Operator: Hello, everyone. Thank you for joining us and welcome to the Enerpac Tool Group Q4 2026 Earnings Conference Call. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now turn the call over to Christian Audi, Head of Investor Relations. Christian, please go ahead.
Christian Audi: Thank you, operator. Good morning, and thank you for joining us for Enerpac Tool Group's earnings call for the Q4 and full year fiscal 2026. Joining me on the call today are our President and Chief Executive Officer, Paul Sternlieb, and our Chief Financial Officer, Darren Kozik. On today's call, we will reference non-GAAP measures. You can find a reconciliation of GAAP to non-GAAP measures in the press release issued yesterday and in the appendix of today's presentation. Yesterday, we also issued a separate press release announcing the completion of our acquisition of SFE Group. Our comments will also include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include matters noted in our latest SEC filings. The slides referenced on today's call are available in the Investor Relations section of our website, which you can download and follow along.
Christian Audi: A recording of today's call will also be made available on our website. I will now turn over to Paul.
Paul Sternlieb: Thanks, Christian, and good morning, everyone. As you saw in our earnings release, we ended fiscal 2026 on an extremely strong note. Revenue in the Q4 exceeded our expectations with 10% organic growth in our Industrial Tools & Services or IT&S segment. That gain was driven by exceptional performance in the Americas. Moreover, we enjoyed strong sales gains in both IT&S's product and service businesses in the quarter. While near-term uncertainty remains on the service side, given the fluid situation in the Middle East, we are encouraged by its progress in the Q4 as the actions we have taken to transition to a higher margin service business while improving its cost structure are clearly beginning to show results. In fact, the organic growth in the service business has improved sequentially every quarter in fiscal 2026 and turned sharply positive in Q4.
Paul Sternlieb: Fourth quarter momentum drove record annual revenue of $652 million, our highest since the relaunch of Enerpac Tool Group in 2019, with full-year organic growth of 4%. While full-year margins remain impacted by several factors, which Darren Kozik will address, we delivered robust cash generation in fiscal 2026, with free cash flow up 30%, which positions us for better than anticipated balance sheet leverage following the acquisition of SFE. As announced yesterday, we are very pleased to have completed the acquisition of SFE Group with the closing effective 28 October. We will share a lot more about SFE, the synergies we are targeting, and the status of our integration progress at our upcoming Investor Day in New York next week. This morning, Darren Kozik will walk through our fiscal 2026 performance, provide details on our balance sheet and the SFE transaction, and introduce our fiscal 2027 guidance.
Paul Sternlieb: Then I will come back to give a preview of our next generation profitable growth strategy, which we call Propel, and highlight our successful innovation program. Darren?
Darren Kozik: Thanks, Paul. Turning to slide 4, we finished the year with strong momentum. In product, growth was led by the Americas, supported by demand from data center build-out, power generation, and defense, and by the continued traction from the launch and commercialization of our newer products. In service, the actions we have taken are clearly beginning to show results, and the business grew nicely in the quarter, reversing the decline we saw over the first 9 months of the year. Cortland extended its run of double-digit growth as it continued to win new customers and projects. As shown on slide 5, the Americas led our growth in the Q4 with strong gains across standard products, Heavy Lifting Technology, and service.
Darren Kozik: In addition to benefiting from a strengthening US industrial sector and reshoring activity, we continue to make inroads into growing end markets, including infrastructure, data center build-out, power generation, and defense. From a commercial standpoint, customer reception to our newer products continues to gain traction. We secured major contract wins, and we qualified for additional approved vendor lists. Notably, to continue to position us well for serving the US defense sector, in the Q4, we received CMMC certification, which is the US Defense's Cybersecurity Compliance Program. In EMEA, our standard product business grew in the Q4. Our HLT business remained solid, but declined against a difficult comparison, given a series of large deals in the prior year. The underlying trends are positive for this business.
Darren Kozik: Finally, despite continued challenging conditions in the Middle East, service revenue in EMEA grew for the first time in fiscal 2026, helped by LNG maintenance and shutdown work. In Asia Pacific, we saw strong product momentum in India, Korea, and Australia, along with Heavy Lifting Technology wins, including E-Movers and gantries, while our service business was impacted by macro and geopolitical events. Please keep in mind that given the relatively small size of the business in Asia Pacific, quarterly results will fluctuate. Notably, all three regions saw strong double-digit order rate growth in the quarter. Turning to slide 6. For the full year fiscal 2026, our product business drove growth across IT&S, reflecting accelerating investments in Enerpac Commercial Excellence, or ECX, and innovation.
Darren Kozik: That more than offset the decline in service revenue, which was affected in part by our inability to access certain geographies in the Middle East due to the conflict, as well as a softer North Sea market in the H1 of the year. Combined with another standout year at Cortland, Enerpac delivered total organic growth of 4% for the year, with currency adding roughly 2 points to reported growth. Turning to slide 7. For the full year, the Americas drove our IT&S growth up 10%, led by Heavy Lifting Technology as the US benefited from a strengthening industrial sector and reshoring activity. In EMEA, full-year organic revenue declined 3%. Standard products and Heavy Lifting Technology both grew.
Darren Kozik: That growth was offset by service, which was pressured in the H1 of the year by our UK business and the continued customer consolidation in the North Sea, which we have previously discussed. However, we are pleased to report that the major win secured in the Q2 continues to ramp well. In addition, the conflict in the Middle East continues to create uncertainty in our business. Overall, slower economic growth across Europe weighed on results. That said, we have seen solid order flow in the EMEA region. We strengthened the infrastructure market and large orders from the defense industry that will be beneficial in fiscal 2027. In Asia Pacific, organic revenue declined 1%, as growth in Heavy Lifting Technology was offset by lower service revenue. Looking ahead, we are encouraged by strong order rates and new product momentum in India, Korea, and Australia.
Darren Kozik: Stepping back, it is important to note that nearly half our business, prior to the addition of SFE Group, was generated from the Americas region, which we believe provides significant benefits over the next several years, particularly given the strength of the US economy and industrial sector. Moreover, the skew to the Americas will be further bolstered by SFE Group, where roughly 74% of its revenue is generated in the Americas region. Turning to slide 8. Gross margin declined year-over-year, impacted by mix and higher bonus expense in the cost of goods sold. The increase in adjusted SG&A as a percent of sales was driven by investments in our new strategy and higher bonus expenses. We are proud of the fact that all permanent Enerpac employees are covered under our bonus plan, which rewarded the team for strong performance in fiscal 2026.
Darren Kozik: As a result, our Q4 adjusted EBITDA margin was 22.6%, compared with 26.5% in the prior year quarter, which was the highest margin quarter of fiscal 2025. Turning to slide 9. For the full year, gross margins were negatively impacted by mix, given the higher growth rate of our Heavy Lifting Technology business and dilution from our service business. Overall, EBITDA margins were also impacted by our increased investments, including higher R&D and incentive compensation, as well as investments in continued operational enhancements. As we move into fiscal 2027, we will drive opportunities to improve asset utilization and further optimize our manufacturing footprint. Turning to slide 10. Our asset-light model continues to generate strong cash. Fiscal 2026 free cash flow of $120 million expanded 30% year over year, driven by strong collections activity, inventory management, and reduced cash taxes.
Darren Kozik: Since fiscal 2022, we have nearly tripled free cash flow while keeping capital expenditures at roughly 2% of revenue in most years. Notably, we ended fiscal 2026 with net debt to adjusted EBITDA leverage of only 0.1 times, which positioned us well for the subsequent completion of the SFE Group acquisition. Speaking of our financial flexibility, on 16 October, we successfully renewed and expanded our credit facility with strong support from our banking group. All participating lenders increased their commitments, reflecting continued confidence in our business and financial profile. As a result, we have increased the size of our five-year credit facility from $600 million to $850 million. The new structure consists of a $300 million term loan and $550 million revolving credit facility, providing us with enhanced financial flexibility to support our strategic priorities and growth opportunities.
Darren Kozik: The facility also includes an accordion option of up to $425 million, providing additional capacity for future M&A. Moreover, despite the significant increase in facility size, we were able to maintain the favorable pricing and key terms of our prior agreement, which we view as a strong outcome in the current financing environment. Turning to slide 11, as we highlighted when we announced the agreement to acquire SFE Group, the company provides a strong strategic fit and creates significant opportunities for value creation for Enerpac, in addition to expanding our addressable market by approximately $1 billion. The approximately $472 million purchase price consisted of roughly $452 million in cash and about $20 million of equity awards granted in lieu of transaction bonuses. We funded the cash portion with cash on hand, our expanded term loan, and borrowings under our new revolver.
Darren Kozik: The purchase price represents a 10.6 times SFE's trailing adjusted EBITDA or 9.5 times including the synergies we expect to realize within three years. We expect the acquisition to be accretive to adjusted EPS in fiscal 2027. We continue to target $4 million to $6 million of synergies by year three. Thanks to our strong cash generation in fiscal 2026, we achieved a net leverage at closing of approximately 2.3 times, down from our original estimate of 2.8 times. With SFE Group's strong free cash flow profile, we expect to bring that down to approximately 2 times by the end of the first year, well within our target range of 1.5 times to 2.5 times. That gives us the flexibility to continue our disciplined capital allocation strategy, including internal investments, bolt-on acquisitions, and opportunistic share repurchases.
Darren Kozik: Integration is already underway with our governance and cross-functional execution teams in place. We look forward to sharing more at our investor day next week. With that, our initial guidance for fiscal 2027 is shown on slide 12. I say initial, given that we just closed the SFE Group acquisition yesterday. We are confident in our day 1 readiness, long-term synergy potential, and the pre-close planning we have completed to leverage our combined human resources, IT, finance, and legal infrastructure. Now that the deal has closed, we can begin working on the commercial side with customers and developing detailed plans to capture revenue synergies. As you evaluate guidance, keep in mind that fiscal 2027 will include approximately 10 months of SFE Group's performance. Adjusted EBITDA and adjusted EPS guidance for fiscal 2027 exclude M&A transaction charges and integration-related items. Adjusted EPS also excludes the amortization of acquisition-related intangibles.
Darren Kozik: Starting with the top line, we expect fiscal 2027 revenue of $825 million to $845 million, with organic growth of 4% to 6%. We expect adjusted EBITDA of $195 million to $205 million, which includes incremental investments in our new strategy and support for SFE. For adjusted EPS, we are guiding to a range of $2 to $2.15. Our other modeling assumptions, including depreciation and amortization, interest expense, CapEx, adjusted tax rate, and share count, are shown on the slide. Our guidance assumes no substantial change to the current tariff or regulatory environment and economic trends similar to those as we exited Q4 of fiscal 2026. With that, let me turn it back to Paul.
Paul Sternlieb: Thanks, Darren. As previously announced, we will be hosting our investor day in New York next week. Among the many topics we plan to discuss, we will introduce our next generation growth strategy, Propel. As shown on slide 13, Propel is built on 3 pillars. First, we will grow in attractive end markets with commercial excellence. We plan to deploy next generation Enerpac Commercial Excellence, known as ECX, our commercial engine, to accelerate growth across all products and regions, driving share gains through differentiated channels, digital reach, and application-led sell-in. We also plan to accelerate the growth of SFE Group by leveraging Enerpac's global distribution and key account capabilities. Second, we will differentiate through product-first, application-led innovation. As I will discuss in a minute, we have steadily increased our R&D investment, and with it, accelerated the pipeline of mission-critical customer solutions.
Paul Sternlieb: And third, we will expand through operational excellence initiatives, including our PEP operating system, inventory management, and service expansion into higher margin applications. We look forward to sharing the full story along with our multi-year financial objectives on 4 November. Of course, a critical part of our growth strategy is our commitment to innovation. As you can see on slide 14, we have significantly increased our investment in R&D, growing it at an 11% compound annual rate over the past 3 years. More importantly, we are seeing the benefits in the pace of new product introductions. In fiscal 2026, we launched 11 products, up from 5 the prior year. Heading into fiscal 2027, we have a lot to be excited about at Enerpac. Our product business continued to deliver broad-based strength across the Americas.
Paul Sternlieb: Our service business is showing encouraging trends with sequential improvements every single quarter in fiscal 2026. Our strong cash flow and balance sheet provide the flexibility to pursue our growth strategy. The addition of SFE Group, with its premium brand platform and market-leading products, further strengthens our position as a premier industrial solutions company. With that, we would be happy to take questions.
Operator: We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Your first question comes from the line of Will Gildea with CJS Securities. Your line is open. Please go ahead.
Will Gildea: Hey, good morning. Thanks for taking our questions.
Paul Sternlieb: Morning, Will.
Darren Kozik: Hey, Will.
Will Gildea: So congrats on the strong quarter and closing the deal. Can you just expand some more on the assumptions embedded in your guidance?
Paul Sternlieb: Well, sure. Happy to, Will. Thanks for the question. First, we are really excited about where we are headed. I think there is a lot to be really pleased about, particularly having finally closed the acquisition of SFE. That is a business with very premium products and margins. In fact, I was with the team at a major trade show, FABTECH, in Las Vegas last week. It showed really well. They had a number of new products on display, very strong customer receptivity on those. That team has demonstrated the ability to drive very strong growth, both organically and inorganically. Frankly, they have exposure to higher growth end markets and attractive geographies with over 70% of their revenue in the Americas. That will be, we think, a nice tailwind for us as well.
Paul Sternlieb: Of course, a very complementary position that expands our addressable market by about $1 billion, and it comes with a great, strong management team who will stay on with Enerpac and is incentivized and motivated for the long term. We are really, really excited and pleased that we were able to close on that. In terms of guidance, I will turn that over to Darren. He can talk a little bit about our thinking behind that.
Darren Kozik: Thanks, Paul. Will, as we look at 2027, I would say a couple of things. First, just as a reminder, we are only going to have 10 months of SFE. As you work up your estimates and models, just remind yourself of that. Then as we look at the year, we see organic sales of roughly 4% to 6%. Behind that, we see continued strength in the Americas. That was very strong in Q4. We see that progressing into next year. In addition to that, our HLT business has been on a really strong growth run. So we expect to see that positive momentum. Then service is stabilizing. That business did turn around in Q4. We are still looking for strong, profitable work there, so we want to make sure we get the right work in service.
Darren Kozik: I would say the wild card is still, as we talked about even this time last year, is Europe. There really is no impetus for a significant change there. So as we think about our business, roughly 40% in Europe, we still have our eyes there. That part of the portfolio is a little bit slower, although our product order growth rates were very strong in Q4. So I would say that is the volume front. As we go down the P&L, we will have some leverage from that volume, but there are two places we need to invest back in. Number one is SFE. That team is very strong. They have great products, great operations, but their finance and IT infrastructure and some other places, we just need to invest back because they are not at public company standards or Enerpac standards. So those will be investments we make.
Darren Kozik: Second is Propel. Paul started to allude to that. Next week, we have a lot of great things to show you around grow, differentiate, and expand, where we can invest back to get stronger growth in the future. So that is the shape, the investments, and when we think about it at the midpoint, that will turn about a 24% EBITDA margin, which is very strong. $2.07 EPS, which is up double digits. That includes SFE accretive in year one. So we are very happy about that as well. So that is the guide that is out there. The business is in a really good position.
Will Gildea: That is great color. Thank you. Then just looking at the quarter, really, really solid organic growth. 24% organic sales growth in the Americas is very impressive. Can you talk about the drivers of that? How much of that was price versus volume? Can you also expand on the drivers behind lower margins in the quarter?
Paul Sternlieb: Yeah, sure, Will. I think, look, we were extremely pleased with the growth overall on the quarter, particularly in the Americas. Very robust. Certainly, clearly, the industrial sector in the US is very robust, improving, and I would say performing better than really any other significant country or region in which we operate. That is obviously a plus for Enerpac, where nearly half of our revenue comes from the Americas region. As we talked about with the addition of SFE, over 70% of their revenue is generated in the Americas. So on a pro forma basis, we will be in the mid-50s, I think, on a revenue basis, skewed to the Americas. So I think it is really driven by the strength of the US industrial sector.
Paul Sternlieb: Clearly, we see a lot of growth tailwinds, particularly in end markets like infrastructure, data center build-out, power generation, and the defense sector as well. I think we also see very nice continued tailwinds from reshoring activities here in the US market, and we think that those are not only robust, but sustainable over the mid and potentially long term. So we are quite bullish about that. I think outside the Americas, as Darren talked about, obviously slower growth, but we did see very solid order flow in EMEA, particularly with strength in infrastructure and large defense orders, and we think that will be beneficial here in fiscal 2027 as well. So overall, yeah, I think, again, we were quite pleased with the performance in the quarter, and particularly with the growth rates that we saw here in the Americas region.
Darren Kozik: Yeah. Will, to talk about the Q4 margin, just as a reminder, we were comparing to our highest margin quarter of last year at 26.5%. So we did have a tough comp there. But as you unpack some of that change year-over-year, probably in the first position here was there is some mixed dynamics there. We talked a lot about HLT growth in the Americas, and as a reminder, HLT margin tends to be a little bit lower than the portfolio average because it is a capital good. That will run in the mid-40s. So that puts a little bit of pressure overall. Second, with that strong quarter from an organic growth rate as well as free cash flow generation, we did have to increase for some incentive comp. We are happy to reward our people for that strong performance, but that put a little bit of pressure in the quarter.
Darren Kozik: But then third, we invested in Propel. In the second half of the year, we really started to invest behind that strategy because we see a strong market, particularly in the US, so we want to get ahead and get those investments in to drive growth in 2027. So those are the large drivers. We are excited about Propel. We are excited to invest behind that because we think that will be a catalyst for growth, and we thought that was a wise move.
Paul Sternlieb: Yeah, I would just add color on that, which is we will talk a lot more next week at Investor Day about Propel. But to Darren’s point, the reality is, we have been executing on that internally now for many months. Obviously, we have a public unveiling effectively next week, but the team has been hard at work in executing on that growth strategy. Frankly, as Darren said, we have been investing behind that for a while now.
Will Gildea: Great. Thank you for the color, and then just one more from me. Leverage is going to be a half turn lower after the close of this deal than previously expected. So back in your target range, how are you thinking about cash generation and the new credit facility?
Darren Kozik: Sure, Will. We were pleased to close the credit facility. We had great support from our banks. As we sit here today, probably around 2.3 times levered, and I would say, and just as a reminder, free cash flow generation for us is really strong in the H2 of the year. So a lot of that leverage will come down in Q3 and Q4, just given the H1 of the year for us has a lot of tax payments, bonus payments, things of that nature. So that will be the kind of profile of leverage throughout the year. As we look at that, given where we sit today and with the credit facility, obviously debt paydown is top of mind. We have not had this amount of leverage in a while, so that will be a focus of ours.
Darren Kozik: But that is not to say we will not look at opportunistic share repurchase or even bolt-on M&A. We think we have got a platform now and a profile for a company that is in a really good spot that we can add on other industrial tools and solutions players. I think we tend to look at it, Will, as everything is on the table, but we will focus to get that leverage down, and that is our commitment.
Will Gildea: All right. We are looking forward to your Investor Day. Thank you.
Darren Kozik: Thank you.
Paul Sternlieb: Thanks, Will.
Operator: Your next question comes from the line of Ross Sparenblek with William Blair. Your line is open. Please go ahead.
Ross Sparenblek: Good morning, gentlemen.
Paul Sternlieb: Morning.
Darren Kozik: Morning.
Ross Sparenblek: Really good quarter there on the top line. Looks like highest in company history since you guys got here. Anything one time to call out that just feels like your maybe abundance of caution going into the next year? Or if there was anything with the data centers as a big HLT sell or something of that nature that would give you pause for a potential deceleration in 2027?
Paul Sternlieb: Ross, thanks for the question. Really nothing in terms of any meaningful one-offs to note in the quarter. It was just overall a very strong, robust performance by the team. I think we're pleased with the progress we've been making there. I think it was broad-based. We talked about a number of end markets where we're seeing really nice tailwinds and favorable dynamics there, and we expect that to continue here into fiscal 2027. I think on the organic growth, obviously finishing the full year at around 4% organic growth, we feel like the guide of 4% to 6% here for fiscal 2027 makes sense, and we'll continue to evaluate as we progress throughout the year. But just given the market dynamics and the execution of the team, we feel that's appropriate. I think overall that's where we sit today.
Ross Sparenblek: Okay. No, that's helpful. On the data center and power side, can you just remind us of what the sales cycle looks like? Is it a similar dynamic with other large projects where it's kind of a one-time purchase, so you see more of a recurring cycle there?
Paul Sternlieb: Yeah.
Ross Sparenblek: This equipment goes to different job sites.
Paul Sternlieb: Right. Yeah. Thanks for the question, Ross. It is pretty interesting. I would say specifically on data centers, our exposure is less so on the data centers themselves or the hyperscalers. It is one step back. We are generally selling to folks that are manufacturing equipment that goes into a data center, like gen sets or other power equipment, et cetera. Then we are providing equipment and support for either their own manufacturing facilities as they are making that equipment, need to move it around in their plants, or ultimately to transport it or to install it into a data center. Our equipment does not typically sit permanently in the data center. What I would say is we are seeing a number of repeat or recurring orders in that space.
Paul Sternlieb: Most of the work that we see tends to revolve around our smaller HLT gantries, which are really a very nice substitute for more permanent overhead crane solutions. As you see other industrial manufacturers building out new capacity, whether it is expansion or even new manufacturing facilities, they do not necessarily want to make these large one-time investments in overhead cranes, which are fixed in a facility, and they cannot easily move, which also are very expensive and also have very significant lead times. Our smaller gantries are really an exceptional substitute that allow them to get that with very short lead times, and it is mobile equipment. So plays very well there. E-Movers, another one of our HLT products, also is supporting those customers, particularly in those applications. We have, as I said, seen a number of repeat orders.
Paul Sternlieb: I would say the cycle time or the lead time for those is generally shorter than what we typically see in our HLT business. Probably most important for these customers is availability. I would say price is probably a much less critical element for them, frankly. So, we have been making investments behind inventory and operational improvements to be able to support very quick lead times.
Ross Sparenblek: Okay. That's helpful. Do you get the sense then that you're kind of expanding that TAM customer by customer when you think of just competitive landscape? Are you going out there kind of big game hunting to make sure that your brand's well enough or people know about it and they know that you have the ability to deliver?
Paul Sternlieb: Yeah. It's a great question, and Ross, we will talk more specifically about this on our investor day next week. Phil Jefferson, our Chief Commercial Officer, will speak exactly to that. But suffice it to say, we have been, and we are continuing to make additional investments in more resources behind commercial sellers, specifically focused on the data center market, including a focus on enterprise selling as well. We already have some very strong, established customer relationships, but we have more active hunting work underway with more resources and feet on the street dedicated to that activity.
Ross Sparenblek: No, that's great to hear. I will jump back in queue. Thank you.
Paul Sternlieb: All right. Thank you.
Darren Kozik: Thanks, Ross.
Operator: Your next question comes from the line of Steve Silver with Argus Research. Your line is open. Please go ahead.
Steve Silver: Good morning, and thanks for taking my questions and my congratulations on the closing of the acquisition as well.
Paul Sternlieb: Thanks, Steve.
Steve Silver: You guys mentioned major contract wins in the data center space as well as approved vendor lists. I was wondering if you could provide a little more color on that and really what the implications might be for the business moving forward.
Paul Sternlieb: Yeah, look, I think those wins that we talked about, they really reflect the commercial traction that we are building, particularly in the Americas and also I would say the disciplined sales process that we have built, we call ECX, Enerpac Commercial Excellence. I think we are making particular gains in infrastructure as we talk about data center build-out, power gen, defense industries. I do think we are taking share. We see good evidence of that, and as I said, we are continuing to invest and accelerate investments, particularly commercially as well as operationally and from an inventory selective perspective behind that. Some of these approved vendor lists also, I think, position us well into the future because again, we become the easy button, frankly, for these customers and the one-stop shop.
Paul Sternlieb: If they build increasing confidence behind our capability to deliver for them on short notice with very high-quality product that meets their needs, and frankly, is a great substitute for what otherwise would be expensive and long lead time investments for them, it is really a no-brainer for those sort of customers.
Steve Silver: Great. A key component of the Propel strategy you are talking about is product innovation, and I know you guys have been talking about this for quite some time in terms of new products. Yet you have done this pretty much with a modest R&D expense on an absolute basis. You mentioned the 10% CAGR in R&D growth, but still a pretty low number on an absolute basis. I am just curious as to whether that will likely be accelerated either on an absolute basis or as a percentage of sales moving forward.
Paul Sternlieb: Yeah, we've been extremely pleased, Steve, with the progress that our innovation team has made over the last several years. As you may recall, we previously talked about effectively it was a reboot strategy from 4 or 5 years ago. We've come a long way in terms of building out the process, the capability, the team behind that. Obviously the roadmap now executing in terms of launches and commercialization. So I think we've made really exceptional progress. Kudos to our team on that, and launching 11 products here in fiscal 2026. And frankly, a similar target or if not better here in fiscal 2027. We will talk a lot more specifically about innovation at our investor day next week.
Paul Sternlieb: Mart Hinnen, who heads up our innovation function in our HLT business globally, will spend quite a bit of time going into really significant detail behind innovation, how we run it, what the future looks like. We have been, and we will continue to increase our level of investment in R&D here. We think that we are a clear technology leader in our space, and we want to continue to be front and center in the industry in that respect. The only other comment I'd make in terms of absolute levels of investment. It's hard to compare, but I think at the end of the day, just bear in mind the bulk, if not really the vast majority of our innovation spend is on our product business.
Paul Sternlieb: So when you look as a percent of revenue, really have to think about percent, the denominator effectively being our IT&S product business overall. So I think we'll continue to invest behind product innovation, but frankly also supporting areas like our field service and our applications expertise as well, which I think is a key differentiator and maybe the unsung hero of our business in many respects.
Steve Silver: Great. Thanks for the color, and I'll get back in queue.
Paul Sternlieb: Thank you.
Operator: Your next question comes from the line of Ross Sparenblek with William Blair. Your line is open. Please go ahead.
Ross Sparenblek: Thanks for taking the follow-up, sir. Just a couple on the margins. Can you maybe help us pinpoint what this integration and growth investment cost is for 2027? We have the SFE targets. It is something like around $20 million. I do not know if that is all in FY27, and it seems like there is maybe some other moving parts there too. You guys did not say anything about material inflation. I know others are having that issue. I just wanted to verify that that is not an issue for you guys as well.
Darren Kozik: Yeah, Ross, let me take a couple pieces there. I would say, first, pure integration cost, we think that is in the ballpark of $10 to $14 million. I would say that is to put the businesses together, to get the ERPs to work, those types of dynamics. Okay? Outside of that, there is some core investment we need to make in SFE to stand that up that will be recurring costs in the business. So really there is investments of two types there. One, just to get it up and running, which is put out at $10 to $14 million. And two, some core investments in things, call it SEC reporting or legal resources that we will need on a recurring basis. So there is kind of a combination of both there, from an integration perspective. Second, on the material inflation. We read the news too.
Darren Kozik: We see some impacts of it, but I would say it is not as exorbitant as some may be led to believe. Obviously, we have our eyes on the ball there, and obviously, we have a sourcing team that is driving all the costs that we can. But, as we enter 2027, it feels like an environment similar to 2026 that we are prepared for.
Paul Sternlieb: Yeah. I think as always, Ross, from an inflation standpoint, our goal is to at least offset that through a combination of pricing where appropriate and productivity actions here in the business. We continue to firmly believe we can do that, if not over-recover a little bit, just maintain margin profile. As you know, from a pricing standpoint, we typically take one to two price increases a year. That is never peanut butter. We evaluate that by geography, by product line, even at SKU level. But we will continue to evaluate that here in fiscal 2027.
Ross Sparenblek: Okay. It is hard to tell what the core incrementals should be as our starting point for 2027. Can you just give us a sense of what the organic should be before we start layering in some of these costs?
Paul Sternlieb: Yeah, I think on the incrementals, what I would say is we are going to share more specifics around that. Not to sound like a broken record, but we will specifically address incrementals and actually decrementals, should those occur, next week at our Investor Day. So stay tuned. But we will talk specifically next week around sort of the fixed versus variable cost structure of the business and why that gives us confidence in our ability to deliver on the numbers that we will share to the incremental and decrementals.
Darren Kozik: Yeah. Ross, I would just add that we've been on a journey here. Free cash flow has tripled almost over the last couple of years here. We've done the acquisition. We feel the time is right in a good market to invest back in the business and get growth above market. That's what we're here to do.
Ross Sparenblek: I never had a doubt on the free cash flow. You guys, you're on a tight ship over there. Just one more here, just on the, I believe that we had SFE accretion around $0.25 for year one. So 10 months of that, about $0.20 is kind of the starting point. What do you think about the organic EPS? Just trying to back up a few parts.
Darren Kozik: That's in the range, Ross. I think you got to kind of look at that business in a couple of components. One, kind of take that down to 10 months. Two, look at the current interest rate environment. Then three, the incremental investments we need to make back in that business. So that might get you to something that's a little bit less than that in the grand scheme of things.
Ross Sparenblek: Well, fantastic, guys. Thank you for your time.
Paul Sternlieb: Okay. Thank you, Ross.
Darren Kozik: Thank you.
Operator: If you would like to ask a question, please press star one to raise your hand. To withdraw your question, please press star one again. Please stand by while we compile the Q&A roster. If there are any further questions, please press star one to raise your hand. There are no further questions at this time. I will now turn the call back to Paul Sternlieb, CEO, for closing remarks.
Paul Sternlieb: Well, we hope that you will join us for Investor Day being held next week on Wednesday, 4 November, at the New York Stock Exchange. In addition to Darren and myself, we will be joined by other members of Enerpac's leadership team, providing a comprehensive overview of our strategic vision and an in-depth review of our products, capital allocation strategy, and financial objectives. Attendees will also be able to see our products close up through live demonstrations and meet the management team at a luncheon following the presentation. If you are unable to attend in person, the presentations will be webcast and accessible on the investor relations section of our website. In addition, we will be participating in the Baird Global Industrial Conference in Chicago the following week on Tuesday, 10 November. We hope to see you there.
Paul Sternlieb: Well deserved. With that, thanks again for joining us, and have a great day.
Operator: This concludes today's call. Thank you for attending. You may now disconnect.
