Enerpac Tool Group Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
June 22, 2023

There are 4 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Enerpac Tool Group's Third Quarter Earnings Conference Call. As a reminder, this conference is being recorded June 22, 2023. It's now my pleasure to turn the conference over to Travis Williams, Director of Investor Relations. Please go ahead, Mr.

Operator

Williams.

Speaker 1

Thank you, operator. Good morning, and thank you for joining us for Enerpac Tool Group's 3rd quarter fiscal 2023 earnings conference call. On the call today to present the company's results are Paul Sternley, President and Chief Executive Officer and Tony Colucci, Chief Financial Officer. Our slides and a recording of today's call will be available on Enerpac's website in the Investors section. Today's call will reference non GAAP measures, and you You'll find a reconciliation of GAAP to non GAAP measures in the press release issued yesterday.

Speaker 1

Today's comments will include forward looking statements that are subject to business risks that could cause actual results to be materially different. Those risks include, among others, matters noted in our latest SEC filings. Now I will turn the call over to Paul.

Speaker 2

Thanks, Travis, and good morning, everyone. First, I'd like to formally welcome Travis to the Enerpac Tim is our new Head of Investor Relations. Thank you for joining our earnings call this morning. I'm happy to cover our Q3 results and the progress we are making on the implementation of our growth strategy and Ascend. Starting on Slide 3, Steady demand for our products drove core sales growth of 4% in the quarter.

Speaker 2

We were pleased to see growth in 3 of our 4 regions year over year, led by double digit growth in Europe and Asia Pacific. Continued implementation of eightytwenty and a more selective quoting process in our MENAC region negatively impacted service in the quarter, which we estimate at a 200 basis point impact. We believe we're about halfway through this process in the MENAC region. For the 2nd consecutive quarter, we saw record gross profit and adjusted EBITDA margins since the launch of Enerpac Tool Group in 2019, and we continue to track towards our long term targeted margins of greater than 25% as we laid out during last year's Investor Day. Our Ascend transformation program continues to deliver significant sustainable results to our top and bottom line.

Speaker 2

In a moment, I'll share some examples of Ascend in action. Our strategic growth initiatives also continue to gain traction, and we see an increasingly attractive macro backdrop for wind, rail and infrastructure. Industry estimates indicate that installed wind capacity is expected to increase nearly tenfold between 2020 In the rail sector, rail tool manufacturers should benefit from a renewed focus on capital improvements as an aging locomotive fleet and deteriorating infrastructure drives demand. And finally, in the infrastructure space, The U. S.

Speaker 2

Is expected to spend approximately $1,000,000,000,000 over the next decade to rebuild infrastructure, onshore manufacturing to improve for the company's supply chain resilience and transition towards clean energy. Industry analysts estimate that over $200,000,000,000 worth and we are pleased to announce that the company has been announced in the past few years alone, half of which are earmarked for roads and bridges. All this bodes well for our focus on these 3 vertical markets where we believe we are well positioned to drive accelerated growth. In light of our year to date performance, the continued progress on our Ascend transformation and our outlook For Q4, we are updating our full year guidance range for revenue and raising our full year guidance for adjusted EBITDA. Now moving on to Slide 4, we were pleased to see strong demand in 3 of our 4 regions.

Speaker 2

In addition, Underlying demand levels in the Middle East or MENAC region are healthy, but not reflected in our Q3 growth due to the more selective quoting process that I referenced earlier. Product order rates were steady throughout the quarter and through the 1st few weeks of June, we've seen order rates up year over year. During the quarter, I had the opportunity to meet with several customers and distributors across Europe and several parts of Asia. Overall, the sentiment remains positive, though somewhat cautious. They remain excited about our growth strategy and the ways in which we are improving Enerpac to create more value for our end customers and channel partners.

Speaker 2

And finally, from an operations perspective, Supply chain is still an issue for select components in certain markets, mainly electronics, though we continue to make progress on reducing our past due backlog. In addition, the market for skilled labor remains challenging, especially for 3rd shift. Moving on to the regions on Slide 5. The Americas delivered solid core sales growth in the mid single digit percent in the 3rd quarter, driven by year over year growth in both product and service. From a vertical market perspective, Aerospace and Mining were strong during the quarter.

Speaker 2

Our Heavy Lifting Technologies or HLT business was solid across multiple verticals, but especially in infrastructure where government spending is driving significant projects. National dealer sentiment remains cautious as they watch for any potential slowdown in the back half of the year. Regional partners have remained neutral with some citing a slight shift into service and rental. Overall channel inventory is staying consistent and our most strategic partners are keeping levels steady. The ability for our partners to deliver product is critical and they continue to invest in inventory accordingly.

Speaker 2

Demand also continues to increase for sales through our enterpact.comusecommercechannel. U. S. Website traffic was up 86% year over year and revenue has increased for 5 consecutive months. We remain very excited about the growth in our e commerce channel.

Speaker 2

Moving on to Europe, this region delivered solid year over year core growth in the low double digit percent, driven by broad based improvement in both product and service. Activity was strong in both wind and infrastructure. And similar to the Americas, HLT continued to see strong demand and booked several large orders. On the service side of the business, we are seeing margin improvement driven by expansion into new verticals like nuclear as well as growth in attractive geographies like Scandinavia. Additionally, a greater portion of our service revenues came from with higher margin niche services like our integrity assurance offering.

Speaker 2

On the challenging side, the traditionally busy North Sea off Sure. Sector is seeing some project deferral due to large events planned for the summer of 2024. Although overall demand was solid, Dealer sentiment remains cautious in many European markets, driven by the economic situation and the recent news that the Eurozone has entered in a mild recession. We believe inventories are appropriately positioned across the channel for most product lines. And moving to Asia Pacific, the region recorded core growth in the high teens percent.

Speaker 2

Given Asia Pac Expansion is one of our strategic growth pillars. We are encouraged by the performance in the quarter. From a vertical perspective, mining continued to be the largest and is being recorded. Shipbuilding in Korea and Japan continued to be positive, driven by the transportation of liquefied natural gas. In Japan, our HLT business continues to shift from power generation installations to infrastructure projects, driven in part by an aging highway system.

Speaker 2

In Australia, large miners are moving to cleaner energy products, which has resulted in strong demand for our cordless pumps. And we're also pleased with the discussions that we are having with multiple distributors in the region on our second brand expansion strategy. Turning to the MENAC or Middle East region. MENAC experienced a year over year core decline in the high 20% range, driven by our continued implementation of 80 20 and a more selective process for quoting service projects focused on more differentiated Notably, this has contributed to the overall profitability improvement of the region year to date as we focus on higher quality projects. From a vertical market perspective, oil and gas continues to be favorable driven by commodity prices.

Speaker 2

The region is showing positive signs of growth with an estimated $113,000,000,000 worth of projects under execution in the oil and gas sector to be commissioned by 2025. Estimates indicate that the yearly investment in the offshore sector is up to approximately $40,000,000,000 Overall, dealer sentiment in the region is neutral with oil and gas strength being offset by lower levels of infrastructure project work. We believe channel inventories are also at appropriate levels. And finally, a brief update on Cortland. The Korlym business delivered core growth of 5% year over year in the Q3.

Speaker 2

As it relates to the biomedical portion of the business, We continue to see growth in robotic surgery and orthopedic products launched during the quarter. Sales to diagnostic customers were also positive in the quarter. We also have several new projects in the pipeline for orthopedic and cardiovascular applications that look quite promising. And moving on to the industrial side of the Cortland business, We experienced solid activity in the marine market where we saw our best quarter in 2 years. Demand was driven in part by the conversion of a fleet of large transport vessels from steel wire to high performance synthetic mooring lines in addition to offshore wind project activity.

Speaker 2

Dealer sentiment remains cautious as regional distributors have seen some project delays. Overall, We continue to be pleased with the progress in Cortland in terms of both growth and margin expansion. Turning to Slide 6, I'd like to highlight a few examples of the accelerated progress that we continue to make on our Ascend Initiatives. We have several initiatives underway across the organization to drive structural improvements in SG and A. First, we've created an engineering center of excellence in a lower cost location.

Speaker 2

This expanded center will host technical writers, New Product Development and Sustaining Engineering as well as Custom Engineering. Formally disparate teams across in multiple regions will now be co located, driving economies of scale, standardization and labor arbitrage. 2nd, we've established our finance center of excellence in India, leveraging an existing office site there. Services span general ledger, accounts payable and accounts receivable from multiple regions. The new center will enable across regional process standardization paving the way for further automation.

Speaker 2

Additionally, the shared Service Center is taking on select reporting capabilities, allowing in region teams to focus more on strategic partnership with local leaders. And finally, we've announced a regional consolidation, which will be effective as we enter fiscal 2024, combining the current SI and MENAC regions into a single Europe, Middle East and Africa or EMEA region. And we have a new regional President starting in that role in early July. This further simplifies our structure, bringing the total number of regions from 4 to 3. The consolidation will help drive accelerated growth, create economies of scale, to simplify our organizational structure and enable more streamlined and standardized reporting.

Speaker 2

Continuing on Slide 7. During our Investor Day, we spoke at length about our eightytwenty lean initiatives as part of the Ascend transformation. One such initiative is our SKU rationalization program with the goal of simplifying our product portfolio and reducing complexity. Starting with nearly 35,000 SKUs, we completed a rigorous review and established a target to rationalize approximately 30%. Phase 1 of this initiative was elimination of what we called the long tail SKUs across all product lines.

Speaker 2

These were products with low volumes and or in some cases negative margins. I'm pleased to report that our team has now completed Phase 1 and deactivated approximately 4,000 SKUs or about 12% as a result. Phase 2 will consist of consolidating certain SKUs into existing SKUs and standardizing components within SKUs. The second phase is expected to reduce the total SKU count by a further 5000 to 7000, with the majority completed by the end of this calendar year. These actions are expected to create material efficiencies from procurement leverage as well as labor and overhead efficiencies from reduced complexity.

Speaker 2

Importantly, We do not believe that SKU rationalization has negatively impacted or will negatively impact revenue as we have ample substitutes in our product catalog. And finally, with regard to capital investments within the Ascend program, one area that is paying early dividends is the purchase and implementation of additional factory automation, such as new machining equipment at multiple facilities to increase capacity, and will reduce production costs and shorten lead times. We are also implementing the latest generation of warehouse management systems into our largest European distribution center, which will move it to the next level of efficiency and productivity. And we're investing in additional systems enhancements across the organization. For example, we recently initiated a project to overhaul and provide better service and self-service options to our employees.

Speaker 2

So as you can see, we remain and very excited about the progress we're making on Ascend and the sustainable benefits it is driving in our business. With that, I'll hand it over to Tony to take us through the Q3 financial results. Tony?

Speaker 3

Thanks, Paul, and good morning, everyone. Now turning to Slide 9, let's review our adjusted Q3 results. Net sales in Q3 were approximately $156,000,000 which is 4% core sales growth, excluding approximately $2,000,000 of FX headwind, driven by the strengthening of the U. S. Dollar, primarily related to the euro and GBP.

Speaker 3

This core sales growth was in spite of the approximate 200 basis point headwind due to lapping revenue from service customers that we strategically exited in our MENAC region this year. Tool product core sales increased 9 as we increased as we continue to see consistent demand for our products. The 3rd quarter saw double digit growth in both our SI in APAC regions. Single digit growth in the Americas, slightly offset by single digit Q3 decline in MENAC, which is our Similar to prior quarter trends, pricing actions contributed to our Q3 net sales growth, thanks in large part to the impact of Ascend strategic pricing implemented this year. Service Core sales were down 13% over Q3 2022, driven mostly by declines in our MENAC region due to the for purposeful exit of low margin service business.

Speaker 3

The core service decline was partially offset by Q3 growth in our Americas and SI regions. Cortland core sales were up 5% over Q3 2022, driven by growth in both our medical and industrial businesses. In the Q3, we delivered over $37,000,000 of adjusted EBITDA, which is a $19,000,000 year over year improvement. 3rd quarter adjusted EBITDA margin was 24%, which is an increase of nearly 1200 basis points over Q3 of fiscal 2022 and reflects a currency neutral incremental profitability of 303%. Excluding a prior year Q3 discretionary bad debt reserve for an agent in the Middle East, We saw a 480 basis point increase in currency neutral incremental profitability of 134%.

Speaker 3

The adjusted EBITDA improvement in the quarter was also driven by a combination of pricing actions, product productivity improvements in our manufacturing plants and for further improvements in our SG and A costs. We also continue to see lower year over year freight costs as we continue to tighten up our usage of expedited freight, along with improved ocean freight rates compared to Q3 2022. The EBITDA impact of service was roughly flat in the quarter as improved margins driven by eightytwenty, more selective project quoting and favorable mix were largely offset by lower net sales due to the aforementioned strategic exits. Cortland contributed $1,000,000 of EBITDA improvement behind top line growth, a stronger mix of medical sales and improved margins across both medical and industrial businesses. Excluding the favorable impact to largely European costs resulting from the stronger U.

Speaker 3

S. Dollar. Q3 SG and A was down approximately $13,000,000 when compared to the prior year. This was driven by lapping the previously mentioned non repeating bad debt reserve in Q3 fiscal 2022, along with lower salary and wages, resulting from savings tied to restructuring and reorganization efforts, partially offset by higher year over year short term incentive compensation. As Paul previously mentioned, 3rd quarter adjusted EBITDA was also positively impacted by the execution of our Ascend transformation program, which we estimate benefited the quarter approximately $16,000,000 We incurred approximately $2,000,000 in restructuring charges in in the quarter associated with our Ascend Transformation Program and the associated statements from those actions positively impacted the quarter and will take full effect in fiscal 2024 for those specific initiatives.

Speaker 3

The adjusted tax rate for the quarter was 26%, which is a bit higher than last year's Q3 tax rate of 22% due to the timing of discrete tax benefits in 2023 versus 2022. Overall, Our adjusted EPS for the quarter was $0.39 which is $0.23 higher than Q3 2022, a 144% improvement year over year. Moving on to a financial summary of our liquidity on Slide 10, We generated positive free cash flow of $14,000,000 during the quarter, approximately a $13,000,000 improvement over Q3 2022 in spite of higher Ascend related payments this quarter. Excluding the impact from foreign currency translation, Working capital increased primarily driven by lower payables mainly due to Ascend and higher accounts receivable as we cyclically and we are actively moving into the busier portion of our fiscal year, slightly offset by lower net inventory. Capital expenditures were and recorded for approximately $3,000,000 in the quarter.

Speaker 3

Our leverage is at 1.0x, remaining below our target range of 1.5x to 2.5x. Next on Slide 11, we continued our share repurchase program in Q3 under the current authorization, We still have 5,400,000 shares remaining and we will continue to look for opportunities to provide value to our shareholders through future share repurchases. With our solid overall liquidity position and strong balance sheet, we believe we are well positioned to support our balanced capital allocation priorities, which includes our Ascend transformation program, along with other potential internal investments, return to shareholders and with significant capacity to pursue strategic growth opportunities through M and A. We remain committed to leveraging our capital and will position to drive long term value for our shareholders. With that, I will turn the call back to Paul.

Speaker 2

Thanks, Tony. Based on the results year to date, the progress we have made on Ascent our Ascent transformation in the program and our view on the Q4, we are increasing our full year guidance. Specifically, We are updating our revenue expectations to $590,000,000 to $600,000,000 towards the high end of our previous range of $580,000,000 to at $600,000,000 We continue to expect IT and S product revenues to be up mid single digit percent for the year and IT and S service revenues to be down mid single digit percent as we continue implementation of the eightytwenty process in MENAC. We are also increasing our full year adjusted EBITDA range to $123,000,000 to $130,000,000 up from our prior expectation of $118,000,000 to $128,000,000 This assumes current foreign exchange rates and that there is not a broad based recession. Before I wrap up, I want to add that I remain very pleased with and we are making progress we are making across the company as we continue to transform Enerpac Tool Group into a world class industrial tools and services business.

Speaker 2

And I'd like to express my sincere thanks to all our Enerpac tool group team members around the world for their dedication and commitment. It is due to their hard work, drive, focus and determination and that we continue to deliver solid results. That concludes our prepared remarks today. But as always, Please reach out to Travis Williams if you have any questions. We thank you for joining our Q3 earnings call, and we look forward to speaking with you again in October for our Q4 fiscal 'twenty three full year results.

Speaker 2

Thank you and have a good morning.

Operator

Thank you. That does conclude today's teleconference and webcast. You may

Remove Ads
Powered by Quartr
Earnings Conference Call
Enerpac Tool Group Q3 2023
00:00 / 00:00
Remove Ads