Q3 2021 Enerpac Tool Group Corp Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcome to the inner Pact tool group third quarter earnings conference call during.
During the presentation, all participants will be in a listen only mode. Afterward, we will conduct a question and answer session at that time. If you have a question. Please press star followed by the number 1 on your telephone keypad if at any time during the conference you need to reach an operator, Please press star zero as.
As a reminder, this conference is being recorded at June 29th 2021. It is now my pleasure to turn the conference over to Bobby Belzer Senior director of Investor Relations and strategy. Thank you Ms. Belzer. Please go ahead.
Thank you operator, good morning, and thank you for joining us for inner Pactual group's third quarter fiscal 'twenty, 1 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 Josh mailing Chief operating officer.
Also with US our bar Boland, Chief strategy Officer, Fabry study General Counsel, and Bryan Johnson, Chief Accounting Officer.
Our earnings release and slide presentation for today's call are available on our website at <unk> tool group Dot com in the investors section.
We are also recording this call and 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 on todays 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 have conducted prior calls we ask that you follow our 1 question 1 follow up practice in order to keep todays 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 Thanks, Bobby and good morning, everybody.
We're gonna start over on slide 3 today.
Third quarter developed largely as we expected.
As we discussed last quarter, we can see that all our global markets were showing signs of recovery on returning to a normal scenario.
Before I go through the details on the quarter I'd like to provide some insights into how we performed on what lies ahead for <unk>.
First of all I can't say enough for the commitment from all of our employees worldwide to maintain a high level of service and quality our customers demand.
Especially our production and service employees, which have stayed on the job throughout the pandemic on we're able to work safely and to continue to deliver our products.
I will cover the regional details later on on the call, but clearly most of the World has returned to normal with a few hotspots on mid east and Southeast Asia.
Financial results met our expectations in the quarter and further supported our long term objectives and sales growth margin expansion and cash.
These factors have given us the confidence to reinvigorate our view of new product development as well as potential acquisitions to expand the <unk> product line.
New product launches in the quarter have delivered outstanding results and help capture the attention of our distributors and drive additional sales growth and.
And lastly, we've spoken at length about our commitment to the environment, social and governance objectives of interfax and I'm proud of the team's efforts to improve in all areas.
Over the coming quarters, you will see additional commitments to environmental sustainability, which will help significantly lower our production on office facilities need for external power sources.
Now, let's flip over to slide 4.
As you can see from the chart with third quarter experienced sequential and significant sales group, which firmly placed us back within our normal operating bandwidth.
We exited the quarter with monthly sales in the normal range with EBITDA margin closing on on our 20% target.
We believe this trend will continue through the balance of the year and absent any major resurgence in the virus activity or supply chain constraints.
Now, let's move over to slide 5 as I mentioned earlier, the third quarter met our financial expectations core sales grew by 36% comprised of 40% up on products and 23% on services.
Just going to cover the regions later on but I am very pleased with the broad expansion in sales across many vertical markets EBITDA margins expanded significantly in the quarter and we're on track to achieving our 20% sustainable level.
Incremental margins reflected the strength of the <unk> product line and exceeded our target of 35% to 45%.
This was a direct result of our cost control activities, which ensured our outstanding margins were reflected in the earnings.
As a result, EPS grew significantly in the quarter.
As well as free cash flow.
Regionally 2 areas were firmly back in double digit growth range led by the Americas, and Europe with slower growth growth rates in Asia Pacific and the Middle East.
Overall, we're very pleased with results in the quarter and the progression towards our strategic goals and growth and profitability.
<unk> is now well positioned to accelerate our growth strategy, which we outlined prior to starting the pandemic and deliver superior shareholder returns.
Going to turn the call over to Jeff and Rick now to go through the details on the quarter and then I'm going to come back with some market outlooks on guy and guidance for the remainder of fiscal 2021, Jeff over to you.
Thanks Randy.
It's great to be talking to you about a quarter largely full of positives and not just 1 about recovering from the effects of the pandemic, but also about our return to growth into our strategy starting off with some regional comments as Randy mentioned, we're really pleased to report all of our regions were in positive territory for the quarter compared to fiscal 'twenty given the impact we saw.
From Covid last year, I guess, it I guess it doesn't surprise me, but even more gratifying is that the order rates in this quarter exceeded those from our Q3.2019 levels as well to remind you. All Q3.2019 was the high watermark for <unk>. So we take this as another solid indicator we are back in growth mode moving.
Moving on to slide 6 to dive into some more details on the regions, both the Americas and Europe experienced significant year over year core growth and momentum continued to build as we progressed through the quarter in the Americas, we saw improvement across most all of our sub regions and end markets and our dealer confidence continues to improve.
The general distribution International partners.
The region delivered nearly 40% year over year core sales growth, which counters to mid 30 decline. We saw this time last year.
The recovery this quarter was due entirely to improve product sales, while service has been a bit slower to recover to date strengthening oil prices and delayed maintenance spending are resulting in more quoting activity, which we do believe we will generate orders here in the fourth as well as drive some pickup in our dry rental business.
Dealer stocking orders continue to return to normalized levels and retail sell through improved throughout the quarter as evidenced by our lower drop ship rates, we saw a nice uptick in orders from national distribution as well as our OEM partners, which again, we take as a signal of demand recovery.
As I mentioned, we saw broad based improvement across most geographies in the Americas as well as most verticals.
But continued to see strength, particularly from our wind nuclear in general construction customers.
In Latin America. They also delivered a solid quarter driven by the strength in copper and iron ore mining as well as some projects in power Gen and all this comes despite continued COVID-19 related challenges throughout the region.
Moving on to Europe, which is our best performing sales region posted nearly a 70% year over year core growth and nearly 10% improvement against 2019 again. Despite continued travel restrictions in many countries are dealers covering multiple verticals like wind infrastructure in general towards intention had a very good quarter and.
Both general and specialty distribution showed strength.
We anticipate these verticals will continue to be positive throughout the remainder of the fiscal year due to continued government spending on infrastructure improvements as well as emphasis on clean energy.
Globally, we had a nice quarter on our heavy lift business, but especially in Europe as we delivered several key projects late in the quarter.
I am pleased to see our Asia Pacific region delivered nearly 20% year over year core sales growth. Despite continued challenges with ongoing COVID-19 related restrictions and Lockdowns and this was particularly in southeast Asia. We continue to track. These countries closely and work with our distribution to stay engaged with customers as they slowly returned to.
In person customer visits mining continues to be a bright spot in the region by favorable iron ore pricing and power Gen and infrastructure continued to be positive as well and we have begun to see progress within oil and gas in Australia in particular with increased quoting to support some of the large maintenance projects coming back online.
Overall, we are pleased with what we're seeing in China, and Australia, but we will continue to use caution as we forecast recovery in southeast Asia until we see sustained improvement in vaccinations and the relaxation of the travel restrictions still in poster.
Moving on to slide 7 and turning to our Mena region. We're glad to returned to year over year growth in total revenue again headlined by very strong growth in our product sales. We continue to make good progress diversifying our product penetration beyond the oil and gas and we've picked up some nice wins in mining and infrastructure.
Another really positive note with many of our dealers are starting to take on some inventory after several months of drawdown.
Which again indicates to us that some of the delayed projects are going to start coming back online later in our Q4 and on into Q1 of 'twenty 2.
On the service side in Mena Covid related border Lockdowns and restrictions still presents significant challenges in this part of the world.
Service work remain volatile, but as we exited the quarter, we're seeing signs that projects are starting to come back on line. Despite several being pushed out of Q3.
As I've talked about for the last few quarters, the travel restrictions for our workers coming out of India, and Nepal and other areas has been a continuing challenge, but we are leveraging the crews we do have already in country to pick up work and get started on some of the delayed projects that still remain in our backlog.
Switching from the regions to new products I continue to be really pleased with our efforts around new product development.
In Q3 delivered the seventh consecutive quarter of new product vitality in excess of our 10% target as we launched 4 new product families, including some additional battery powered hand tools, some calibration tools and the launch of our new RC trios cylinder line.
Our operations and supply chain team again navigated a very challenging quarter as volume is returning and we deal with a tightening supply chain and logistic constraints I am pleased that our on time delivery remained strong throughout the quarter. Despite these issues, but it remains an ongoing challenge here on the fourth.
Utilization improved along with our returning volumes in our quality remained on target.
On a tightening labor situation continues to be a headwind, but it was not really a major factor in the quarter.
We are however, looking at our wage structure at our key facilities to try to stay ahead of any competitive pressures and help backfill the open positions with the best candidates we can find.
Reiterating my comments from last quarter, the inventory bets, we made earlier in the year paid off in Q3 and now into Q4 and we're continuing this approach by working closely with closely with our key suppliers to ensure we continue to have the right mix of components and finished product to support our improving outlook.
We did take a price increase in May and June as I talked about on the last call, which was aimed at neutralizing the known impacts from commodities and freight, which we think should see us through Q4 that being said it's clear. These headwinds are as well as increasing labor costs will be with us on into fiscal 'twenty..2 so we're prepared.
Now for additional pricing actions early in the new fiscal year.
We're also looking at actions specific to freight in the form of potential surcharges that we could launch regionally here in Q4 as needed. If we see that we're not fully covered from the recent price actions I discussed.
To finish up here with a few comments around cortland, the business experienced core growth of 8% year over year in the third quarter compared to a 21% decline in the second as it relates to the industrial side of the business. We are encouraged by the uptick in order rates, which is consistent with the overall increase in marine and general industrial activity.
<unk>.
We're entering the fourth quarter here with a pretty healthy backlog backlog, but many others like many others. We are faced with labor challenges to meet this increasing demand.
As for the medical portion of the business, we exited the quarter with volumes returning to pre COVID-19 levels on the running business. We've also seen new product development execution speed up as our customers' engineering teams start to return to their offices and labs.
With that I'll turn the call over to Rick for the financials, but I want to reiterate randy's comment.
My thanks to our team around the world, who continue to perform exceptionally well delivering on our commitments to our customers in the face of numerous challenges this quarter.
Thanks, and Rick over to you.
Thanks, Jeff and good morning, everyone.
I'm going to start on slide 8 with the recap of the results.
2021 third quarter sales increased 19% when compared to the second quarter and 41% when compared to the third quarter of the prior year, which was the trough of the pandemic for us.
Our tool product sales were up 44% a significant improvement from down 10% in the second quarter and service was up 23% compared to down 12% in the second quarter <unk> sales were up 8% versus down 21% in the second quarter.
Adjusted EBITDA margin for the quarter was 17% and that's up from 10% reported in the second quarter and 6.5% recorded in prior year.
The adjusted tax rate for the quarter was 3%.
And thats up from the negative 7% reported in the prior year, we still expect our full year adjusted.
The tax rate to be approximately 20%.
Moving on to slide 9 on the sales waterfall.
I'll just make a few additional comments here given jeff's discussion retail performance, we had a $4 million favorable impact from foreign currency with the continued weakening of the dollar that's a slight increase from the second quarter, but it is consistent with our expectation of continued tailwind in the back half of the year.
Our third quarter results marked the fourth consecutive quarter of sequential sequential improvement continuing our break from normal seasonality. We expect this to continue.
In the fourth quarter as a reminder, Q3 is historically, our strongest seasonal quarter followed by Q4.
So moving on to our adjusted EBIT waterfall on slide 10.
Time last year, we implemented several temporary cost savings actions in response to COVID-19 that yielded $12 million in savings. These actions are behind us and the return of product volume is having the impact we expected on both EBITDA margin and dollars with a 61% flow through on a year over year product volume improvement the increased <unk>.
<unk> is also driving $3 million and favorable manufacturing variances this quarter versus a negative $1 million in the second quarter, we saw improved labor productivity and fixed cost fixed cost absorption at our facilities scaled back to normal run rates.
So let's move forward to slide 11.
As Jeff mentioned, the bets, we made on purchasing inventory in anticipation of back half demand increases have all paid off.
Allowing us to minimize the impact of commodities and material pricing, while meeting customer delivery expectations on our third quarter.
Still in aluminum pricing has remained at all time highs with steel prices continuing to accelerate rapidly.
We are seeing supplier price increase request in all regions on all categories, but remain in active discussions with our suppliers can minimize on mitigate these requests and the impact on our results.
We have continued our approach to expanding lead times, placing the appropriate pls with suppliers to secure inventory in line with anticipated demand.
Our targeted pricing actions largely effective June 1 will offset approximately $2 million in mature your material and labor cost inflation in the fourth quarter, we believe surging demand and resulting shortages will ultimately keep cost high for the foreseeable future.
As Jeff noted we are actively planning additional targeted pricing actions early in our fiscal 2022.
Freight costs and availability also remain a challenge with cost shooting up back up as we head into our fourth quarter results have been fluctuating wildly in recent weeks and months if rates continue to climb we may need to move into a surcharge scenario within the next month or so.
So clearly we're in a very dynamic environment, and we are taking the necessary steps to manage through an unsettled and evolving supply chain. We are leveraging our supplier relationships, bringing on second suppliers in some cases and third suppliers to net navigate through capacity constraints on allocation.
We have qualified alternative materials and components to address shortages and ensure that we meet demand without sacrificing quality as noted earlier, we have been respectful of the new and ever expanding lead time and put our sales and operations planning into overdrive actions like these and the seamless coordination with our internal teams.
Have allowed us to execute with minimal disruptions as we navigate through what is a very challenging environment.
We are pleased with the outcome and the work we've done thus far and we will continue our efforts seizing opportunities to drive sustainable solutions where possible.
As noted earlier, our EBITDA margin for the quarter was 17% leveraging a leaner cost structure. We saw the margin expand as our product sales grew during the quarter reporting margins in excess of 20% for the month of May.
Incremental margin for the quarter was 47% our structural cost moves clearly paying off and we will we will continuously look for structural and operating efficiencies going forward.
As illustrated by our results product sales and Thats the recovery to pre pandemic levels and continued core growth beyond that is the biggest driver of EBITDA margin expansion in the future.
So turning now to liquidity on slide 12.
We generated just over $35 million in free cash cash flow during the quarter. This includes proceeds from the sale of on manufacturing facility in China that is part of our efforts to rightsize, our manufacturing footprint post sale of D. C.
The facility was occupied by our <unk> business and the divested ECS business through the transition services agreement.
From a working capital perspective, a $17 million increase in receivables during the quarter due to timing was partially offset by increased payables. Our inventories increased only 2 million striking a balance between increasing demand and working capital on supply chain management as we look to the fourth quarter, we will continue to monitor inventory levels, but.
Do you anticipate increased levels in the fourth quarter in conjunction with the increased demand and the expanding lead times, we just discussed.
We ended the quarter with $136 million on cash and net debt of $59 million. This is a comparison to a net debt of $123 million in the third quarter of 2020 as we anniversary the pandemic.
Our leverage is at 1.1 that's down from 2.1 at the end of the second quarter and 1.8 in the prior year.
We remain pleased with where we sit from a cash and liquidity perspective, our leverage will continue to improve as we continue to show sequential growth. This should position us well as we look to continue our strategy execution and disciplined capital allocation with that Randy I will turn the call back to you.
Thanks, Rick.
So, let's flip over to slide 13.
As we think about the remainder of fiscal 2021, we've assessed the profitability per continued growth as well as the potential market headwinds in the form of cost and supply chain supply chain constraints.
These factors have been well publicized by many reporting companies and we believe our actions to mitigate the impact of been successful thus far.
As we discussed on our second quarter, we expect <unk> to continue sequential growth for the balance of the fiscal year, which is not typical for inter Pac. Additionally product orders continue to grow in June were up 35% versus 2020 and 10% versus 2019.
Secondly, we believe our incremental margins remain expectations for incremental margins remain valid at between 35, and 45%, which support which are supported by cost actions and margin protection activities.
Now on the industrial growth expectations further support sustained recovery through remainder of the year, enabling <unk> to exit fiscal 2021 with normalized sales levels.
Now, let's turn over to slide 14.
For the remainder of fiscal 2021, we expect sales to continue to grow which has facilitated the increase of our second half guide range.
For between 290 and $295 million of core sales growth for products is projected to be in the low 30% range and services projected to grow at the high 40% level.
<unk> will also experienced normalized growth rates in the low to high 20% range.
We expect our incremental EBITDA margins to continue to be at the high end of our stated 35% to 45% range, excluding the impact of currency.
And our assumptions for fiscal 2021 have not changed on our consistent with prior quarters.
The road to recovery just hasn't been easy, but we believe we are now coming back to normal and are well positioned to execute our strategy as Rick reviewed our margins have continued to accelerate and in the month of May we exceeded a 20% EBITDA our financial leverage continues to strengthen which gives <unk> the flexibility.
<unk> ex to execute our capital allocation strategy.
Our long range vision.
As shown on page on the last page of today's presentation is fully aligned with today's results and we see great progress towards our growth increasing profitability and consistent cash cash.
Cash conversion and ultimately best in class returns to our shareholders.
Lastly, I am very proud of the performance of all the <unk> employees globally, which have endured the past year improve on the strength and quality of our company.
Operator that concludes today's prepared remarks, let's open it up for questions.
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Our first question is coming from Jeff Hammond of Keybanc capital markets. Please go ahead.
Hey, Good morning. This is David Tarantino on for Jeff.
Good morning.
Maybe to start out could you dig a little bit more into what you've seen from service momentum and trends in oil and gas markets more broadly. These 2 seem to be the laggard. Thank you gain more momentum moving forward.
Yes, good morning, David its Jeff.
Maybe just a couple of regional comments.
Our <unk> region, which is certainly on our largest service region really really continued to struggle with with Lockdowns in COVID-19 restrictions as I talked about.
And it's really.
It wasn't so much the lack of work, but it was a lack of ability to get our folks where we needed to get them.
We do see that see that slowly coming back and as I talked about last quarter. We've got a pretty strong backlog of work. We just got to get started on it so.
Certainly in the in the in the Gulf as we think about the Americas.
Services again been slow to recover.
I think theres, a pent up demand that we're starting to see quoting activity here on the fourth.
So we're.
We're ready to go in both of those regions and we do see as Randy's risks outlook for service growth in the fourth quarter compared to last fourth quarter, we do see pretty strong growth for us in our forecast for the fourth as that work starts to come back so.
Just a question of being ready to go and having the people to do it so.
And then just as a quick follow up you kind of touched on this in the prepared remarks remarks, but most of our companies are seeing demand that outpaced the ability to ramp production and restock inventories.
So how would you characterize inventories and restocking efforts to date.
Well as you.
You saw from what Rick said, we've increased inventory strategically to make sure that we could cover on.
Our top.
Products and we've been running a very robust.
Supply chain operations meeting or the classic sales order meeting.
For well over a year now that I think has helped US anticipate these increases and has enabled us to get through it without any major disruptions. So we know that that.
Is never going to go away, there's always the potential for an impact, but when you make I think smart bets on inventory you can definitely mitigate most of it.
And then make sure that your sales volume is maximizing on our quarter and that you don't constrain a distributor that start searching elsewhere for compatible products.
Great. Thank you.
Thank you. Our next question is coming from Ann Duignan of Jpmorgan. Please go ahead.
Yes can we go back to the last question I think maybe misinterpreted that or maybe I misinterpreted it but can you talk more about channel inventories on 1 based on your ability to increase inventories.
Where would you see where do you think.
Inventories lie and.
Dealer distributors inventories are at this point.
Hey, good morning, and it's Jeff.
We've seen a nice pick up.
And what I call a return to more normal dealer stocking orders I mentioned our R. R.
Again, another quarter of declining drop ship rates as well as increasing dealer stocking orders so that means to us that the sell through is happening, but the dealers are ordering the right stuff.
Oems in particular.
I'll make 1 additional comment about our OEM business, we have seen I would say an uptick from some of our major Oems that use our components in their finished goods, they're clearly starting to treat us a bit like just on other supplier in the global supply chain, the global tightening supply chain and we.
We did see a couple of our Oems I would say place larger bets.
I assume and we assume because theyre a little concerned about future constraints on supply chain. So that was nice to see of course, a lot of those orders are with phase.
Releases over the coming quarters, so, but it's good to get the orders in our backlog. So that we can do our planning.
Appropriately, but but yes, both Americas I mentioned <unk>.
Stocking orders coming out of distributors and <unk> have been few and far between over over several quarters and we did see some nice uptick in those Europe and the Americas again.
Nice stocking activities so.
No question, we're challenge we've got some challenges in our supply chain, but it's nice to have the distribution partners stepping up and doing their part so our availability to our customers.
It is pretty high which it did throughout the quarter. So.
Yeah again that was on the question. The question is do you think that the dealers and distributors now have.
Adequate inventory are they still replenishing.
So I think what a lot of <unk> seen in past is that.
And you can see it in the channel check reports that are going on right now that certain types of products are simply stocking out which means the dealers.
Our reported in availability to supply retail demand.
What Jeff mentioned is that we haven't had that instant yet for inner pact on.
Our ability to ship out of our facilities is still quite high we have on OTT right, which is still very very good.
Track our.
Past dues at a high level. So that we know exactly if that is climbing a shrinking and thats still in good shape.
And quite honestly, our dealer council will speak to as loudly if they're trying to get retail orders and were saying well we will talk to you in 6 months.
So I think in our case.
The channel has healthy inventory thats moving through there.
We're not experiencing stock outs that are either resulting on them going someplace else like we see on a lot of other products and you read about it.
There just isn't availability of certain products in dealer channels of all types.
That hasnt been the case per interfax.
I hope that answers your question more clearly yes.
That gives me a good sense of your.
Inventories at the dealers on a more normalized there isn't a huge pent up demand there and Thats. What I think we were trying to on trying to get that and then on the cost side can you talk about.
Yes, I think you said I want to make sure I got that right price.
This increases you put through effective monthly June 1st of all you need.
$2 million of offset in Q4.
Thank you Ted last quarter.
Steel prices back then.
Good.
Drive increased costs up 200.600 million on on annualized basis, how do we reconcile the 2 million on a quarter. That's a faraway shy of $200 million 600 million in annualized higher steel prices can you just talk about what.
We sure that's going on.
'twenty 2.
Sure.
200 to 600 was back half it wasn't on an annual basis.
And we also talked about aluminum increases I didn't give a dollar amount there.
But 3% to 6% on aluminum.
And we also last quarter talked about.
Airfreight.
At that time being 2 times normal levels.
Our.
Overall.
Cost increases that and some labor.
Those are.
What we put in place along with some other.
Our anticipated cost challenges, so things like plastic.
Those are the actions we put in place to 2.
$2 million is designed to offset that 200 to 600.
<unk> thousand.
So I think I said million.
Yes.
Steel.
And.
We feel good about those that was what we knew at the time and as we've talked about we've got.
Sure.
Negotiated pricing with the steel suppliers that.
Got us through Q3, and we believe will cover us through Q4, and Thats true of aluminum as well.
So we feel good about that 2 million getting us through Q4 as I noted freight cost is continuing to accelerate steel is continuing to accelerate.
That's what points to either surcharge or additional pricing here.
2022.
I need to expect.
Additional price increases and surcharges to fully offset.
In FY 'twenty 2.
At this point.
Again, we're going to do what we did in Q.
Early Q3, we're going to put on the pricing to offset kind of no cost or our estimate of the impact here.
In early 2022, as we said before.
If we fall short there we're demonstrating that we have the ability to go in.
Do incremental pricing as necessary.
Okay. Thank you very much Harrington.
Greg It on.
I appreciate the color.
Thank you. Our next question is coming from Deane Dray of RBC capital markets. Please go ahead.
Thank you and good morning, everyone.
Good morning, David Good morning.
We just stay on this topic, if we could just a couple other data points would be helpful. I really appreciate all the color you provided so far on the raw material costs and and calling out freight.
Just real curious if freight is trending higher why would you why are you hesitated on putting through surcharges I just think <unk> got enough cover here to do it and you can always rolling back when you need to but why the hesitation.
Yes.
No real hesitation.
As I mentioned before we did do pricing and part of that pricing did pick up some of the anticipated.
We have.
Gone through and we anticipated some of that from a cost perspective, as we came into the year and an hour.
Back half guidance.
It gets out of the range that we had in there and we will do the surcharges for share and think about freight.
It's gone up its come down it has gone up.
Right now it appears to be on a steady climb.
But even that it's settling a little bit and so it really just watching it closely.
And if we get to a point, where we think this thing settled up and climbing then we will go to a surcharge and youre right. We can do that.
Got.
Didn't mean to put it in terms of hesitating to do it we'll do it if we need to cover the cost.
That's real helpful. And then if you could expand on the point on labor shortages were hearing this everywhere and for you it sounded more of a wage pressure, but do you have unfilled positions, you're having trouble getting.
Workers for the factories.
And separate question any pull in from.
For the fourth quarter do you think.
<unk> announced the price and in fact for June did you get any benefit of Poland as customers are trying to avoid that next price increase round.
All day.
Start with.
The Poland comment.
We don't.
Typically we don't see and didn't see a significant.
<unk> of course.
Unquote pulling in I think <unk> got a combination of things going on here, you've got the demand associated with a recovery.
People needing to get that inventory, but also being cautious about it watching demand and so I think you just saw that pull through that you'd normally see in a rising demand and pricing environment. We don't believe.
That our pricing drove.
A tremendous amount of pull forward.
<unk> best in Q4 to Jeff's point.
Our our distributors are getting their orders and their they're staggering the delivery dates, but theyre, giving us the early read because on the demand situation because of the supply chain situation and that their strength and it's impacting not just us. So we feel good about that that's a good.
<unk>.
In fact from our distributors, but don't believe and on.
Not seeing.
Lots of pull ahead of orders that would impact kind of the sequential growth that we're talking about.
Yes.
On the Dean on the on the Labor side is primarily a North America phenomenon. There is no question that we've got some open open positions for a variety of reasons.
We are seeing some wage pressures and the good news is events pretty pretty.
Pretty easy to do your market comps and make the adjustments, where you have to which we have done in.
In Q3 here, but yes, it's definitely it's definitely some shortages out there.
Getting the right.
The right people in the door is really our focus and as long as we're paying competitive wages.
Taking those actions so.
We made some made some progress as late as late as last week and getting some some overhead still we've still got a little ways to go but again, it does not really impact our ability to deliver.
In the quarter and we don't see it.
As a as a strong negative to our fourth quarter either.
Good day, just last question for me.
There's been a couple of iterations of the infrastructure Bill, but every time.
On the durations, we've seen call outs about bridge repair bridge building and I immediately think of that or pack and how thats typically a really good opportunity for you do you have line of sight on.
On the proverbial shovel ready projects.
Related to what looks to be the most promising infrastructure bill related.
<unk>.
Well typically what youre going to see once once that Bill is released then there'll be prioritization by state of their normal.
<unk>.
Priorities and from that is how our typical our distributors will have a line of sight to what.
Bridges or facilities need to be worked on.
Particularly for suspension bridges, and 4 abutments that have to be lifted up theres a lot of cylinder work when you're putting on new investments. So.
Once it is signed you're probably going to see a couple of months delay before.
On the actual data.
Bids are led.
And so definitely.
An infrastructure Bill late in our fiscal year is going to be a 2002.
Impact probably late 'twenty, 2 before youll see significant amount of lifting equipment.
Torque tension equivalent getting sold.
Either way, it's very good for us, but there are also a lot of going on right now.
And the knock on effect not just the actual work being done but the folks that are actually doing the work the major construction companies on the equipment manufacturers.
Equipment rental houses on a lot of our tools are used on the maintenance and upkeep of those heavy heavy excavation bulldozers excavators things like that so that's that's really the.
Second line of offense for us as well and on our dealers really participate a lot on those sales as well.
Thank you.
Thanks, Steve King.
Thank you. Our next question is coming from Brandon <unk> of CJS Securities. Please go ahead.
Good morning, Great results I wanted to ask first on on Europe, you talked about.
Last quarter some some.
Some challenges with the infrastructure on bridge work numbers are great. This quarter. So it seems like a lot of that cleared up but is there still on it headwinds there in Europe or is it all.
Pretty normal now compared to where we sat last quarter.
Actually Brandon as Jeff day.
Actually infrastructure has been a fairly solid story in Europe for the last several quarters, so I'm not I'm not exactly sure.
If we talked about headwinds there but.
Again strong strong quarter bridge work.
Civil construction has really been a nice story in Q3.
And we don't see that letting up.
Okay, Great and then just looking at your long term goals.
Exiting the year pre pandemic levels.
That would indicate adjusted EBITDA approaching 21, 22% after your cost optimizations, you've done but.
That'd be some pretty very strong incrementals.
And of course, you have these increased costs going on presently so I guess.
Netting all of these factors is that kind of.
Structural margin.
It's still possible at pre pandemic levels with this price action that youre doing.
And could you kind of help.
Help us.
Net net all of these things that are going on and where you see that structural margin going.
I think 1 of the things that's really important that we saw on the month of May that we went through the 20% margin level.
And that was a nice milestone because that the month of May although good sales were basically where we should be in any given core month.
So when we think about going forward and.
The things that we've talked about on our margin progression, we have very high confidence.
The 20% level is sustainable and that the incremental margins as we typically talk to a 35% to 45% are going to be on ongoing factor for the business. Because we do have very very strong underlying gross margin and gross profit.
Now that the costs are aligned with the size of the business and we're getting good productivity out of our facilities that margin is going to flow through.
So all of those factors make our long range strategy in terms of margin expansion.
Not not aspirational, but highly probable.
<unk>.
We think that as we talk to our fourth quarter outlook.
We will still be at the very high end of our incremental range, which implies that we're going to be at the high.
And what we exited this quarter and arguably knocking on that 20% level. So I think I'm very confident in it as the business is certainly back on its feet, where we were pretty damned amex now.
Our management team is now highly focused on how do we continue to grow and execute the strategy.
That's an important element now Ram.
Okay.
Hello, Great. Thank you.
I just want to add.
Just to add a couple of other comments to that.
The.
When you talk about pre pandemic just to be clear, we're talking about pre pandemic sales levels prior to the pandemic lower dial back fiscal 19, and we were well below.
20% from an EBITDA margin perspective.
As you saw throughout 2000, and we've been delivering incremental margins outside the top end of our range for what is our normalized incremental margin range. As we continue to grow here and we continue to increase that mix of product just like you saw in the quarter.
You should be thinking about this as continued delivering strong incremental margins that incremental product growth will drive those margins to be certainly at the top end, if not better than as Youre seeing right now.
And that's really part of how you get to that plus 'twenty and beyond.
And to Randy's point.
<unk>.
We're seeing the sales levels.
That were pre pandemic and obviously, we are confident in our ability to continue to grow those practice strategic plan.
Great. Thank you and I'll just quickly follow up on my first question ex.
Actually I misread my notes that the delays, especially as British Airways, where in the U S. So if you could just follow up on on anything there.
With the infrastructure work.
Yeah. Okay. Thanks, Thanks for clarification.
Yes, we're starting to see some of that.
Break loose, we talked about the infrastructure bill, but just more than anything is just folks getting out and getting back to work in.
Certainly the.
Release of Covid restrictions on things like that is helping.
And we did see a nice pickup in general construction as well as.
Some of the infrastructure stuff here in Q3, so we see that continuing to get back on its feet.
Thank you guys very much thanks.
Thanks.
Once again, ladies and gentlemen that is star 1 to register any questions. At this time. Our next question is coming from Justin Bergner of G. Research. Please go ahead.
Good morning, Randy Rick, Jeff and the rest of the team good morning.
Alright.
Had sort of a 3 part question.
So you mentioned that in the fourth quarter on time delivery could be challenged.
Is that mainly a function of free uncertainty.
And then I guess the second part of the question is the revenue range.
For the fourth quarter is that more tied to.
Apply chain issues and is to demand from your vantage point.
And then I guess the third part of the question is given that you've been able to deliver at least so far.
To your customers and distributors do you see yourselves as gaining share because youre able to meet demand with some of your competitors or not thank you for taking the various parts.
Maybe I'll, maybe I'll start with a great question.
I don't see any particular constraints from our capacity point of view.
Certainly certainly.
<unk> has been a bit of a wildcard.
Delays and we're getting everything we're ordering sometimes on container or 2 shows up late which means we have to scramble at 1 of our plants to assemble and get the stuff back out the door.
But.
Generally speaking, yes that is the variable in the quarter were making certain assumptions around order rates going through the quarter, which we see as strong in June we don't see any reason to believe they're not going to continue to be strong for the rest of the quarter.
We came into the quarter with a fairly healthy backlog, which we like.
We're working hard to get that out the door, but a little bit a little bit of delay in a container or something coming out of another part of the world.
Causes us to scramble, but it's not going to be particularly.
Catastrophic we don't think.
<unk> so.
<unk> touched on the Q4 revenue outlook in <unk>.
And why I made mention to the.
On June inbound order results as they are positive and we've tried to give some clarity into that on prior quarters, because when you're reporting our earnings essentially as we wrap up June we have pretty good line of sight to what occurred.
35% up versus 2020, that's a good number.
And 10% up versus 19 is even more encouraging number because of 19 that was a decent quarter.
And so the order certainly support.
Continued revenue growth and which gave us the confidence that the 290 to $2.95 level, what's the right thing to do to reflect that number 1 sequentially. Our typical Q3 being the strongest quarter, it probably not going to occur this year.
It means that sequentially, we're continuing to strengthen and we will exit the year.
And a pretty good shape. So we tried to give you enough clarity in terms of guiding out for the full year of the $2.90 to 295 number you.
To give you further clarity that our inbound orders are <unk>.
Better than 20, and that also better than 19 and that we expect the typical sequential effect of <unk> to be a little not be normal which is that Q3 is stronger than Q4. So we've given you some data points to help guide you towards where we think we'll land for our fourth.
Quarter and setting the stage for 2022.
And maybe I'll follow up on your share question you know so many of the things that we sell it's a little difficult to give you an exact share but I will tell you anecdotally, we're hearing from some of our customers and distributors that some of our competitors are having a hard time delivering on time.
Levering all the products in their line.
The fact that we think that that.
We're doing a better job there.
I would.
The optimist in me says that we are picking up share.
Again, a little hard to hard to measure that but.
What we're hearing from the from the marketplaces that we're doing well on delivering on our commitments and there are some folks out there that arent. So thats about as granular as I can give you on that question.
Okay. Thank you for taking that multi part question I appreciate it.
Okay. Thanks, Jason.
Thanks.
Thank you our last question today is coming from Michael Mcginn of Wells Fargo. Please go ahead with your question.
Okay.
Can you walk through the timing and rationale of the China facility closure with demand ramping lead times extending.
Maybe.
What other actions like this are left similar to China facility closure of the Courtland facility consolidation.
We put out there that we were continuing to look for footprint rationalization. So.
Even in the.
Net.
Rising demand, we obviously wouldn't take capacity out.
We do want to make sure we have the most efficient footprint that we can have it on our margin walk.
That we would deliver savings from that.
And so clearly we believe there's opportunity. This was 1 step where we had a facility.
That was a large facility in China, we had both businesses operating in it and we still had incremental.
Capacity with the split off of BCS.
We don't need that footprint in China.
So we sold the building.
Part of exiting.
ECS.
And we have other facilities in China and were leasing a small piece.
On the building.
Probably less than a third.
Of the facility.
But for our.
Ongoing work and ultimately we'll make the determination if that's where we stay long term, but we're left with less than a third of.
Of our footprint, there and we don't have.
The building.
That's ownership because we were not a situation, where we need the capacity or go out to meet that capacity in China.
It's a on.
All of what you see from our AR facility and footprint rationalization. All of those are planned all of those are moves that we have indicated our structural cost moves that we need to make.
<unk> hit our strategic objectives.
Got it understood and then can you walk me through the tax rate.
It just looks like taxes payable on your balance sheet doubled sequentially EBT.
It was up 4 ex sequentially.
Walk me through the mechanics of that.
And what your normalized tax rate.
On a long term basis.
Sure.
As to the latter question, we said for modeling purpose since used 20% to 25%.
On taxes, we had historically, we moved 20 reform put us in that range for now.
And so that Hasnt changed.
We've been talking about our tax rate is usually lumpy.
It's just based on the seasonality of our business first half being the lowest half back half being our strongest half in this quarter.
Quarter, we had a couple of things going on.
1 being.
The release of some valuation reserves, if you will or.
Reserves associated with uncertain tax positions that went through an audit.
And we released <unk> non-GAAP those out.
And then also.
The jurisdiction of.
Of our earnings and so you had a favorable <unk>.
Tax law change here in the quarter all of that anticipated in our overall rate. That's why you haven't seen us move the expectations for 2021 at all it's just you will as well.
If you look at us youre going to see a lumpy right throughout.
On a.
Quarter by quarter basis, and we seek to kind of guide to that for full year.
Got it and just to put a bow on this can you characterize the length of the incoming blanket PFS from your large national account.
And distributors relative to the length of your lead time average lead time.
2 things.
Jeff talk we really don't have blanket p&l's, Vince I, just want to correct that but.
We do have.
Ill call some forward ordering from our nationals.
And relative to how that matches up with our lead time I think as we ex as we've.
<unk> been talking about so far we've been able to navigate that and deliver.
It's on it's on us to do the things that we've been doing in terms of getting out ahead, managing our inventory in anticipation of demand and thus far we've not had.
Issues meeting any of our customer demands.
We sit here today do we have concerns going forward.
Got it I appreciate the time.
Okay.
Thank you at this time I would like to turn the floor back over to Mr. Baker for closing comments.
Alright, thanks, very much operator, so as we wrap up today clearly we've had a very good quarter. The business is on very solid ground as we go into our fourth quarter and get prepared for 2022 on.
Very proud of the team I think we've done a lot to improve the margins in the business to realize our goal of 20%.
We've been able to unlock the margin value of this company and most importantly for me as CEO. We're now at a level that where we can start executing our strategy to the fullest extent that we had planned pre pandemic. We now have the margin capability of the cash flow and liquidity as Rick mentioned this companies and 1 of the best position.
Liquidity wise that we've seen in a long long time, so our capital allocation strategies are very well within our grasp and we're able to start moving hard on that so I can't say enough for the effort from this team.
It has been a great time watching this come through this and successfully navigate probably 1 of the most difficult times any company has seen in their history and we have done to successfully so.
I want to thank all of our team worldwide and look.
Look forward to the next quarter and continuing on so our operator, thank you and thank you everybody for joining us per day.
Ladies and gentlemen, thank you for your participation and interest in <unk> Group Conference. You may disconnect. Your lines at this time and have a wonderful day.
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Yes.