Q1 2025 Enerpac Tool Group Corp Earnings Call
Ladies and gentlemen, thank you for standing by welcome to Inter Pac tool group's first quarter fiscal 2025 earnings conference call.
As a reminder, this conference is being recorded December 19th 2024.
Speaker Change: It is not my pleasure to turn the conference over to Travis Williams Senior Director of Investor Relations. Please go ahead Mr. Williams.
Travis Williams: Thank you operator, good morning, and thank you for joining us for <unk> group's first quarter fiscal 2025 earnings call on the call today to present. The company's results are all Stern, Lee President and Chief Executive Officer, and Darin Kozak, Chief Financial Officer.
Travis Williams: The slides referenced on today's call are available on the Investor Relations section of the company's website, which you can download and follow along.
Travis Williams: A recording of today's call will also be made available on our website.
Travis Williams: Today's call will reference non-GAAP measures you can find a reconciliation of GAAP to non-GAAP measures in the press release issued yesterday.
Speaker Change: Our comments will also include forward looking statements that are subject to business risks that could cause actual results to be materially different. Those risks include matters noted in our latest SEC filings now I'll turn it over to Paul.
Speaker Change: Thanks, Travis and good morning, I'd like to welcome Darren to his first <unk> earnings call. He's been on board as our CFO for nearly two months, it's coming up to speed very quickly. We're thrilled to have him on the team and now switching to the quarter and beyond.
Speaker Change: We enter fiscal 2025 mindful of a continued sluggish industrial macro environment.
Speaker Change: Evidenced by persistently weak manufacturing PMI and industrial production trends you can see on slide three.
Speaker Change: While we saw a decline in the Americas region of our industrial tools and services business due to these challenging market conditions. We were pleased to report sales growth across <unk> to other geographic regions and <unk> biomedical.
Overall, we believe <unk> can continue to outperform the market given our global brand leadership targeted growth strategy customer driven innovation and continuous improvement process to enhance operational efficiency and productivity.
Speaker Change: In light of the global macro situation, we are actively monitoring costs in the short term to ensure our cost structure aligns with business conditions.
Speaker Change: Also have a detailed strategy that will enable us to continue to enhance profitability on a longer term basis, which I will speak to in a moment in the meantime, I'll turn the call over to Darren to elaborate on our financial performance in the quarter.
Speaker Change: Thanks, Paul.
<unk> four <unk> total revenue increased two 3% in the first quarter of 2025.
Speaker Change: At our Ics business revenue increased two 3% year over year with a 1% decline in organic sales.
Slight decline in organic sales was comprised of a five 6% increase in service revenue offset by a 3% decrease in product sales pollo speak about the regional performance later in the call.
Speaker Change: Results for the first quarter included nearly a full quarter of revenue from DTA and acquisition that closed on September 4th in the quarter, We made solid progress on integration and delivered more than $3 million in revenue and $5 million in order volume. We are excited about the combination of DTA with our heavy lifting technology or HRT business and <unk>.
Speaker Change: <unk> gross benefits as you expand DTA sales beyond Europe by leveraging <unk> Global commercial network. Therefore, we are maintaining our expectation of a full year 2025 sales of 20 million euros from DTA.
Speaker Change: At Courtland Biomedical reported in our other segment, we generated another quarter of growth with a year over year revenue increase of two 6%.
Speaker Change: Turning to slide five gross profit margin declined 90 basis points year over year to 51, 4%. This was primarily due to lower sales in the Americas, a higher percentage of service revenue and a return to normalized margins at Cortland, which remains accretive to <unk> overall performance.
Speaker Change: Adjusted SG&A held flat at 29% of revenue despite the inclusion of DTA, reflecting our ability to manage our cost base. We will continue to monitor our costs closely in the second quarter given the environment adjusted.
Speaker Change: Adjusted EBITDA margins declined 100 basis points in the first quarter of 2025 due.
Speaker Change: Due to the gross margin discussed and the inclusion of DTA.
Adjusted earnings per share were <unk> 40 for the first quarter of 2025, compared with 39 cents and a year ago period, a 3% increase.
Speaker Change: Effective tax rate was nearly flat at 22% compared with 21, 9% in the year ago period.
Speaker Change: Turning to the balance sheet shown on slide six <unk> position remains extremely strong net debt was $63 million, resulting in net debt leverage of <unk> five times adjusted EBITDA at the end of the first quarter total liquidity was $529 million.
Speaker Change: In the quarter free cash flow improved $11 million from the prior year period as a result of higher net earnings and lower annual incentive compensation payments, which more than offset increased capex related to our upcoming headquarter relocation. We remain very excited about the move and the benefits that we'll have for the company.
Speaker Change: As we continue to generate cash coupled with our current leverage we have the needed capacity to deploy capital for our disciplined M&A strategy as well as internal investments and continued opportunistic share repurchases with that let me turn it back to Paul to discuss our commercial performance by region.
Paul: Thanks, Darrin on a geographic basis as seen on slide seven we were encouraged by our performance in the EMEA region, which continued to generate positive year over year growth against tough comparisons. Despite the macro pressures in Germany, and France, which are two of our largest economies in the region. We enjoyed particular strength in the.
Wind market with a bright outlook given an array of projects in the pipeline service revenue also remained strong driven by petrochemical markets and power generation, particularly in nuclear in the Asia Pacific Region. We were pleased to see a return to year over year growth with a sales gain in the mid single digits.
Paul: While Australia continues to be soft mainly due to depressed conditions in the mining industry. The rest of the region is experiencing solid trends for the full year, we continue to anticipate growth in the Asia Pacific region.
Paul: In our largest market the Americas the environment remains cautious which is reflected in our results. This quarter. While we are seeing gains in heavy lifting technology or <unk> and services sales of our standard industrial tool products were weaker in the quarter with many customers sticking to a wait and see posture with <unk>.
Inventories in line, we're cautiously optimistic that clarity on the direction of interest rates and policies from the new administration will create a more positive demand environment in the coming months.
Paul: In the meantime, we are enjoying a favorable market response to our new products, including our line of battery torque wrenches battery powered pumps and hydraulic bowlers. In addition, we continue to focus on our sales funnel management utilizing <unk> commercial excellence or ECS.
Paul: For the second consecutive quarter Cortland posted year over year revenue growth and remains on track to generate growth for the full year with the benefit of several new products.
Paul: Turning to slide eight last quarter, we introduced powering <unk> performance or Pat our continuous improvement program, which will propel our goal of capturing further profitable growth and margin improvement overall, we're focused on continued standardization and simplification of processes and ensuring best practice.
Paul: <unk> are consistently applied across the organization.
Paul: Let me drill down on some specific opportunities on the gross profit line, we have several levers, including increasing lean conversion and kaizen activity in our facilities.
Paul: <unk> engineering and ongoing SKU rationalization just to name a few but perhaps our most significant near term opportunity is on the sourcing side under our new Vice president of sourcing and our strategic sourcing initiative, we are optimizing and rationalizing our supply base.
Paul: At the start of the ascend program in 2022 and are packed with sourcing for more than 6000 suppliers.
Paul: Through the application of $80 20, we've been able to reduce that to fewer than 5000 today and our goal is to drive further reductions in the supply base to leverage our buying power and focus our spend with supply partners, who can support our needs most effectively and provide the best cost quality and delivery.
Paul: On the SG&A expense line, we have already made tremendous progress toward our goal of being best in class as a percent of revenue over the past three fiscal years, we have reduced adjusted SG&A as a percent of sales by approximately 650 basis points.
Paul: For example, we have derived a significant benefit from off shoring of transactional processing and certain finance it and.
Paul: And human resource functions, but moving labor to lower cost regions is just the start we're now embarking on the next phase, which is to simplify standardize and ultimately automate key processes and Darren experienced in managing shared service center operations will be a tremendous asset as we add.
Paul: Additional functions and optimize the performance of our offshore operations.
Paul: Since we announced the rounding out of Interfax leadership, including the recent additions of Darin and Eric <unk>, Our executive Vice President of operations. We have held our annual Global leadership Conference. This was a great opportunity to conduct a deep review of our growth strategy evaluate challenges and opportunities.
Paul: And generate key action plans to pursue in fiscal 2025 and beyond I believe we have the right people and strategy to succeed in any environment. Moreover, we were pleased to see yet another year of improving employee engagement scores, which I believe is a reflection of our winning culture that has been embraced.
Paul: Raced across the organization.
Paul: With that we'd be happy to take questions.
Speaker Change: Thank you the floor is now open for questions. If you have dialed in and we would like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue.
Speaker Change: If you would like to withdraw your question simply press Star one again.
Speaker Change: If you are called upon to ask your question and you are listening via loud speaker on your device. Please pickup your handset and ensure that your phone is not on mute when asking your question.
Your first question comes from the line of Tom Hayes of C. L. King Your line is open.
Tom Hayes: Good morning, guys.
Speaker Change: Good morning, Tom Good morning, Hey.
Speaker Change: Paul I was just wondering I think when we spoke on the fourth quarter and you called it out today, obviously, the industrial environment is a little bit weaker and continues to be weak I was just wondering you know obviously you guys don't provide quarterly guidance, but did <unk> play out generally.
Speaker Change: As you would expect it to do anything.
Speaker Change: You know maybe positive that you saw in the quarter. Besides you know pretty strong results.
Speaker Change: Yes. Thanks for the question, Tom I think as we mentioned on our remarks on the call. It played out pretty much as we expected frankly, I mean, we knew was a <unk>.
Speaker Change: Software comp lapping Q1 of fiscal 'twenty four.
Speaker Change: And obviously just the environment that we're seeing so we suspected it was going to be global more challenging here.
Speaker Change: In Q1, and our expectations are.
Speaker Change: At this point built into our guidance essentially for the rest of the year for for better top line performance.
Speaker Change: And I think we're optimistic just given the things that we referenced on the call around some of the potential new policies from the New administration and also just frankly, what we hear in terms of.
Speaker Change: <unk> I'll call voice of customer research from our customers and our channel partners, even though in the last week or two there is a let's say a fair amount of optimism I mean, certainly that as to ultimately translate into demand and orders, but I think people are relatively hope.
Speaker Change: Hopeful about what to expect in calendar 'twenty five so, but really Q1 played out essentially as expected for us.
Speaker Change: Great and kind of.
Speaker Change: In offshore that you mentioned.
Speaker Change: With the change in administration and the talk of tariffs I think you make a good percentage of your products here in the U S. But do you have any early thoughts on the you talk of tariffs with China and Mexico.
Speaker Change: No potential impact for you guys.
Speaker Change: Yes, sure, we do make where global manufacturer, but our largest facility is here in the U S actually in Wisconsin. So I think generally speaking I would say <unk> is probably in a relatively favorable position when it comes to the impact or potential impact of any new tariffs.
Speaker Change: Just for reference imports from Canada, and Mexico into the U S for us are negligible.
Speaker Change: And then from a China perspective.
Speaker Change: On a direct basis I would estimate that our products and components imported from China into the U S represents less than $20 million of value.
So certainly not zero, but something we're able to deal with effectively something we did deal with in the first Trump administration years ago, I think we've got a good playbook.
Speaker Change: Playbook to work with that from a cost perspective from a dual sourcing perspective, and also certainly price if thats needed.
Speaker Change: <unk>.
Speaker Change: It's not nothing but I wouldn't say, it's hugely impactful given that dollar value for us.
Speaker Change: Okay I appreciate it maybe one or two more kind of shifting gears a little bit on the geographic front.
Speaker Change: Happy to see that the up low single digits on the EMEA I was just.
Speaker Change: Wondering I mean, we continue to hear about challenging business environment, especially in Germany, I think you'd called it out as one of your larger segment just any other color you seem to be kind of outperforming the market. There just your thoughts on your EMEA performance.
Speaker Change: Yes, I mean, we do continue to be pleased.
Speaker Change: We had good performance in Q4 in EMEA.
Speaker Change: Even here in Q1.
Speaker Change: Relatively stronger performance certainly versus the Americas, and I think the market conditions have been more challenging more recently I mean, we can see that in the macro data as we referenced particularly in Germany, and France, but I think we are.
Speaker Change: We believe with the.
Speaker Change: A good degree of confidence we are continuing to gain share there just based on the execution.
Speaker Change: Our commercial strategies, our growth strategies in the region. Some of the key leadership and people changes, we've made which are having a great effect. There some of the process changes again, we've made commercially and I think some of the success frankly that we're seeing with our new product rollout in the region. So we're pleased again with.
Speaker Change: The progress that we're seeing in EMEA, even I would say in a tougher macro environment.
Speaker Change: Okay I appreciate that maybe just lastly on the services business kind of a two part question.
Speaker Change: You continue to kind of call out or put up good.
Speaker Change: Year over year organic growth in the services business I guess one.
Speaker Change: What do you attribute the drivers to it in two.
Speaker Change: I think you'd called it out as may be a drag on overall margins I apologize if I got that wrong, but I just is there a pathway to get that to more of a company wide.
Speaker Change: Product margin just any thoughts on that I. Appreciate it. Thank you, yes, yes, no absolutely. So yes, I think we have seen certainly services here in the short term outperforming from a growth perspective in <unk>.
Speaker Change: Not hugely surprising service revenue can outpace product.
Because it is in service more tied I would say a regularly scheduled maintenance as opposed to kind of.
Speaker Change: Some of our product business that can be more linked to project work or sometimes capex investments. So I think the service business does tend to be a bit more steady.
Helps offset some of the weaknesses, we see from time to time in the product business.
Speaker Change: Over the longer term, however, I would say, we would expect to see product growth outpaced service just as we continue to execute on our four pillar growth strategy that is primarily focused on share gains on product on the product side of the business from a margin perspective in service you may recall service about 20% of our revenue about half of the service business.
Speaker Change: As our rental business, where we have a fleet of assets that we rent out to customers and that has pretty good margin for us, but the other half of it is essentially a labor or manpower business, where we're performing specialty work for customers at their sites utilizing our tools and assets and while we tend to be a premium player under the.
Speaker Change: <unk> brand in that space there are still are.
Speaker Change: Ceilings on labor rates, just practically speaking so that part of our service business does tend to be generally margin dilutive, but having said that we do continue to see a path to continue to improve margins overall in service certainly through continued operational execution and efficiency gains, but also I would say continued focus on more differ.
Speaker Change: <unk> on the kinds of service lines that we offer and the kinds of project business that we pursue in that region and as you may recall.
Speaker Change: Probably a year or so ago.
Speaker Change: We did make an active choice through 2020 actually.
Speaker Change: Walkaway effectively from some relatively lower quality lower margin service business, particularly in the Middle East region, and we'll continue to look at that Opportunistically, but I think we still see leavers have opportunity for margin improvement in service.
Speaker Change: Great appreciate the color. Thank you.
Thanks, Sean.
Speaker Change: Your next question comes from the line of Ross Sparing Blech William Blair. Your line is open.
Speaker Change: Ross Good morning, guys line is on mute.
Speaker Change: Good morning Ross.
Speaker Change: Apologies I was on mute.
Speaker Change: Forgive me I, maybe I missed it but anything on pricing.
Speaker Change: Within the U S in the quarter and kind of what Youre seeing more globally sure.
Speaker Change: Yeah.
Speaker Change: So as a general rule of thumb I mean, we're always evaluating our price positioning as you know we tend to be.
Speaker Change: A premium or the premium player in our space for most of <unk>.
Speaker Change: Where we're positioned and generally speaking we would look to.
Speaker Change: Take price increases either one to two times a year or two at least.
Speaker Change: Recover.
Speaker Change: Recover over recover from any inflationary costs that we see and we are still I remind folks in an inflationary environment.
We can see in the data and in fact.
Speaker Change: We actually just announced a round of price increases in both the Americas and our EMEA region that will be effective at the beginning of January.
Speaker Change: Very low single digits, but that's pretty typical in the norm for us.
Speaker Change: Certainly we monitor what's happening in the marketplace I'd say generally what we see as a behaved observer observer is.
<unk> kind of aspect in the market is that we typically see competitors.
Speaker Change: Within a period of time, and we will continue to monitor that but we typically tend to be the price leader in our space.
Speaker Change: Okay.
Speaker Change: You guys give.
Speaker Change: For a year price increases if it's warranted cap number yes.
Speaker Change: Yes, I mean, we certainly have in the past, where we've seen more inflationary environment taken more than one price increase and we certainly would look at that if warranted.
Speaker Change: Clearly if tariff or incremental tariffs do come into play if we don't feel that we can.
Speaker Change: Effectively mitigate those appropriately through other actions, we certainly would evaluate other pricing actions as we go into 2025.
Speaker Change: Okay, a couple more here.
Speaker Change: It seems like there is early chatter about infrastructure spending in the U S picking up a lot of companies are calling for second half project activity timing dependent.
Speaker Change: So just anything you are hearing from your distributors and maybe expectations on what the lead times look like for restocking if we were to start to.
Acceleration in Greenfield activity.
Speaker Change: Yes, I mean I think.
Speaker Change: We subscribed to some proprietary databases, they gave us a pretty good indication of kind of what's coming down the pipe.
Speaker Change: <unk>.
Speaker Change: That is favorable I mean, we certainly see a fair amount of activity picking up I would say it hasnt necessarily materialized for us in meaningful ways, yet as you know <unk> really participate.
Speaker Change: On the back end of the lifecycle once material show up at the job site and they really need to start putting the pieces together, but the indications we do see our projects being bid out in kind of the design and civil engineering work underway et cetera.
Speaker Change: Some of the early indications.
Speaker Change: Indications procurement processes. So I think that does bode well and we think will be favorable we do continue to believe that will be a nice tailwind for <unk> over the next several years.
Speaker Change: We haven't seen that materialize so much here in the U S. Although I would say we have seen actually relatively decent infrastructure projects outside of the U S, including in Europe and parts of Asia Pac. So that's what we've seen to date from a lead time perspective, I think we're well positioned we're pretty competitive there overall certainly for our.
Speaker Change: Standard products high runners we do typically maintain finished goods here in <unk> as well as in our channel. We think those are largely at appropriate levels, but we monitor that closely and I think given the lead times in these projects I mean, you get pretty good runway and indications.
Speaker Change: We wouldn't have an issue being able to address any of that at this point in time.
Awesome, that's great to hear and then just.
Speaker Change: Maybe lastly for Darrin two months into the role, but any initial impressions and can you give us a sense of what your priorities are coming 612 months.
Yeah, no. Thanks, Ross, it's a great question.
Speaker Change: Yes, it's been a great start started.
Speaker Change: Obviously, meaning a significant amount of investors shareholders as well as extended leadership team in Milwaukee, So over the first six weeks.
Speaker Change: Greenfield.
Speaker Change: Specify the culture about her back.
Speaker Change: Been here kind of a culture of continuous improvement that mindset embedded itself in the organization and I would say second observation I'll take them. One is the power of the <unk> brand.
Speaker Change: Seeing that at play in the markets the pricing we can drive.
Speaker Change: A fantastic benefit for the company.
Speaker Change: And finally, it's as Paul alluded to in his comments.
Speaker Change: The team we have made as a team we can languishing, taking weight out of the market. So we're going to operate and we're going to win.
Speaker Change: Okay welcome to the team and we look forward working with you. Thanks guys.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of Steve Silver of Rguest Research. Your line is open.
Speaker Change: Thanks, operator, and good morning, everybody.
Speaker Change: Great to see great to see the return to growth in APAC. This quarter I'm curious, whether you could provide some context in terms of what drove that return to growth given the soft the continued softness in mining whether it was just a return to growth among the core products or whether there was some.
Speaker Change: Benefit of the implementation of the second brand strategy.
Yes, I think it actually was all of the above Steve I mean, certainly the more challenging areas. We referenced is Australia and that market is still soft just due to the mining sector, but beyond that it was pretty broad based in Asia Pac.
Speaker Change: Most of the other countries, where we operate with scale, we saw good growth year over year.
Speaker Change: It was in both our core product and we saw.
Speaker Change: Some good performance on our <unk> business as well.
So overall I think it was pretty broad base that gives us some increasing costs as we go into the rest of the fiscal year here certainly on second brand, we continue to execute that.
Speaker Change: Got.
Speaker Change: Increased commercial focus on our team behind that and we have made some incremental progress good progress I think on adding additional.
Speaker Change: Distributors in the region to cover second brand, obviously that is definitely a multi year effort to get the channel partners.
Speaker Change: The network built up for the second brand and also to continue to drive overall marketing and brand awareness, but we feel good about where we are with that to date.
Speaker Change: Great and then so you guys have a lot of programs going on at the same time, all working towards improving the efficiency of the business.
Speaker Change: Whether it be Pep, there you see X or the digital transformation strategies, a lot of those things like investing in yourself kind of strategies can you put any context around where you guys see yourselves within this the skull I know, it's probably early stage overall, but just in terms of where where you guys are within these initiatives.
Speaker Change: Yes, I mean, it's really evergreen for us Steve as we've talked about tap is essentially.
Speaker Change: The continuation of ascend and although ascend is formally over and we're not adjusting out one time costs really the mechanism I call. The machine that we built through <unk>.
Speaker Change: As effective day to day in tap in fact, we have a transformation office that staff that drives the program day to day for US all the scene tracking of the initiatives et cetera same language that we use internally to track these initiatives and categorize them in to make sure theyre driving sustainable impact to the P&L.
Speaker Change:
Speaker Change: Ultimately, we see this driving more efficiency and productivity and enabling more organic growth in the business certainly from a margin perspective through sand effectively we got to <unk>.
Speaker Change: Our target margin of 25% adjusted EBITDA margin essentially a year ahead of plan into fiscal 'twenty four.
Speaker Change: But we do see continued opportunity and we did say even this year effectively at the midpoint of our guidance. If you exclude DTA essentially we felt another 50 bps of margin expansion in there and that's kind of our framework under our current <unk>.
Speaker Change: Multi year financial guidance going forward. So we do continue to see and expect to see benefits from the implementation of <unk> and we're also extending that right I mean, we're extending it into commercial tools like <unk> commercial excellence.
Speaker Change: As we previously mentioned, we rolled that out here in the Americas region through fiscal 'twenty four and we're now in the process of rolling out <unk> in the EMEA region in fiscal 'twenty five. So that's just again part of our continuous improvement process and ethos here at <unk>.
Speaker Change: Great and then one last one if I may.
Speaker Change: The integration of the GTA acquisition, just curious as to.
Speaker Change: How that's going in terms of.
Speaker Change: The reception from the marketplace around the combined capabilities now combining both the vertical and horizontal lifting technologies just curious as to how the messaging is that being received in the early days the integration.
Speaker Change: Yes, I'll take both parts of that from an integration.
Speaker Change: <unk> perspective, performing well.
Speaker Change: Our back office functioning working as a team together and then commercially.
Speaker Change: That promise holes and now we can move things vertically, we can move things horizontally.
Speaker Change: Taking that business from its roots in Europe.
Speaker Change: We're excited about the future and this year, taking some of our commercial wherewithal moving that outside of Europe.
Speaker Change: Big Big player in the last couple of years, so and its holdings have promise for holding to the expectation and it is performing very very well for us orders were very strong in the corner, which is a great sign for the future.
Speaker Change: Yeah, and I would just add I agree with terns points also we have built our commercial growth playbook, we've rolled that out across our <unk> commercial network.
Speaker Change: And they're very clear on how to identify and qualify initial leads for DTA.
Speaker Change: Im really encouraged by the progress you've made there initial lead generation that's happening through the inner pact commercial network.
Speaker Change: Which that was certainly a big part of the premise of our investment thesis behind the acquisition early days seems to be playing out well.
Speaker Change: Great. Thanks for all the color and congratulations on the execution in some challenging markets.
Speaker Change: Thanks, Steve.
Speaker Change: That concludes our Q&A session I will now turn the call back over to CEO, Paul for closing remarks.
Speaker Change: Okay, well, thanks again for joining us this morning, <unk> will be presenting at the upcoming CJS Securities Annual Investor Conference on January 14, and the Gabelli annual pump valve and water Symposium on February 27th in New York, We hope to see you there. Thank you and best wishes for a one.
Speaker Change: <unk> holiday season, and a happy new year.
Speaker Change: This concludes today's conference call you may now disconnect.
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