, it drive out some of the the overall cost of the product and improve the production efficiencies over time. So and so it's a really exciting acquisition early days, but but we're pleased with the progress we're making.

Operator

Gary Prestopino, Barrington Research.

Hi, good morning, everyone. Just a quick question on your building and acquisition pipeline, would it be safe to say that a lot of these acquisitions are small, family-owned 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?

Yes. Hi, Gary. So from from a size perspective, I mean, 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 are we're really trying to stay close to our knitting. Here is what I would say. We're looking for product tuck-ins. 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 are 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.

And I would add to that, Gary, our current funnel that 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 it wasn't fully dedicated to that. I'd 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 from so many of them, yes, could be characterized as more privately held kinds of businesses, but we've got all different kinds in there.
And we continue to we 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 or target identification through to outreach and cultivation, ultimately transacting and integrating deals.

And then just lastly on the ASCEND program on a prior question, I think you hit a nice this quarter, close to your adjusted EBITDA margin target and going forward as has moved from Ascent and maybe just, you know, continual cost control productivity improvement, whatever it was, 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 assembly has been taken care of.
So what do you bank on to grow the margins going forward? Is it products higher margin products or are you still able you're going to go through a program where you're going to really tightly control SG&A expenses, any vision you can give us on that, that would be helpful.

Yes, or I think there are a few things you know, from a cost of goods perspective, we still believe we have ample opportunities to drive more manufacturing productivity inefficiencies 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. We continue to evaluate our footprint and look for opportunities there.
And then on the SG&A side, as Tony referenced, in his remarks. I mean, we're we're pleased with the progress we've made. And yet I would say we're still high relative to what we see as best-in-class industrials and think there's more opportunities over time to drive greater efficiencies there as we've been doing so then, of course, there will be some pricing and ultimately mix benefits, especially driven, I would say, particularly by our focus in our verticals and the work that we do in innovation, I would say, you know, generally speaking, most of our innovation, we would expect to be margin accretive especially if it is a truly differentiated product in the marketplace, which is really what's in our funnel.
So all that should be favorable over time. Of course, some of that we may choose to reinvest to drive accelerated organic growth come off. Not all that will drop to the bottom line. But on balance, we still see opportunities for margin expansion.

We agreed I didn't add that we have a lot of opportunities and initiatives in our pipeline here across the board did a lot of work in the last two years, but there's still more opportunities that are there and that that we are driving and we really are taking that to the next level here as well. In terms of the ideation that we have and just really moving to a continuous improvement type of mindset.

Operator

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

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. Thank you.

Operator

That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation.