Standex International Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
March 21, 2024

There are 6 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Enerpac Tool Group's 2nd Quarter Fiscal 20 24 Earnings Conference Call. As a reminder, this conference is being recorded March 21, 2024. It is 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 Q2 fiscal 2024 earnings call. On the call today to present the company's results are Paul Sternleap, President and Chief Executive Officer and Shannon Burns, our Interim Principal Financial Officer. Our slides and a recording of today's call will be available on Enerpac's website in the Investors section. Today's call will reference non GAAP measures.

Speaker 1

You can find a reconciliation of GAAP to non GAAP measures in the press release issued yesterday. Our comments will also include forward looking statements that are subject to business risks that could cause actual results to be materially different. Those risks include matters noted in our latest SEC filing. Now, I will turn it over to Paul.

Speaker 2

Thanks, Travis, and good morning, everyone. Enerpac posted another solid quarter despite the broader macro environment and the overall slowdown in the industrial sector. We were particularly pleased with the 2nd quarter margin expansion as we made further progress improving our operating efficiency and SG and A productivity. Moreover, we believe organic sales growth in At the halfway point in fiscal 2024, with organic revenue growth of 4% and adjusted EBITDA growth of 18 percent, we remain on track to achieve our full year guidance. And we continue to make solid progress toward our longer term goals as we take Enerpac to the next level of growth and profitability.

Speaker 2

I'd like to welcome Shannon Burns to the call. Shannon is serving as our Interim CFO as we continue the surge process. He is a seasoned finance executive who leads Enerpac's Business Decision Support Office and brings financial leadership experience from several other major corporations. I'll let Shannon review our 2nd quarter performance, then I will speak about geographic trends, product innovation and a few key initiatives that will continue to advance Enerpac's progress as a premier industrial solutions provider. Shannon?

Speaker 2

Thanks, Paul.

Speaker 3

Paul mentioned our team executed another solid quarter within our industrial tool and services business enjoying top line growth of 2.8% with a 3.7% increase in product revenue and a 0.8% decline in services. Service revenue declined slightly from a year ago period largely driven by some specific one time projects worked in the prior year. In addition, through our eightytwenty approach, we continue to focus on higher quality, more differentiated projects and service lines. ITS growth was partially offset by a 25% decline at Cortland Biomedical. As we finalized commercial negotiations with a key Cortland customer, some shipments were temporarily on hold.

Speaker 3

We concluded the negotiations and shipments resumed at the end of the second quarter. Additionally, there has been some softness in demand related to certain surgical procedures utilizing Cortland products. However, on a mid term basis, there's a promising funnel of commercial opportunities to offset the softness. We remain bullish on the outlook for the Cortland Biomedical business given its differentiated offerings and exceptional innovation coupled with the favorable macro trends driving long term demand for Cortland's technology in the medical device sector. Due to the sale of Cortland Industrial in late fiscal 2023, total net sales for the company declined 2.5% year over year.

Speaker 3

On an organic basis which excludes divestitures and the impact of foreign exchange, sales increased 1.8%. Slide 5 reflects the continued progress we've made improving operating efficiency and SG and A productivity. In the Q2 gross margins expanded approximately 200 basis points year over year to 51.6% despite the aforementioned volume driven decline at Cortland Biomedical. The improvements in margins was driven by operational improvements related to the Ascend transformation as well as pricing actions, a favorable sales mix and the disposition of Cortland Industrial. Similarly, we continue to benefit from the initiatives that improved our SG and A efficiency.

Speaker 3

Adjusted SG and A expense which excludes Ascend and other one time charges from both periods declined 3% year over year as we continue to responsibly manage discretionary spending. As expected, Ascent and other one time charges have declined substantially. Turning to Slide 6, with both top line growth and continued gains in operating efficiency and SG and A productivity, adjusted EBITDA increased 6.4% year over year. Adjusted EBITDA margins improved 210 basis points from 22.7 percent to 24.8%. On a GAAP basis, diluted earnings per share from continuing operations totaled $0.33 in the quarter.

Speaker 3

Adjusted EPS for the quarter was $0.36 compared to $0.35 in the prior year as the benefit of a lower share count was offset by a significantly higher effective tax rate. The higher tax rate in the Q2 of fiscal 2024 was primarily due to lower Ascent charges as well as our efforts to repatriate cash during the quarter. We continue to expect the full year adjusted tax rate to be in the range provided by our guidance. In the Q2 of fiscal 2024, cash provided by operations was $13,000,000 compared to use of cash of $8,000,000 in the year ago period. The improvement was primarily due to the timing of annual incentive compensation payments, lower Ascent transformation payments as well as higher net earnings.

Speaker 3

In addition, we continue to drive improvements in working capital management and in particular inventory efficiency. As we have discussed, Enerpac's liquidity and balance sheet remains strong. At the end of the second quarter, net debt was $91,000,000 resulting in a net debt leverage ratio of 0.7 times adjusted EBITDA down from 0.9 times at the end of last quarter. Total liquidity was approximately $500,000,000 Additionally, as we've said previously, we have the option in the credit facility to request an M and A accordion up to $300,000,000 We remain focused on a disciplined strategy related to deploying capital to enhance returns. With that, let me turn the call back to Paul.

Speaker 2

Thanks Shannon. Turning to the regional performance of IT and S, In the Americas, we saw low single digit growth in the quarter. As we said in the prior quarter, we expect low single digit growth in the Americas in 2024 given the neutral to cautious sentiment amongst our channel partners. While inventory levels are above average at a few distributors, our heavy lifting technology business or HLT has a solid funnel going into the 3rd quarter and the service business is starting the quarter with backlog and momentum. In the EMEA region, we saw solid mid single digit growth in the quarter.

Speaker 2

We are enjoying strength across our targeted vertical markets including wind and industrial MRO with particular strength in the infrastructure vertical driven by increasing government investment in large projects and our direct sales approach with engineering and construction companies. Distributor inventory in the region is appropriate, although sentiment remains cautious due to weaker trends in the general industrial market. The Asia Pacific region saw a low single digit decline in the quarter. We enjoyed over 20% revenue growth for our standard products in the region. However, HLT, which can be very lumpy, was down sharply from a year ago period, which included a large project in Australia.

Speaker 2

Dealer sentiment is neutral to cautious, while inventory in the channel is generally appropriate, albeit with some pockets of elevated levels. On the innovation front, we are very pleased with the flow of new products generated by our disciplined customer focused product development process. Last quarter, we discussed the launch of 2 new battery powered portable pumps that we believe have clear competitive advantages in our key vertical end markets. I'm pleased to say that these pumps are being well received in the marketplace with sales tracking ahead of plan. This quarter, we launched a new 100 ton hydraulic lock grip puller.

Speaker 2

The puller provides a safe and productive way to remove large shaft mounted components without damage and is a meaningful addition to our product portfolio for railcar maintenance. We also launched a new pin puller in the Americas. The PPH series 40 ton hydraulic pin puller kits provide a safe and easy way to remove joint pins used in mining, on and off highway vehicles and equipment found in manufacturing facilities. And by using hydraulic force, the pin puller replaces more dangerous methods that involve torching, lancing or hammering. All of these new products support Enerpac's mission of making complex often hazardous jobs possible safely and efficiently.

Speaker 2

And speaking of our ability to handle critical jobs, Enerpac's cube jacks were recently used to move the retired space shuttle Endeavour to its permanent display location at the California Science Center. We were proud to be involved in this unique and highly complex move. This is yet another example of the application of Enerpac's world class products and technology to help customers solve challenging problems. In the Q2, we began the rollout of our Enerpac Commercial Excellence or ECX program in the Americas. As you may recall, early on, we realigned our sales force to optimize coverage.

Speaker 2

We also modified our incentive compensation structure to reward regional performance, but we believe there is additional and significant room for improvement in terms of commercial effectiveness with ECX. ECX significantly raises the bar with a proprietary disciplined playbook, tools and support for the sales process, including everything from market segmentation to account planning and tracking. With ECX, we will also optimize the potential of our CRM platform and integrate with our financial systems to improve forecasting and business intelligence. As a result, we expect to achieve better line of sight on business opportunities, including key leading indicators and deepen our relationships with channel partners and end users. We see this as a meaningful step in improving our overall commercial effectiveness by driving stronger growth in our sales funnel and improving the overall conversion and win rate.

Speaker 2

As I mentioned, rollout is well underway in the Americas with EMEA and Asia Pacific regions to follow. Finally, as you may have seen on our website, we have announced plans to relocate our corporate headquarters from the suburb of Menomonee Falls to a new location in downtown Milwaukee by early 2025. The new space located in the vibrant downtown business district will be right sized for our approximately 130 person Milwaukee area workforce and remodel to suit our needs. With its proximity to many local amenities, the new location should enhance our ability to attract and retain top talent as well as inspire strong collaboration and innovation. We are particularly excited to be part of a return to and revitalization of the downtown Milwaukee area.

Speaker 2

In addition, the move will be financially beneficial for Enerpac. Speaking of our workforce and our headquarters and around the globe, I'd like to express my deepest thanks to our team for all their hard work in taking Enerpac to the next level of growth and profitability and serving our customers with world class products and services every day. With that, we'd be happy to take questions.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from Tom Hayes from CL King. Please proceed.

Speaker 4

Hey, good morning, Paul. Thanks for taking the questions. Can you hear me?

Speaker 3

Chris?

Speaker 4

Yes. Can you hear me, guys?

Speaker 2

We can hear you. Yes. Good morning.

Speaker 4

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

Speaker 2

Sure. Thanks, Tom. Yes, I think we certainly enjoyed some nice organic growth in Q1. Obviously, sequentially, you saw that slow a bit here in Q2. I think what we saw in the marketplace, there are kind of some mixed signals.

Speaker 2

We did reference in our comments here earlier that there still remains, I'd say, quite a bit of kind of cautionary tone from some of our distributors across the regions, frankly. I'm not sure that's entirely new. We've talked about that now for several quarters. In some pockets, there are elevated levels of inventory. And then certainly some of the market data that we subscribe to and then just what we see, our own data would indicate there is some slowness generally speaking in the broader industrial market, not just for Intact but more broadly.

Speaker 2

So I think we remain kind of cautious there, but we're still firm in reaffirming our outlook for the full year. As you can see through the first half, we're kind of close to the higher end of our full year organic growth guidance, the 2% to 4%. And so at this point, we see no reason to modify that.

Speaker 4

No, I appreciate that. Then maybe on the geographic front, I think I just want to make sure I kind of understood it right. It sounds like on the APAC region, it was more the low single digit declines, it was more the Australian customer driven versus some broad change in demand, did I get that right?

Speaker 2

Yes. I think in Asia Pac, we actually saw pretty nice growth in what I would call the core aspect of our business we call our standard products. We referenced over 20% growth in the quarter in Asia Pac. But we do have a reasonable amount of sales in Asia Pacific for our heavy lifting technology or HLT business. That's basically capital equipment.

Speaker 2

It does tend to be lumpier and we were lapping a Q2 last year that had some pretty strong sales for HLT in Asia Pacific. So that's what drove the kind of low single digit decline, but we still see generally good, I'd say, market conditions and health otherwise in the region.

Speaker 4

Okay, great. Maybe a couple more. One, maybe you kind of discuss what you're seeing on 2 of your growth pillars, the rail and the wind. I think we've some of our challenges we get and some little bit of mixed messages as far as the levels of activity there. I just wanted to see what you guys are seeing?

Speaker 2

Sure. Yes. As you mentioned, that's one of our 4 key growth pillars is our focus on this select set of verticals, which to your point includes rail and wind amongst others, but also infrastructure and industrial MRO. I'd say in the rail and wind sectors, if I take them in turn, I think in rail, we still see very promising opportunities. We did a very small kind of acquisition late last fiscal of track tools to add to our portfolio.

Speaker 2

We referenced here in the call today, we continue to drive forward on our innovation pipeline in the rail sector, including the launch one of our new products this quarter. The engagement levels within customers in the rail sector remains robust, including a lot of good conversations with Class 1 operators. And I think given the investments that are going on more broadly in the rail sector, including some of the government investments, obviously, for safety and build out of infrastructure. We still feel very good about the kind of macro fundamentals in the rail sector generally. I think in wind, likewise, we continue to build our funnel there and work on innovation in that space.

Speaker 2

And although I would say there probably has been a slowdown in wind over the last 6 to 12 months, I think we see some green shoots of recovery. We do believe that's temporal given some of the issues that particularly some of the OEMs in that sector faced over the last year. But the demand profile still remains the need for clean energy and the transition of clean energy still remains. We believe that's one of the best place technologies to address that need. And so we remain very focused on driving forward on the work we're doing and the activity we're doing in the wind sector.

Speaker 4

I appreciate the color. Maybe 2 more if I could. 1, I noticed your service revenue was down year over year. Just wondering what was that? Because I believe I didn't go back and double check, but I think Q1 was up nicely.

Speaker 4

Was that just a timing or a seasonal issue?

Speaker 2

Yes. I think there is a bit of timing to it, Tom. Generally speaking, our service business remains healthy. Actually, I think we referenced in our comments, we're entering this quarter with some nice momentum in backlog. So we still feel good about where we are.

Speaker 2

It was in one of our regions only where we saw some decline, but I would say it's more specific to particular opportunities than it is anything systemic truly.

Speaker 3

Yes. And I also mentioned in the comments that our eightytwenty philosophy, we're still working through some of that this quarter and that did have an impact.

Speaker 4

I appreciate that. I'll jump back in the queue. Thanks guys.

Speaker 2

Okay. Thank

Operator

you. Our next question comes from Steve Silver from Argus Research. Please proceed.

Speaker 5

Good morning, everybody, and thanks for taking the questions and congratulations on the continued margin expansion momentum. It's great to see. Following up on one of the initial questions, given the slowdown in the industrial sector that you cited in the prepared remarks, Just trying to get a sense as to how you're seeing that play out on the balance sheet. It looks like the balance sheet is remaining under the target leverage ratio. You're reaffirming your free cash flow guidance for the full year.

Speaker 5

Just trying to get any updated thoughts you might have on the M and A environment given the macro challenges?

Speaker 2

Yes. Thanks, Steve, and good morning. Yes, I think our team continues to execute well, managing our balance sheet responsibly, feel good about where we landed in the quarter, obviously bringing the leverage down sequentially from last quarter. So certainly quite healthy there. I think the team continues to make nice progress year over year, particularly on inventory and managing inventory as well.

Speaker 2

And we have further opportunities to continue to optimize working capital in particular. I think where we sit today, we're certainly well positioned from a capital perspective and certainly with our ability to deploy capital. We have and maintain a disciplined and kind of balanced approach to capital deployment, capital allocation. Certainly, I would say first priority remains CapEx projects here in the business. Our guidance for this year is higher than prior years and we continue to work that.

Speaker 2

And we'll continue to look at share repurchase opportunistically. But on the M and A front, we've done quite a bit of work. Obviously, we haven't announced anything to date, but I'd say we feel really good about the progress we're making internally, both in terms of quantity and quality of the funnel of things that we're looking at, particularly opportunities that are well linked to our strategy and some of our focus on vertical markets. So again, we remain very disciplined. Anything we do would have to check all of our boxes, both from a strategic and financial and returns perspective.

Speaker 2

And we've got a pretty comprehensive process to evaluate that. But we're certainly well positioned. And to your point, the balance sheet is in good shape to support it.

Speaker 5

Great. That's helpful. Thanks. And one last one, if I can. Last quarter, you guys highlighted the advancing rollout of the large ZEP brand.

Speaker 5

You cited some new distributor deals and some promising early order flow. Just curious if there's any update on the front this quarter?

Speaker 2

Yes, sure. So again, one of our key growth initiatives is driving the second brand what we call 2nd brand initiative, which is really targeting essentially the mid tier segment of the market, particularly in Asia Pacific and parts of Latin America, in those markets for a really good quality product, but not necessarily with all the features, functionality and performance of what Enerpac offers. And so we've utilized our LARZET brand, which we already own and built a range of products, certainly a much smaller subset of SKUs that we feel are spot on with addressing the needs of that mid tier segment of the market. So far, the progress has been good. We have signed up some distributors in Asia Pacific and are already getting some nice sales progress there.

Speaker 2

We're also utilizing some of the existing distributor network in Asia Pacific and Latin America. And so we're seeing some good early traction. But again, I'd say it's obviously early days for us. It will take time to roll out. I think the exciting thing for us though is when we step back and do our view and analysis on the market, we believe in those regions that the size of the mid tier segment is roughly the same size from a dollar basis as the premium tier of the market.

Speaker 2

So it really opens up a pretty nice opportunity for us to capture some additional market share of a broader TAM that we haven't historically participated in.

Speaker 5

Great. Thanks for all the additional color. Appreciate it.

Speaker 2

Thank you.

Operator

This concludes our question and answer session. I would like to turn the floor back over to Paul Sternle for closing comments.

Speaker 2

Okay. Well, thanks again for joining us this morning. As always, Travis will be available to take any follow-up questions. And in addition, for those interested, we will be attending the Deutsche Bank 15th Annual Global Industrials Materials and Buildings Products Conference in New York on Wednesday, June 5. We hope to see you there.

Speaker 2

Thank you.

Remove Ads
Powered by Quartr
Earnings Conference Call
Standex International Q2 2024
00:00 / 00:00
Remove Ads