Q2 2024 Enerpac Tool Group Corp Earnings Call

Ladies and gentlemen, thank you for standing by welcome to enter package tour groups second quarter fiscal 'twenty 'twenty four earnings conference call.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Enerpac Tool Group's second quarter fiscal 2024 earnings conference call. As a reminder, this conference is being recorded March 21st, 2024. It is now my pleasure to turn the conference over to Travis Williams, Director of Investor Relations. Please go ahead, Mr. Williams.

As a reminder, this conference is being recorded March 21st 2024.

It is now my pleasure to turn the conference over to Travis Williams Director of Investor Relations. Please go ahead Mr. Williams.

Travis Williams: Thank you operator.

Travis Williams: Thank you, operator. Good morning, and thank you for joining us for Enerpac Tool Group's second quarter fiscal 2024 earnings call. On the call today to present the company's results are Paul Sternlieb, President and Chief Executive Officer, and Shannon Burns, our Interim Principal Financial Officer. Our slides and a recording of today's call will be available on Enerpac's website in the investor section. Today's call will reference non-GAAP

Travis Williams: Thank you for joining us for <unk> second quarter fiscal 2024 earnings call on the call today to present, the company's result, our pulse Stern, Lee President and Chief Executive Officer, and Shannon Burns, our interim principal financial officer, our slides and a recording of today's call will be available on <unk> website in the investors section today's.

Travis Williams: Call will reference non-GAAP measures.

Travis Williams: You can find a reconciliation of gap to non-gap 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 filing. Now, we'll turn it over to Paul.

Travis Williams: You can find a reconciliation of GAAP to non-GAAP measures in the press release issued yesterday.

Travis Williams: 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 including include matters noted in our latest SEC filings.

Travis Williams: Now I will turn it over to Paul Thanks, Travis and good morning, everyone Entercom posted another solid quarter, despite the broader macro environment and the overall slowdown in the industrial sector. We were particularly pleased with our second quarter margin expansion as we made further progress improving our operating efficiency.

Paul E. Sternlieb: Thanks Travis and good morning everyone. Enerpac posted another solid quarter despite the broader macro environment and the overall slowdown in the industrial sector. We were particularly pleased with the second quarter margin expansion as we made further progress improving our operating efficiency and SG&A productivity. Moreover, we believe organic sales growth in our industrial tools and services, or IT&S, segment of 3% continues to outpace the market. At the halfway point in fiscal 2024, with organic revenue growth of 4% and adjusted EBITDA growth of 18%, we remain on track to achieve our full-year guidance. And we continue to make solid progress toward our longer-term goals as we take Enerpac to the next level of growth and profitability. I'd like to welcome Shannon Burns to the call. Shannon is serving as our interim CFO as we continue the search process.

Paul: C and SG&A productivity.

Paul: Moreover, we believe organic sales growth in our industrial tools and services or <unk> segment of 3% continues to outpace the market place.

Paul: At the halfway point in fiscal 2024 with organic revenue growth of 4% and adjusted EBITDA growth of 18% we remain on track to achieve our full year guidance.

Paul: And we continue to make solid progress toward our longer term goals as we take enter pack to the next level of growth and profitability.

Paul: I would like to welcome Shannon Burns to the call Shannon is serving as our interim CFO as we continue the search process. He is a seasoned finance executive who leads <unk> business decision support office and brings financial leadership experience from several other major corporations.

Paul E. Sternlieb: He is a seasoned finance executive who leads Enerpac's Business Decision Support Office and brings financial leadership experience from several major corporations. I'll let Shannon review our second quarter performance, then I will speak about geographic trends, product innovation, and a few key initiatives that will continue to advance Enerpac's progress as a premier industrial solutions provider.

Shannon Burns: I'll, let Shannon review, our second quarter performance, then I will speak about geographic trends product innovation and a few key initiatives that will continue to advance <unk> progress as a premier industrial solutions provider Shannon.

Shannon Burns: Thanks, Paul.

Shannon Burns: Thanks, Bob. As mentioned, our team executed another solid quarter within our industrial tool and services business, enjoying top line growth of 2.8% with a 3.7% increase in product revenue and a 0.8% decline in services. Service revenue declined slightly from a year ago period, largely driven by some specific one-time project work in the prior year. In addition, through our 80-20 approach, we continue to focus on higher quality, more differentiated projects and services. ITS growth was partially offset by a 25% decline at Cortland Biomedical. As we finalized commercial negotiations with a key Cortland customer, some shipments were temporarily on hold. We concluded the negotiations, and shipments resumed at the end of the second quarter. Additionally, there has been some softness in demand related to certain surgical procedures utilizing Cortland products.

Shannon Burns: Paul mentioned, our team executed another solid quarter within our industrial tool and services business joined topline growth of two 8% with a three 7% increase in product revenue and a <unk>, 8% decline in services <unk>.

Shannon Burns: Service revenue declined slightly from a year ago period, largely driven by some specific one time project work in the prior year. In addition to our 80 20 approach we continue to focus on higher quality more differentiated projects and service lines.

Shannon Burns: Ics growth was partially offset by a 25% decline at Cortland biomedical as.

Shannon Burns: As we finalized commercial negotiations with our key Cortland customer some shipments were temporarily on hold we concluded the negotiations and shipments resumed at the end of the second quarter. Additionally, there has been some softness in demand related to certain surgical procedures utilizing cortland products. However, on a midterm basis theres, a promising funnel of commercial.

Shannon Burns: However, on a mid-term basis, there is a promising funnel of commercial opportunities to offset this. We remain bullish on the outlook for the Cortland biomedical business given its differentiated offerings and exceptional innovation, coupled with the favorable macro trends driving long-term demand for Cortland's technology in the medical device sector. Due to the sale of Cortland Industrial in late fiscal 2023, total net sales for the company declined 2.5% year over year.

Shannon Burns: <unk> to offset the softness we remain bullish on the outlook for the Cortland biomedical business, given its differentiated offerings and exceptional innovation, coupled with the favorable macro trends driving long term demand for Cortland technology in the medical device sector.

Shannon Burns: Due to the sale of Cortland industrial in late fiscal 2023 total net sales for the company declined two 5% year over year.

Shannon Burns: On an organic basis, which excludes divestitures and the impact of foreign exchange, sales increased 1.8%. Slide 5 reflects the continued progress we've made improving operating efficiency and SG&A productivity. In the second quarter, gross margins expanded approximately 200 basis points year-over-year to 51.6% despite the aforementioned volume-driven decline at Cortland Biomedical. The improvement in margins was driven by operational improvements related to the Ascend transformation as well as pricing actions, a favorable sales mix, and the disposition of Portland Industrial. Similarly, we continue to benefit from the initiatives that improve our SG&A efficiency. Adjusted SG&A expense, which excludes the SEND and other one-time charges from both periods, declined 3% year-over-year as we continue to responsibly manage discretionary spend.

On an organic basis, which excludes the divestitures and the impact of foreign exchange sales increased one 8%.

Shannon Burns: Slide five reflects the continued progress we've made improving operating efficiency and SG&A productivity in.

Shannon Burns: In the second quarter gross margins expanded approximately 200 basis points year over year to 51, 6%. Despite the aforementioned volume driven decline at Cortland biomedical.

Shannon Burns: The improvements in margins was driven by operational improvements related to the Suntrust formation as well as pricing actions favorable sales mix and the disposition of Cortland industrial.

Shannon Burns: Similarly, we continue to benefit from the initiatives that improved our SG&A efficiency.

Shannon Burns: Adjusted SG&A expense, which excludes ascend and other one time charges from both periods declined 3% year over year as we continue to responsibly manage discretionary spending.

Shannon Burns: As expected, Offend and other one-time charges declined substantially. Turning to slide six, with both top-line growth and continued gains in operating efficiency and SG&A productivity, adjusted EVA is expected to increase 6.4% year-over-year, and adjusted EBITDA margins improved 210 basis points from 22.7% to 24.8%. On a gap basis, diluted earnings per share from continuing operations totaled 33 cents in the quarter.

Shannon Burns: As expected <unk> and other onetime charges have declined substantially.

Shannon Burns: Turning to slide six with both topline growth and continued gains in operating efficiency in SG&A productivity.

Shannon Burns: Adjusted EBITDA increased six 4% year over year.

Shannon Burns: Adjusted EBITDA margins improved 210 basis points from 22, 7% to 24, 8%.

Shannon Burns: On a GAAP basis diluted earnings per share from continuing operations totaled <unk> 33 in the quarter adjust.

Shannon Burns: The adjusted EPS for the quarter was $0.36 compared to $0.35 in the prior year, as the benefit of a lower share count was offset by a significantly higher effective tax rate. The higher tax rate in the second quarter of fiscal 2024 was primarily due to lower SIN charges, as well as our efforts to repatriate cash during the quarter. We continue to expect the full-year adjusted tax rate to be in the range provided by our. In the second quarter of fiscal 2024, cash provided by operations was $13 million compared to the use of $8 million in the year-ago period. The improvement was primarily due to the timing of annual incentive compensation payments, lower spend transformation payments, as well as higher net earnings. In addition, we continue to drive improvements in working capital management and, in particular, inventory efficiency. As we have discussed, Enerpac's liquidity and balance sheet remain strong. At the end of the second quarter, net debt was $91 million, resulting in a net debt leverage ratio of 0.7 times adjusted EBITDA, down from 0.9 times at the end of the previous quarter.

Shannon Burns: Adjusted EPS for the quarter was 36.

Shannon Burns: Compared to 35 from the prior year.

Shannon Burns: As the benefit of a lower share count was offset by a significantly higher effective tax rate.

Shannon Burns: The higher tax rate in the second quarter of fiscal 2024 was primarily due to lower some charges as well as our efforts to repatriate cash during the quarter we continued.

Shannon Burns: To expect a full year adjusted tax rate to be in the range provided by our guidance.

Shannon Burns: In the second quarter of fiscal 2024 cash provided by operations was $13 million compared to a use of cash of $8 million in the year ago period the.

Shannon Burns: The improvement was primarily due to the timing of annual incentive compensation payments lower Sn transformation payments as well as higher net earnings.

Shannon Burns: In addition, we continue to drive improvements in working capital management and in particular inventory efficiency.

Shannon Burns: As we have discussed <unk> liquidity and balance sheet remains strong.

Shannon Burns: At the end of the second quarter net debt was $91 million, resulting in a net debt leverage ratio of <unk> seven times adjusted EBITDA down from <unk> nine times at the end of last quarter.

Paul E. Sternlieb: Total liquidity was approximately $500 million. Additionally, as we've said previously, we have the option in the credit facility to request an M&A accordion of up to $300 million and remain focused on a disciplined strategy related to deploying capital to enhance return. With that, let me turn the call back to Paul. Thanks, Shannon. Turning to the regional performance of IT&S, in the Americas, we saw low single-digit growth in the quarter. As we said in the prior quarter, we expect low single-digit growth in the Americas in 2024 given the neutral to cautious sentiment amongst our channel partners. While inventory levels are above average at a few distributors, our heavy lifting technology business, or HLT, has a solid funnel going into the third quarter, and the service business is starting the quarter with a strong backlog and momentum. In the EMEA region, we saw solid mid-single-digit growth in the quarter.

Shannon Burns: Total liquidity was approximately $500 million.

Shannon Burns: Additionally, as we've said previously we have the option and the credit facility to request, an M&A accordion up to $300 million.

Shannon Burns: We remain focused on a disciplined strategy related to deploying capital to enhance returns.

Shannon Burns: With that let me turn the call back to Paul.

Paul: Thanks Shannon.

Paul: Turning to the regional performance of <unk> in the Americas, we saw low single digit growth in the quarter as we said in the prior quarter, we expect low single digit growth in the Americas in 2024, given the neutral to cautious sentiment amongst our channel partners, while inventory levels are above average and a few distributors.

Paul: Our heavy lifting technology business or <unk> has a solid funnel going into the third quarter and the service business is starting the quarter with a strong backlog and momentum.

Paul: In the EMEA region, we saw solid mid single digit growth in the quarter, we are enjoying strength across our targeted vertical markets, including wind and industrial MRO with particular strength in the infrastructure vertical driven by increasing government investment in large projects and our direct sales approach.

Paul E. Sternlieb: We are enjoying strength across our targeted vertical markets, including wind and industrial MRO, with particular strength in the infrastructure vertical, driven by increasing government investment in large projects and our direct sales approach with engineering and construction companies. Distributor inventory in the region is appropriate, although sentiment remains cautious due to weaker trends in the general industrial market. The Asia-Pacific region saw a low single-digit decline in the quarter.

Paul: With engineering and construction companies.

Paul: Distributor inventory in the region is appropriate.

Paul: Although sentiment remains cautious due to weaker trends in the general industrial market.

Paul: The Asia Pacific region saw a low single digit decline in the quarter we.

Paul E. Sternlieb: We enjoyed over 20% revenue growth for our standard products in the region. However, HLT, which can be very lumpy, was down sharply from a year ago, which included a large project in Australia. Dealer sentiment is neutral to cautious, while inventory in the channel is generally appropriate, albeit with some pockets of elevated levels. On the innovation front, we are very pleased with the flow of new products generated by our disciplined, customer-focused product development process. Last quarter, we discussed the launch of two new battery-powered portable pumps that we believe have clear competitive advantages in our key vertical and market. I'm pleased to say that these pumps are being well-received in the marketplace with sales tracking ahead of plan. This quarter, we launched a new 100-ton hydraulic lock-grip puller. The puller provides a safe and productive way to remove large shaft-mounted components without damage and is a meaningful addition to our product portfolio for rail car maintenance.

Paul: We enjoyed over 20% revenue growth for our standard products in the region, However, <unk>, which can be very lumpy was down sharply from a year ago period, which included a large project in Australia.

Paul: Sentiment is neutral the cautious while inventory in the channel is generally appropriate, albeit with some pockets of elevated levels.

Paul: On the innovation front, we are very pleased with the flow of new products generated by our discipline customer focused product development process.

Paul: Last quarter, we discussed the launch of two new battery powered portable pumps that we believe have clear competitive advantages in our key vertical end markets.

Paul: Pleased to say that these pumps are being well received in the marketplace with sales tracking ahead of plan.

Paul: This quarter, we launched a new 100 ton hydraulic la polar.

The polar provides a safe and productive way to remove large shaft mounted components without damage and as a meaningful addition to our product portfolio for railcar maintenance.

Paul E. Sternlieb: We also launched a new pin puller in the Americas. The PPH Series 40-ton Hydraulic Pin Puller Kits provide a safe and easy way to remove joint pins used in mining, on and off-highway vehicles, and equipment found in manufacturing facilities. And by using hydraulic force, the pin puller replaces more dangerous methods that involve torching, lancing, or hammering.

Paul: We also launched a new pin pillar in the Americas. The PTH series 40 ton hydraulic pinpoint kits provide a safe and easy way to remove joint pins used in mining on and off highway vehicles and equipment found in manufacturing facilities and.

Paul: And by using hydraulic force the tin polar replaces more dangerous methods that involve torching Lansing or hammering.

Paul: All of these new products support <unk> mission of making complex often hazardous jobs possible safely and efficiently.

Paul E. Sternlieb: All of these new products support Enerpac's mission of making complex, often hazardous jobs possible, safely and efficiently. And speaking of our ability to handle critical jobs, Enerpac's cube jacks were recently used to move the retired space shuttle Endeavour to its permanent display location at the California Science Center. We were proud to be involved in this unique and highly complex move. This is yet another example of the application of Enerpac's world-class products and technology to help customers solve challenging problems. In the second quarter, we began the rollout of our Enerpac commercial excellence for ECX program in the Americas. As you may recall, early on, we realigned our sales force to optimize coverage. We have also modified our incentive compensation structure to reward regional performance.

Paul: And speaking of our ability to handle critical jobs and <unk> were recently used to move the retired space shuttle endeavor to its permanent display location at the California Science Center.

Paul: We were proud to be involved in this unique and highly complex move. This is yet. Another example of the application of <unk> World class products and technology to help customers solve challenging problems.

Paul: In the second quarter, we began the rollout of our <unk> commercial excellence or <unk> program in the Americas.

Paul: As you May recall early on we realigned our sales force to optimize coverage. We also modified our incentive compensation structure to reward regional performance, but we believe there is additional and significant room for improvement in terms of commercial effectiveness with ECS.

Paul E. Sternlieb: But we believe there is additional and significant room for improvement in terms of commercial effectiveness with ECX. ECX significantly raises the bar with a proprietary, disciplined playbook, tools, and support for the sales process, including everything from market segmentation to account planning and tracking. With ECX, we will also optimize the potential of our CRM platform and integrate it with our financial systems to improve forecasting and business intelligence. As a result, we expect to achieve a better line of sight on business opportunities, including key leading indicators, and deepen our relationships with channel partners and end users. We see this as a meaningful step in improving our overall commercial effectiveness by driving stronger growth in our sales funnel and improving the overall conversion and win rate. As I mentioned, rollout is well underway in the Americas, with EMEA and Asia-Pacific regions to follow. Finally, as you may have seen on our website, we have announced plans to relocate our corporate headquarters from the suburb of Menomonee Falls to a new location in downtown Milwaukee by early 2025.

Paul: <unk> significantly raises the bar with a proprietary disciplined playbook tools and support for the sales process, including everything from market segmentation to account planning and tracking.

With <unk>, we will also optimize the potential of our CRM platform and integrate with our financial systems to improve forecasting and business intelligence.

Paul: As a result, we expect to achieve better line of sight on business opportunities, including key leading indicators and deepen our relationships with channel partners and end users.

Paul: We see this as a meaningful step in improving our overall commercial effectiveness by driving stronger growth in our sales funnel and improving the overall conversion and win rate.

Paul: As I mentioned rollout is well underway in the Americas with EMEA and Asia Pacific regions to follow.

Paul: Finally, as you may have seen on our website, we have announced plans to relocate our corporate headquarters from the suburb of Menominee falls to a new location in downtown Milwaukee by early 2025.

Paul E. Sternlieb: The new space, located in the vibrant downtown business district, will be right-sized for our approximately 130-person Milwaukee-area workforce and remodeled to suit our needs. With its proximity to many local amenities, the new location should enhance our ability to attract and retain top talent, as well as inspire strong collaboration and innovation. We are particularly excited to be part of a return to and revitalization of the downtown Milwaukee area. In addition, the move will be financially beneficial for Enerpac.

Paul: The new space located in the vibrant downtown business district will be right sized for our approximately 130 person Milwaukee area of workforce and remodel to suit our needs with its proximity to many local amenities the new location should enhance our ability to attract and retain top.

Paul: As well as inspire strong collaboration and innovation.

Paul: We are particularly excited to be part of a return to and revitalization of the downtown Milwaukee area. In addition, the move will be financially beneficial for <unk>.

Paul E. Sternlieb: Speaking of our workforce and our headquarters and around the world, I'd like to express my deepest thanks to our team for all their hard work in taking Enerpac to the next level of growth and profitability and serving our customers with world-class products and services every day. With that, we'd be happy to take questions. Thank you.

Paul: Speaking of our workforce at our headquarters and around the Globe I'd like to express my deepest thanks to our team for all their hard work in taking <unk> to the next level of growth and profitability and serving our customers with world class products and services every day.

Speaker Change: With that we'd be happy to take questions.

Speaker Change: Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Operator: We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.

Speaker Change: Formation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

Operator: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Tom Hayes from CL King. Please proceed. Hey, good morning, Paul. Thanks for taking the question. Can you hear me, Earth?

Speaker Change: Our first question comes from Tom Hayes from CL King. Please proceed.

Thomas Lloyd Hayes: Hey, good morning, Paul Thanks for taking the questions.

Thomas Lloyd Hayes: Can you hear me.

Thomas Lloyd Hayes: Yeah.

Thomas Lloyd Hayes: Paris.

Thomas Lloyd Hayes: Yep. Can you hear me, guys? We can hear you. Yes. Good morning. Good morning.

Paris: Yes can you hear me guys and we can hear you, yes, good morning, guys.

Speaker Change: Good morning, Hey, Paul I was just wondering if you could give us kind of a big picture outlook on the industrial activity I think in your release yesterday.

Thomas Lloyd Hayes: Hey, Paul, I was just wondering if you could give us kind of a big picture outlook on industrial activity. I think in your release yesterday, you called out, at least in the opening, kind of a slowing industrial activity levels. Maybe kind of discuss what you saw coming out of Q1 and kind of what you're seeing now. I think that'd be helpful. Sure. Thanks, Tom.

Paul: You called out at least in the opening kind of a slowing industrial activity levels. Maybe you could discuss what you saw coming out of Q1 and kind of what Youre seeing now I think that'd be helpful.

Paul: Sure. Thanks, Tom Yeah, I think we certainly enjoyed some nice organic growth in Q1, obviously sequentially you saw that slow a bit here in Q2.

Paul E. Sternlieb: Yeah, I think, you know, we certainly enjoyed some nice organic growth in Q1. Obviously, sequentially, you saw that slow a bit here in Q2. You know, I think what we saw in the marketplace was kind of some mixed signals. You know, we did reference in our comments here earlier that there still remains, I'd say, quite a bit of a cautionary tone from some of our distributors across the regions, frankly. I'm not sure that it's entirely new.

Paul: I think what we saw in the marketplace there kind of some mixed signals, we did referenced in our <unk>.

Paul: Comments here earlier that Theres still remains I would say quite a bit of kind of cautionary tone from some of our distributors across the regions frankly im not sure thats entirely new we've talked about that now for several quarters in some pockets there are elevated levels of inventory and then certainly some of the market.

Paul E. Sternlieb: We've talked about that now for several quarters. In some pockets, there are, you know, elevated levels of inventory. And then, certainly, some of the market data that we subscribe to, and then just what we see, you know, our own data would indicate, you know, there is some slowness, generally speaking, in the broader industrial market, not just for Enerpac, but more broadly. So, you know, I think we remain kind of cautious there. But we're still, you know, we're still firm in reaffirming our outlook for the full year. As you can see through the first half, we're kind of close to the higher end of our full year organic growth guidance, the 2 to 4%. And so, at this point, we see no reason to modify that. No, I appreciate that. And maybe on the geographic front, I think I just want to make sure I kind of understood it right.

Paul: Data that we subscribe to and then just what we see.

Paul: Our own data would indicate there is some slowness generally speaking in the broader industrial market not just for impact, but more broadly. So I think we remain kind of cautious there, but we're still.

Paul: We're still firm.

Paul: We're reaffirming our outlook for the full year.

Paul: As you can see through the first half we're kind of close to the.

Paul: Higher end of our full year organic growth guidance, the 2% to 4%.

Paul: So at this point, we see no reason to modify that.

Speaker Change: No I appreciate that and then maybe on the geographic front.

Speaker Change: Wanted to make sure I.

Speaker Change: Kind of understood it right it sounds like.

Thomas Lloyd Hayes: It sounds like in the APAC region, it was more the low single-digit declines; it was more Australian customer-driven versus some broad change in demand. Did I get that right? Yeah, I think, you know, in AsiaPac, we actually saw pretty nice growth in what I would call the core aspect of our business, what we call our standard products. We referenced the over 20% growth in the quarter in AsiaPac. You know, but we do have a reasonable amount of sales in Asia Pacific for our heavy lifting technology or HLT business. That's basically capital equipment; it does tend to be lumpier.

The APAC region. It was more the low single digit declines was more.

Speaker Change: The Australia and customer driven versus.

Speaker Change: Some broad change in demand and so I get that right.

Speaker Change: Yes, I think in Asia Pac, we actually saw pretty nice growth in what I would call. The core aspect of our business we call our standard products, we referenced over 20% growth in the quarter in Asia Pac.

Speaker Change: But we do have a reasonable amount of sales in Asia Pacific for our heavy lifting technology, our <unk> business, that's basically capital equipment. It does tend to be Lumpier and we were lapping in Q2 last year that had some pretty strong sales for <unk> in Asia Pacific. So that's what drove the kind of low single.

Paul E. Sternlieb: And we were lapping a Q2 last year that had some pretty strong sales for HLT in Asia Pacific, so that's what drove the kind of low single-digit decline, but we still see generally good, I'd say, market conditions and health elsewhere in the region. Okay, great. Maybe a couple more.

Speaker Change: It will decline, but we still see generally good let's say market conditions and help otherwise in the region.

Speaker Change: Okay great.

Speaker Change: Maybe a couple more one.

Paul E. Sternlieb: One, maybe kind of discuss what you're seeing on two of your growth pillars, rail and the wind. I think some of our challenges are that we get some little bit of mixed messages as far as the levels of activity there. I just wanted to see what you guys are seeing. Sure, yeah, as you mentioned, one of our four key growth pillars is our focus on this select set of verticals, which, to your point, includes rail and wind, amongst others, but also infrastructure and industrial. You know, I'd say in the rail and Wind sectors, if I take them in turn, I think in rail, we still see very promising opportunities. We did a very small kind of acquisition late last fiscal year of track tools to add to our portfolio.

Speaker Change: I know you kind of discuss.

Speaker Change: What youre seeing on to your growth pillars, the rail and the wind I think with some of our channel checks we could.

Speaker Change: Mixed messages as far as the.

Speaker Change: The levels of activity there just wanted to see what you guys are seeing.

Speaker Change: Sure Yeah as you mentioned, that's one of our four key growth pillars is our focus on the select set of verticals, which to your point includes rail and wind amongst others, but also infrastructure and industrial MRO I'd say in the rail and wind sectors. If I take them in turn I think in rail we still see.

Speaker Change: See very promising opportunities, we did a very small kind of acquisition late last fiscal attract tools to add to our portfolio. We referenced here on the call today, we continue to.

Paul E. Sternlieb: As referenced in the call today, we continue to, you know, drive forward on our innovation pipeline in the rail sector, including the launch of one of our new products this quarter. The engagement levels with customers in the rail sector remain robust, including a lot of good conversations with class one operators, and I think, you know, given the investments that are going on more broadly in the rail sector, including some of the government investments, obviously, for safety and the build out of infrastructure, we still feel, you know, very good about the kind of macro fundamentals in the rail sector generally. I think in wind, likewise, we continue to build our funnel there and work on innovation in that space. And, you know, although I would say there probably has been a slowdown in wind over the last six to 12 months, I think we are seeing some green shoots of recovery.

Speaker Change: Drive forward on our innovation pipeline in the rail sector, including the launch of one of our new products. This quarter the engagement levels within <unk> with customers in the rail sector remains robust, including a lot of good conversations with class one operators.

Speaker Change: Given the investments that are going on more broadly in the rail sector, including some of the government investments, obviously for safety and build out of infrastructure, we still feel very good about.

Speaker Change: Kind of macro fundamentals in the rail and the rail sector generally I think and win likewise, we continue to build our funnel there and work on innovation in that space.

Speaker Change: And although I would say there probably has been a slowdown.

In wind over the last six months to 12 months I think we see some green shoots of recovery. We do believe that's temporal given some of the issues that particularly some of the Oems in that sector faced over the last year, but.

Paul E. Sternlieb: We do believe that's temporary, given some of the issues that, particularly, some of the OEMs in that sector have faced over the last year, but the demand profile still remains the need for clean energy, and the transition to clean energy still remains. We believe it's one of the best placed technologies to address that need, and so we remain very focused on driving forward the work we're doing and the activity we're doing in the wind sector. I appreciate the call; maybe two more if I could. One, I noticed your service revenue was down year over year. I was just wondering what that was because I believe, I didn't go back and double check, but I think Q1 was up nicely. Was that just a timing or a seasonal issue?

Speaker Change: But the demand profile still remains the need for clean energy and the transition to clean energy still remains we believe thats one of the best place technologies to address that need.

Speaker Change: So we remain very focused on driving forward on.

Speaker Change: The work, we're doing and the activity we're doing in the wind sector.

Speaker Change: So I appreciate the color maybe two more if I could one I noticed your service revenue was down year over year.

Speaker Change: Wondering what what was that because I believe I didn't go back and double check, but I think Q1 was up nicely.

Speaker Change: Was that just a timing or a seasonal issue.

Thomas Lloyd Hayes: Yeah, I think there is a bit of timing to it, Tom. You know, generally speaking, our service business remains healthy. Actually, I think we already referenced our comments.

Speaker Change: Yes, I think there is a bit of timing to it Tom.

Speaker Change: Generally speaking our service business remains healthy actually I think we referenced in our comments, we're entering this quarter with some nice momentum and backlog. So we still feel good about where we are it was in one one of our regions only where we saw some decline, but I would say it.

Paul E. Sternlieb: We're entering this quarter with some nice momentum and backlog, so we still feel good about where we are. It was in only one of our regions where we saw, you know, some decline.

Paul E. Sternlieb: But I would say it's more specific to particular opportunities than it is anything systemic, truly. Yeah, and I also mentioned in the comments that our 80-20 philosophy, you know, we're still working through some of that this quarter, and that did have an impact. I appreciate that. I'll jump back in the queue.

Speaker Change: More specific to particular opportunities than it is anything systemic truly yen.

Speaker Change: <unk> mentioned in the comments that our 80 20 philosophy, we're still working through some of that.

Speaker Change: Quarter on net debt.

Speaker Change: <unk> alright.

Speaker Change: I appreciate that I'll jump back in the queue. Thanks, guys. Okay. Thank you.

Thomas Lloyd Hayes: Thanks, guys. Okay. Thank you. Our next question comes from Steve Silver from Argus Research. Please proceed.

Speaker Change: Our next question comes from Steve sell there from Rguest Research. Please proceed.

Steve Silver: Good morning, everybody, and thanks for taking the questions. And congratulations on the continued margin expansion momentum. It's great to see. Following up on one of the initial questions, given the slowdown in the industrial sector that you cited in your prepared remarks, just trying to get a sense as to how you're seeing that play out on the balance sheet. It looks like the balance sheet's remaining under the target leverage ratio. You're reaffirming your free cash flow guidance for the full year. Just trying to get any updated thoughts you might have on the M&A environment given the macro challenges. Yeah, thanks, Steve. And good morning.

Steve Sell: Good morning, everybody and thanks for taking the questions and congratulations on the continued margin expansion momentum it's great to see.

Steve Sell: Dave following up on one of the initial questions given the slowdown in the industrial sector that you cited in the prepared remarks, just trying to get a sense as to how you're seeing that play out on the balance sheet.

Steve Sell: It looks like the <unk>.

Steve Sell: She's remaining under the target leverage ratio, you're reaffirming your free cash flow guidance for the full year, just trying to get any updated thoughts you might have on the M&A environment given the macro challenges.

Dave: Yeah, Thanks, Steve and good morning, Yeah, I think our team continues to execute well managing our balance sheet responsibly feel good about where we landed in the quarter, obviously, bringing the leverage down sequentially from last quarter. So certainly quite healthy there I.

Paul E. Sternlieb: Yeah, I think, you know, our team continues to execute well, managing our balance sheet responsibly, and I feel good about where we landed in the quarter, obviously bringing the leverage down sequentially from last quarter, so certainly quite healthy there. I think, you know, the team continues to make nice progress year over year, particularly on inventory and managing inventory as well. And we have further opportunities to continue to optimize working capital, in particular. I think where we sit today, we're certainly well positioned, you know, from a capital perspective, and certainly with our ability to deploy capital, we have and maintain a disciplined and kind of balanced approach to capital deployment and capital allocation. Certainly, I would say the first priority remains CapEx projects here in the business.

Dave: I think the team continues to make nice progress year over year, particularly on inventory managing inventory as well.

Dave: And we have further opportunities to continue to optimize working capital in particular.

Dave: I think where we sit today, we're certainly well positioned.

Dave: From a capital perspective, and certainly with our ability to deploy capital, we have and maintain a disciplined and balanced approach to capital deployment capital allocation certainly I would say first priority remains capex projects here in the business.

Paul E. Sternlieb: Our guidance for this year is higher than prior years, and we continue to work on that. And, you know, we'll continue to look at share repurchase opportunistically. But on the M&A front, we've done quite a bit of work. Obviously, we haven't announced anything to date, but I'd say, you know, we feel really good about the progress we're making internally, both in terms of the quantity and quality of the funnel of things that we're looking at, particularly opportunities that are well linked to our strategy and some of our focus on vertical markets. So, again, we remain very disciplined.

Dave: Our guidance for this year is higher than prior years, and we continue to work that.

Dave: And we will continue to look at share repurchase opportunistically, but on the M&A fronts, we've done quite a bit of work.

Dave: Obviously, we haven't announced anything to date, but I would say.

Dave: We feel really good about the progress you are making internally both in terms of quantity and quality of the funnel of things that we're looking at particularly opportunities that are well linked to our strategy and some of our focus on vertical markets. So.

Dave: Again, we remain very disciplined anything we do would have to check all of our boxes, both from a strategic and financial and returns perspective, and we've got a pretty.

Paul E. Sternlieb: Anything we do, we'd have to, you know, check all of our boxes, both from a strategic and financial and returns perspective. And we've got a pretty comprehensive process to evaluate that. But we're certainly well positioned, and to your point, the balance sheet is in good shape to support it. Great, that's helpful.

Dave: A comprehensive process to evaluate that but we're certainly well positioned and to your point the balance sheet is in good shape to support it.

Speaker Change: Great. That's helpful. Thanks, and one last one if I can last quarter you guys highlighted the advancing rollout of the <unk> brand.

Steve Silver: And one last one, if I can. Last quarter, you guys highlighted the ongoing rollout of the L'Arzep brand. You cited some new distributor deals and some promising early order flow. Just curious if there's any update on that front this quarter. Yeah, sure. So, you know, again, one of our key growth initiatives is driving the second brand, what we call the second brand initiative, which is really targeting essentially the mid-tier segment of the market, particularly in Asia Pacific and parts of Latin America, where, historically, Enerpac has not really played. I mean, we're more of a premium player, generally speaking, in the space, but there is a need in those markets for a really good quality product, but not necessarily with all the features, functionality, and performance of what Enerpac offers.

Speaker Change: You cited some new distributor deals and some promising early order flow just curious if theres any update on that front this quarter.

Speaker Change: Yes, sure so again one of our.

Speaker Change: Key growth initiatives is driving.

Speaker Change: The second Brent what we call second brand initiative, which is really targeting essentially the mid tier segment of the market, particularly in Asia Pacific and parts of Latin America, where historically inner pact.

Speaker Change: It's not really played I mean, we're more of a premium player generally speaking space, but there is a need in those markets for a really good quality product, but not necessarily with all of the features functionality and performance of what <unk> offers and so we've utilized our large that brand, which we already own.

Paul E. Sternlieb: And so, you know, we've utilized our Larzep brand, which we already own, and built a range of products, certainly a much smaller subset of SKUs, that we feel are spot on with addressing the needs of that mid-tier segment of the market. So far, the progress has been good. We have signed up some distributors in Asia Pacific and are already, you know, getting some nice sales progress there. We're also utilizing some of the existing distributor network in Asia Pacific and Latin America, and so we're seeing some good early traction. But again, I'd say it's obviously early days for us.

Speaker Change: <unk> built a range of products is certainly a much smaller subset of skus that we feel.

Speaker Change: Our spot on with addressing the needs of that mid tier segment of the market.

So far the progress has been good.

Speaker Change: We have signed up some distributors.

In Asia Pacific in already.

Speaker Change: Getting some nice sales progress there. We're also utilizing some of the existing distributor network.

Speaker Change: Asia Pacific and Latin America, and so we're seeing some good early traction, but again I'd say, it's obviously early days for us It will take time to rollout I think the exciting thing for US, though is when we step back and do.

Paul E. Sternlieb: It will take time to roll out. I think the exciting thing for us, though, is when we step back and do our view and analysis on the market, we believe in those regions that the size of the mid-tier segment is roughly the same size from a dollar basis as the premium tier of the market. So it really opens up a pretty nice opportunity for us to capture some additional market share of a broader TAM that we haven't historically participated in.

Speaker Change: Our view and analysis on the market, we believe in those regions that the size of the mid tier segment is roughly the same size from a dollar basis, that's a premium tier of the market. So it really opens up a pretty nice opportunity for us to capture some additional market share of a broader Tam that we haven't historically participated in.

Speaker Change: Great. Thanks for all the additional color I appreciate it.

Paul E. Sternlieb: Great. Thanks for all the additional color. I appreciate it. Thank you. This concludes our question and answer session. I would like to turn the floor back over to Paul Sternlieb for closing comments. Okay, well, thanks again for joining us this morning. As always, Travis will be available to take any follow-up questions. And, in addition, for those interested, we will be attending the Deutsche Bank 15th Annual Global Industrials, Materials, and Buildings Products Conference in New York on Wednesday, June 5th. We hope to see you there. Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Speaker Change: Thank you.

Speaker Change: This concludes our question and answer session I would like to turn the floor back over to Paul <unk> for closing comments.

Paul: Okay, well, thanks again for joining us this morning, as always Travis will be available to take any follow up questions and in addition for those interested we will be attending the Deutsche Bank, 15th annual Global Industrials materials and building products Conference in New York on Wednesday June 5th we hope to see.

See you there thank you.

Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Yes.

Speaker Change: Yeah.

Speaker Change: Yeah.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: [music].

Speaker Change: Hum.

Speaker Change: Mhm [music].

Speaker Change: Hum.

Speaker Change: Hum.

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: [music].