Enerpac Tool Group Corp.

earnings call on the call today to present the company's results are Paul sternly president and chief executive officer and Darren Kozik chief financial officer 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 a recording of today's call will also be made available on our website today's call will reference non gap measures you can find a reconciliation of gap to non gap measures in the press release issued yesterday Our comments will also include forward-looking statements that are subject to business risk that could cause actual results to be materially different. Those risks include matters noted in our latest SEC filings. Now I will turn it over to Paul.

Thanks, Travis, and good morning. I'd like to welcome Darren to his first InterPAC earnings call. He's been on board as our CFO for nearly two months and is coming up to speed very quickly. We're thrilled to have him on the team. And now, switching to the quarter and beyond. We enter fiscal 2025 mindful of a continued sluggish industrial macro environment as evidenced by persistently weak manufacturing PMI and industrial production trends you can see on slide three. 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 Interpax's two other geographic regions and at Cortland Biomedical. Overall, we believe Enerpac 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. 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. We 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.

Thanks, Paul. As seen in slide 4, Interpac's total revenue increased 2.3% in the first quarter of 2025. At our IT&S business, revenue increased 2.3% year-over-year, with a 1% decline in organic sales. The slight decline in Organic sales was comprised of a 5.6% increase in service revenue, offset by a 3% decrease in product sales. Paul will speak about the regional performance later in the call. Results for the first quarter included nearly a full quarter of revenue from DTA, an acquisition we closed on September 4th. In the quarter, we made solid progress in 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 HLT business and expect growth benefits as we expand DTA sales beyond Europe by leveraging Interpac's global commercial network. Therefore, we are maintaining our expectation of a full year 2025 sales of 20 million euros from DTA. At Cortland Biomedical, reported in our other segment, we generated another quarter of growth with a year-over-year revenue increase of 2.6%. 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 InterPAC's overall performance. 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 costs closely in the second quarter given the environment. Adjusted EBITDA margins declined 100 basis points in the first quarter of 2025 due to the gross margin discussed and the inclusion of DTA. Adjusted earnings per share were 40 cents for the first quarter of 2025 compared with 39 cents in the year-ago period, a 3% increase. The effective tax rate was nearly flat at 22% compared with 21.9% in the year-ago period. Turning to the balance sheet shown on slide six, Interpac's position remains extremely strong. Net debt was $63 million, resulting in net debt leverage of 0.5 times adjusted EBITDA at the end of the first quarter. Total liquidity was $529 million. 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 the increased capex related to our upcoming headquarter relocation. We remain very excited about the move and the benefits it will have for the company. 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.

Thanks, Darren. 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. 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. 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 HLT 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 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. 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 pullers. In addition, we continue to focus on our sales funnel management, utilizing Interpac Commercial Excellence, or ECX. 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. Turning to slide eight, last quarter we introduced Powering Interpac Performance, or PEP, 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 practices are consistently applied across the organization. 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, value engineering, and ongoing skew 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. At the start of the Ascend program in 2022, Interpac was sourcing from more than 6,000 suppliers. Through the application of 80-20, we've been able to reduce that to fewer than 5,000 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. On the SG&A expense line, we've already made tremendous progress toward our goal of being best in class as a percent of revenues. Over the past three fiscal years, we've reduced adjusted SG&A as a percent of sales by approximately 650 basis points. For example, we have derived a significant benefit from offshoring of transactional processing and certain finance, IT, 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's experience in managing Shared Service Center operations will be a tremendous asset as we add additional functions and optimize the performance of our offshore operations. Since we announced a rounding out of Interpac's leadership, including the recent additions of Darren and Eric Chack, 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, 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 across the organization. With that, we'd be happy to take questions.

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up 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 CL King. Your line is open.

Good morning, guys. Good morning, Tom. Good morning. Hey, Paul, I was just wondering, I think when we spoke on the fourth quarter and you called it out today, obviously the industrial environment's 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 1Q play out generally as you had expected? Is there anything maybe positive that you saw in the quarter besides pretty strong results?

Yeah, thanks for the question, Tom. I think, you know, as we mentioned on our remarks on the call, it played out pretty much as we expected, frankly. I mean, we knew it was a tougher comp, lapping Q1 of fiscal 24, and obviously just the environment that we're seeing. So we suspected it was going to be a little bit more challenging here, certainly in Q1. Our expectations are, you know, at this point, built into our guidance essentially for the rest of the year for better top-line performance. And I think we're optimistic just given the things that we referenced on the call around some of the potential new policies from new administration and also just frankly what we hear in terms of latest, I'll call it voice of customer research from our customers and our channel partners, even on the last week or two. There's, I'd say, a fair amount of optimism. I mean, certainly that has to ultimately translate into demand and orders, but I think people are relatively hopeful about what to expect in calendar 25. But yeah, really Q1 played out essentially as expected for us.

Great. And kind of an offshoot of that, you mentioned a little bit of that. With the change in administration and the talk of tariffs, I think you make a good percentage of products here in the U.S., but any early thoughts on the talk of tariffs with China and Mexico and a potential impact for you guys?

Yeah, sure. We are a global manufacturer, but our largest facility is here in the US, actually in Wisconsin. So I think generally speaking, I'd say Interpac is probably in a relatively favorable position when it comes to the potential impact of any new tariffs. Just for reference, imports from Canada and Mexico into the US for us are negligible. And then from a China perspective, 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, you know, 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 to work with that from a cost perspective, from a dual sourcing uh perspective and also certainly price if that's needed so it's um you know it's not nothing but i wouldn't say it's hugely uh impactful given that dollar value for us okay i appreciate it maybe um one or two more uh kind of shifting gears a little bit on the geographic front um you know happy to see that the up low single digits on the amia i was just um

know wondering i mean we continue to hear about you know challenging business environments especially in germany i think he called it out as one of your larger segments just you know any other color you seem to be kind of outperforming you know the market there you say thoughts on your amia performance yeah i mean we do continue to be pleased um you know we had good performance in q4 and amia and even here in q1 um you know relatively stronger performance certainly versus the americas and i think you know 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, we believe, you know, with a good degree of confidence, we are continuing to gain share there, just based on the execution of our commercial strategies, our growth strategies in the region, some of the key leadership and people changes we've made, which are having great effect there. Some of the process changes, again, we've made 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 the progress that we're seeing in EMEA, even, I would say, in a tougher macro environment.

Okay, I appreciate that. Maybe just lastly on the services business, kind of a two-part question. You know, you continue to kind of call out or put up good year-over-year organic growth on the services business, I guess. One, you know, what do you attribute those drivers to? And two, I think you called it out as maybe a drag on overall margins. I apologize if I got that wrong, but I just, you know, is there a pathway to get that to more of a company-wide or a, you know, product margin? Just any thoughts on that? Appreciate it. Thank you.

Yeah, yeah, no, absolutely. So, yeah, I think we have seen certainly services here in the short term outperforming from a growth perspective and Probably not hugely surprising. I mean, service revenue can outpace product because it is in service more tied, I would say, to regularly scheduled maintenance as opposed to kind of 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 and helps offset some of the weaknesses we see from time to time in the product business. Over the longer term, however, I'd say we'd expect to see product growth outpace service just as we continue to execute on our four pillar growth strategy that is still primarily focused on share gains on product, on the product side of the business. From a margin perspective in service, you may recall, you know, service is about 20% of our revenue. About half of the service businesses are rental business where we have a fleet of assets that we rent out to customers. And that is 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 hydrotype brand in that space, there still are ceilings on labor rates, just practically speaking. So that part of our service business does tend to be generally margin diluted. 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'd say continued focus on more differentiation 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, you know, probably a year or so ago, you know, we did make an active choice through 8020 to actually, you know, walk away 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 levers of opportunity for margin improvement in service. Great.

Appreciate the call, Eric. Thank you. Thanks, Sean.

Your next question comes from the line of Ross Barenbleck of William Blair.

Your line is open. Ross, your line is on mute. Can you hear me?

Apologies. Yeah, I was on mute. Forgive me. Maybe I missed it, but anything on pricing, you know, within the U.S. in the quarter and kind of what you're seeing more globally?

Sure. Yeah. So, you know, as a general rule of thumb, I mean, we're always evaluating our price positioning. As you know, we tend to be, you know, a premium or the premium player in our space for most of where we're positioned. And generally speaking, we would look to take price increases either one to two times a year to at least recover or, you know, recover or over-recover from any inflationary costs that we see. And we are still, I remind folks, in an inflationary environment, as we can see in the data. And in fact, we actually just announced a round of price increases in both the Americas NRME or region that will be effective at the beginning of January. It's, you know, very low single digits, but that's pretty typical in the norm for us. And, you know, certainly we monitor what's happening in the marketplace. Let's say generally what we see is a behaved observer or behavioral kind of aspect in the market is that, you know, we typically see competitors follow within a period of time and we'll continue to monitor that. But we typically tend to be the price leader in our space.

Okay. Do you guys give, you know, entry year price increases if it's warranted? Can't remember.

Yeah, I mean, we certainly have in the past where we've seen more inflationary environment taken, you know, more than one price increase. And we certainly would look at that if warranted. Clearly, if tariffs or incremental tariffs do come into play, if we don't feel that we can effectively mitigate those appropriately through other actions, we certainly would evaluate other pricing actions as we go into 2025. Okay.

A couple more here. You know, it seems like there's early chatter about the infrastructure spending in the U.S. picking up. A lot of companies are calling for, you know, second half project activity, timing dependent. So just anything you're hearing from your distributors and maybe expectations on what the lead times look like for restocking if we were to start to see acceleration in greenfield activity.

Yeah, I mean, I think we subscribe to some proprietary databases. They give us sort of pretty good indication of kind of what's coming down the pipe. And that is favorable. I mean, we certainly see a fair amount of activity picking up. I'd say it hasn't necessarily materialized for us in meaningful ways yet. As you know, InterPAC really participates kind of on the back end of the lifecycle, you know, once materials show up at the job site and they really need to start putting the pieces together. But the indications we do see are projects being vetted out and kind of the design and civil, you know, engineering work underway, etc. some of the early, you know, sort of indications of procurement processes. So, I think that does bode well, and we think we'll be favorable. We do continue to believe that will be a nice tailwind for Interpac over the next several years. Again, we haven't seen that materialize so much yet here in the U.S., although I'd say we have seen actually relatively decent infrastructure projects outside of the U.S., including in Europe and parts of Asia Pac. what we've seen today from a lead time perspective i think we're well positioned we're pretty competitive there overall certainly for our kind of standard products high runners we do typically maintain finished goods here at interpac as well as you know in our channel uh we think those are largely appropriate levels but you know we monitor that closely and i think we you know given the lead times on these projects i mean you get pretty good runway and indications, and I think 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 just maybe lastly for Darren, two months into the role, but any initial impressions, and can you give us a sense of what your priorities are in the coming six, 12 months?

Yeah. No, thanks, Ross. It's a great question. It's been a great start. It started, obviously, meeting a significant amount of investors, shareholders, as well as the extended leadership team in Milwaukee. So over the first six weeks, it's been a great feel, especially for the culture of Interpac. You know, as I've been here, kind of the culture of continuous improvement, that mindset embeds itself in the organization. And I would say, you know, second observation and a big one is the power of the Interpac brand. Seeing that at play in the markets, the pricing we can drive, it's a fantastic benefit for the company. You know, and finally, it's, you know, as Paul alluded to in his comments, you know, it's just a team we have. You know, it's a team we can win. We think we can win any market. So we're going to operate, and we're going to win.

Okay. Well, welcome to the team. We look forward to working with you. Thanks, guys.

Your next question comes from the line of Steve Silver of Argus Research. Your line is open.

Thanks, Operator, and good morning, everybody. Good morning. So it's 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 softness in mining, whether it was just a return to growth among the core products or whether there was some benefit of the implementation of the second brand strategy.

Yeah, 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. Most of the other countries where we operate with scale, we saw, you know, good growth year over year. It was in both our core product and we saw some good performance on our HLT business as well. So, overall, I think it was pretty broad-based. That gives us some increasing confidence as we go into the rest of the fiscal year here. Certainly, on second brand, we continue to execute that. We've got, you know, increased commercial focus on our team behind that, and we have made some incremental progress, good progress, I think, on adding additional distributors in the region to cover second brand. Obviously, that is, you know, definitely a multi-year effort. to get the channel partners, 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.

Great. And so you guys have a lot of programs going on at the same time, all working towards improving the efficiency of the business, whether it be PEP or ECX or the digital transformation strategies, a lot of those like investing in yourself kind of strategies. Can you put any context around where you guys see yourselves within this goal? I know it's probably early stage overall, but just in terms of where you guys are within these initiatives.

Yeah, I mean, it's really evergreen for us, Steve. As we talked about, PEP is essentially 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 Ascend, is effective day-to-day in TEPP. In fact, we have a transformation office that staff that drives the program day-to-day for us, all the same tracking of the initiatives, et cetera, same language that we use internally to track these initiatives and categorize them and to make sure they're driving the sustainable impact to the P&L. Ultimately, we see this driving more efficiency and productivity and enabling more organic growth in the business. Certainly, from a margin perspective, you know, through SEND, effectively, we got to our target margin of 25% adjusted EBITDA margin, essentially a year ahead of plan and a fiscal 24. But we do see continued opportunity. And we did say, you know, even this year, effectively, at the midpoint of our guidance, if you exclude DTA, essentially, we built another 50 bps of margin expansion in there. And that's kind of our framework under our current kind of multi-year financial guidance going forward. So we do continue to see and expect to see benefits from the implementation of PEP. And we're also extending that, right? I mean, we're extending it into commercial tools like ECX or Interpac Commercial Excellence. As we previously mentioned, we rolled that out here in the Americas region through fiscal 24, and we're now in the process of rolling out ECX in the EMEA region in fiscal 25. That's just, again, part of our continuous improvement process and ethos here at Interpac.

Great. And one last one, if I may. The integration of the DTA acquisition, just curious as to how that's going in terms of, I guess, the reception from the marketplace around the combined capabilities now, combining both the vertical and horizontal listing technologies. Just curious as to how the messaging is being received in the early days of the integration.

Yeah, I would take both parts of that. You know, from an integration perspective, performing well, you know, we've got the back office functioning, we're working as a team together. And then commercially, you know, that promise holds that now we can move things vertically, we can move things horizontally. You know, taking that business from its roots in Europe, you know, we're excited about the future and this year, taking some of our commercial wherewithal, moving that outside of Europe, where they've been a big, big player the last couple of years. So it is holding to the promise, we're holding to the expectation, and it's performing very, very well for us. Orders were very strong in the quarter, which is a great sign for the future.

Yeah, and I would just add, I agree with Darren's points. Also, we have built a commercial growth playbook. We've rolled that out across our Interpac commercial network, And they're very clear on how to identify and qualify initial leads for DTA. So I'm really encouraged by the progress we've made there, the initial lead generation that's happening through the InterPAC commercial network, which, you know, that was certainly a big part of the premise of our investment thesis behind the acquisition. Early days seems to be playing out well.

Great. Thanks for all the color and congratulations on the execution in some challenging markets.

Thank you. That concludes our Q&A session. I'll now turn the comments back over to the CEO, Paul, for closing remarks.

Okay. Well, thanks again for joining us this morning. Interpac will be presenting at the upcoming CJS Securities Annual Investor Conference on January 14th 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 wonderful holiday season and a happy new year.

This concludes today's conference call. You may now disconnect.