Enerpac Tool Group Corp.

Thank you, operator. Good morning, and thank you for joining us for InterPAC Tool Group's second quarter fiscal 2025 earnings call. On the call today to present the company's results are Paul Sternlieb, 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-GAAP measures. You can find a reconciliation 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. With that, I will turn it over to Paul.

Thanks, Travis, and good morning. We were pleased with our performance in the quarter. Organic sales grew 5% year over year. We believe our performance continues to reflect above-market growth and strong execution in what remains a very soft industrial sector. EBITDA margins came in at 23.2% for the quarter, down a bit from the prior year due to the impact of mix, but still at top tier levels. Moreover, we are maintaining our full-year fiscal 2025 guidance and are confident our future will reflect Interpac's global brand leadership, targeted growth strategy, customer-driven innovation, and continuous improvement through the execution of powering InterPAC performance or PEP. Let me turn the call over to Darren to provide more detail on the quarter. Thanks, Paul.

As seen on slide three, InterPAC's revenue increased 5.1% in the second quarter of 2025 on a reported basis. On an organic basis, adjusting for foreign exchange and our recent PTA acquisition, we grew to 5%. At our IT and S business, revenue increased 4% organically year over year. Both product and services were ahead this quarter, with growth of 4% in product sales and 3% in services. The gain in products was driven by strong performance in our heavy lifting technology business, the continued ramp of new products, and focused effort by our commercial organizations. Cortland Biomedical, reported in our other segment, posted growth of 33%, as anticipated, given comparisons with the year-ago period that was impacted by temporary shipment delays related to commercial negotiations. Starting at slide four, which shows our performance by geography, we delivered high single-digit growth in the Americas. This is due to share gains driven by Interpac Commercial Excellence, or ECX, a program we introduced a year ago in the region, along with continued execution of our targeted growth strategy and strong growth in our HLP business. With ECX, we are improving overall commercial effectiveness by driving stronger growth in our sales funnel and improving the conversion and win rate. We've expanded the implementation of ECX with a rollout in the India region earlier this year, leveraging the talent and skill sets developed in the US. In the AFAC region, we continue to generate solid performances that also enjoyed high single digit growth in the second quarter. Among the highlights, we are seeing industrial construction growth in several countries, notably India and Singapore. While we experienced continued weakness in Australia with cost pressure in the mining sector, and the impact of steel and aluminum tariffs on metal producers, we are seeing benefits from continued orders for our second brand, Larzap, as we onboard new distributors in Australia. While we posted a low single-digit decline in sales for the EMEA region, breaking a two-year pattern of consistent growth, we believe that we continue to outperform in a region beset by significant macro pressures, especially in our largest markets of France and Germany. From a commercial standpoint, the region continues to make progress in the rollout of ECX. Turning to slide five, gross profit margins of 50.5% declined 110 basis points year over year. On the product side, we had significantly higher growth in our HLP business, which carries slightly lower gross margins than our standard industrial tools. Additionally, margins were impacted by the mix of service projects in the quarter. As we have previously discussed, service business as complementary to our product business, as we perform work at customer sites and gain strong insights for new product development. Given the recent margin trends in the service business, we have specific initiatives underway to improve the margin profile, as we focus on higher quality projects, more differentiated service line offerings, and invest in additional field service technicians and equipment to support growth. Adjusted SG&A improves slightly as a percent of revenue to 28.3%, versus 28.4% in the year-ago period. We continue to carefully manage costs and are considering additional actions, as appropriate, to align our cost structure in 2025 and beyond for long-term success. Altogether, adjusted EBITDA margins declined 160 basis points in the second quarter due to the aforementioned impact of mix on gross margins and the inclusion of BTA, the acquisition we completed in early September. The effective tax rate returned a more normalized 24.3% compared to 27.3% in the year-ago period. Adjusted earnings per share were $0.39 for the quarter, compared with $0.36 in the year-ago period, an 8% increase. Turning to the balance sheet, shown on slide 6, Interpac's position remained extremely strong. Net debt was $73 million at quarter end, resulting in net debt to adjusted EBITDA ratio of 0.5. Total liquidity? including availability under our revolver, was $518 million. Through the first half of fiscal 2025, cash flow from operations was $16 million compared with $7 million in the year-ago period. Pre-cash flow of $5 million, all slightly year-over-year, was impacted by one-time capex associated with the headquarters move. For the full year, we are maintaining our cash flow guidance at $85 to $95 million, as cash generation increases with higher revenue in the second half of the year. In the second quarter, the company repurchased approximately 220,000 shares of common stock, totaling $10.2 million. As we continue to generate cash, coupled with our current leverage, we have ample capacity to deploy our capital for our disciplined M&A strategy, as well as internal investments and continued opportunistic share of our purchases.

With that, let me turn it back to Paul. Thanks, Darren. Let me start with some color on key end markets. On the power generation front, we've seen a pickup in nuclear business in the US, including orders related to maintenance as well as decommissioning. For the refinery and petrochemical industry, our customers and distributors indicate a positive sentiment. Specifically, some refineries are actually just catching up with the shutdowns that were delayed during COVID. We are also seeing a steady level of new investments and assets coming online. Additionally, we see continued oil and gas investments in the Middle East. In the Americas, we are seeing strong growth and demand from the aerospace industry, and we've expanded our focus globally to target opportunities in the EMEA and APAC regions. On the defense side, we're optimistic about the outlook as European governments look to increase their defense budgets. For the rail market, we've seen some short-term tightening of budgets in the Americas, although we expect that a couple of upcoming rail-focused trade shows will generate special projects and orders. In the EMEA region, rail has remained solid, mainly due to activity in Italy and Spain. And we are encouraged by our rail-focused new products, some of which have already been approved by Network Rail in the UK and others in the process of approval. General and industrial manufacturing, particularly in the U.S., remains soft, and mining, specifically in Australia, remains under pressure as we share the past few quarters. Regarding the wind market, while there has been some negative sentiment towards the sector in recent months, Interpac's domestic business has been strong, a trend we expect to continue. As we've said, our product line serves the full life cycle of wind turbines, from manufacturing and installation to operations and maintenance, and eventual decommissioning, which has proven to be a real asset. At the same time, we continue to pursue growth opportunities outside of the U.S., and we remain bullish about the wind sector in Europe and parts of Asia. For the infrastructure vertical, while the benefits of the domestic infrastructure bill are only just starting to materialize, we are seeing very good signs of project activity, including scoping, bidding, and permitting. We are also experiencing good activity in infrastructure outside of the U.S., particularly in Europe and the Middle East. Additionally, we are encouraged by the German government's recently announced spending package that will include additional infrastructure investments of some 500 billion euros. We expect that will present a favorable tailwind in the coming years. And speaking of infrastructure investments, as you can see on slide seven, Enerpact's sink hoist synchronous hoist system is being used to position concrete bridge beams for a new railway bridge over the B.O.B.O. River in central Chile. Enerpact's sink hoist technology was selected for this delicate job as it enabled the bridge contractor to install asymmetric shaped beams over nearby commuter highway and rail track using only a single crane. This is yet another example of how we help our customers make complex often hazardous jobs possible safely and efficiently. Let me comment on a couple other ongoing initiatives. Last year, we announced a number of new products, the result of our revamped innovation program. We're pleased to see them ramping well with very positive reception from our customers across the globe. Our team is also looking forward to settling into our expanded innovation lab at Enterpact's new downtown Milwaukee headquarters And we expect to announce a number of product line extensions and upgrades in 2025, with even more to come in 2026. Regarding DTA, which we acquired in September 2024, we're progressing well on its integration into our heavy lifting technology or HLT business. We are actively cross-selling DTA technology through the Interpac commercial team, as evidenced by a recent sizable order from a legacy Interpac customer. We're also leveraging our global sales capabilities to expand DTA's reach beyond its traditional stronghold in Europe. In fact, just last week, DTA exhibited at ProMat, one of the leading trade shows for material handling, logistics, and supply chain solutions held in Chicago. At the show, DTA showcased its innovative mobile robotic solutions, strengthening relationships with industry professionals, and generating a high level of potential new business opportunities. We believe Interpac is well-positioned to help DTA as we implement more efficient manufacturing processes and tools to increase throughput. Finally, Interpac will be exhibiting at the Bauma trade show next month. Held in Munich, Germany every three years, Bauma is the world's leading fair for construction machinery and equipment. While we will focus on HLT and feature DTA at our booth, we will also exhibit a range of standard industrial tools. And in the past, Interpac has benefited from orders placed at the show and the opportunity to build relationships with both distributors and end users. As I said at the top of the call, we have maintained our guidance for fiscal 2025, but we remain cautious in light of the high level of macro uncertainty and the prospect that tariffs could bring higher inflation and lower growth. What we are certain of is that InterPAC will be relocating to our new downtown Milwaukee headquarters in a space designed for our specific needs and a building proudly featuring the InterPAC logo as seen on slide eight. So next quarter, we will be speaking to you from our new location at the InterPAC Center. With that, we'd be happy to take questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. Your first question comes from the line of Will Gildia from CJS Securities. Your line is open.

Hi. Can you provide some more color regarding the mix shift? Hi. Good morning. Can you provide some more color regarding the mix shift toward HLT? And where are you seeing strength from a geographic and market perspective? And what are your expectations for the back half of the year from a mix and gross margin perspective? Thank you.

Yeah, sure. Maybe I'll just start, and Darren can add a few comments, especially about the back half. But, yeah, I mean, we saw good growth, as you can see, this quarter organically. HLT in particular had a lot of strength. I would say particularly in the U.S., but also we saw some nice activity in HLT in Europe in the quarter. And HLT is good margin business. It's just not as strong gross margins as our standard products. And so with that mix shift, along with some of the mix shift in service in the core, that was really what impacted gross margins and consequently the margins in the core. But Darren can talk about the second half in particular.

Yeah, typically when you look at our business in the second half, we do north of 50% of our revenue, typically in the 52% range. You know, with that additional revenue, obviously we get some volume leverage that comes out of that. So we expect to see a higher profitability in the back half of the year. But it's not only volume. We do have our productivity initiatives and PEP ongoing. So we'll continue to drive that. We should improve profitability in the second half of the year, which is why we're confident about our guidance for the year.

Thank you. Super helpful. And then just one more. How is the DTA integration going relative to your expectations? Any surprises so far, either positively or anything more challenging than expected? Thank you.

Sure, yeah. No, I'd say the DTA integration is going well. We continue to be very excited about the strategic fit with Interpac, particularly with our HLT business. We've been pleased with the progress we're making, pleased with the customer response we've seen in the order activity, and we're I would say remain bullish about the overall fit with the business as well. So everything remains on track from that perspective. And as I mentioned on our prepare remarks, we're extremely excited to have DTA represented at our booth at the upcoming BAUMA exhibit next month in Munich, Germany. Thank you. Thank you.

Your next question comes from a line of Tom Hayes from CL King. Your line is open.

Thanks. Good morning, guys. I appreciate all the color. Maybe just, Paul, on the geographic breakdown, in Q1, you know, the Americas was down mid-single digits. Now it's up high single digits in second quarter. I think Darren called out the commercial excellence program. I was just wondering maybe probably a little bit more You know, detail on that or in addition to kind of some of your internal initiatives, was there any, you know, maybe end markets that kind of stood out in the second quarter that kind of helped push the Americas forward?

Right. Yeah. Thanks, Tom. Yeah, I mean, we were certainly particularly pleased with the growth in the Americas as well as in Asia-Pac. And even in Europe, I think, as Darren remarked, I mean, it's, you know, we had really a strong number of quarters of solid growth in Europe. So, I mean, despite the fact we saw a slight decline in the core, I think we're still pretty confident that we're outperforming the market and some of the challenges they're seeing in Europe. But I think in particular, the strength in America is we saw was pretty broad-based in terms of end markets and verticals and customers. So that was good news for us. And then I think, as I mentioned earlier, HLT as well was particularly strong for us in America's in the quarter. And finally, to the point that Darren referenced earlier, we do see ECX or impact commercial excellence really, I think, starting to take hold, and we are seeing benefits of that. And ECX for us is really around kind of systematizing the process for sales and for managing much more actively our sales funnel. So we have much better visibility into leading indicators as opposed to just orders. Also managing, you know, sales people's activity and time and focus on where they're calling on customers. Just kind of basic, you know, hygiene, I'll say, around, you know, pre-call plans and post-call visit notes and things like this that, you know, become extremely useful tools if put in place rigorously. And that's really what we've done is adopted that process and put it in place and really mandated it. And I think it's now starting to become the culture of the business, and we're rolling that out, as we referenced in the prepared remarks, in the EMEA region as well. So pleased with the progress we're making, and I think that's part of why we're seeing the organic growth performance that we saw in the quarter.

Okay, I appreciate that. That's great. Maybe just lastly, you touched on a little bit in your prepared remarks, and I know it tends to change by the hour or by the day or the tweet. I'm just wondering if you could provide any thoughts on you know, the talk of the tariffs, whether they're coming from Mexico, Canada, and kind of how you're positioned, whether from either selling into those regions or buying products from those regions?

Yeah, I think, you know, as we referenced on last quarter's call, you know, we do think, I'd say we're in a relatively favorable position as it comes to potential impact of new tariffs. And obviously, as you mentioned, I mean, it is a bit of a dynamic environment for sure. So we're trying to react and be as responsive as we can to new news, of course. But on a direct basis, we mentioned last quarter, we estimate that both finished products and components imported into the U.S. from China specifically is less than $20 million. Imports into the U.S. from Canada and Mexico for us are basically negligible. So the direct impact, I think, is pretty clear to be able to calculate depending on the changing tariff environment. I think what's more important, perhaps, though, is the indirect impact from our suppliers, which is admittedly a bit harder to measure. You know, that includes really two aspects. One are domestic U.S. suppliers who may themselves source material or components from China or from Canada or Mexico, but also domestic suppliers who may maybe haven't increased their capacity, but they're facing higher demand from customers. And in both of those situations, we have seen some price inflation from those aspects of kind of indirect impact. And the good news is that I think we have a fair amount of experience across our team in terms of adapting to a pretty changing tariff policy. And I think also given the global nature of our business, we have quite a bit of flexibility to secure alternative supply and to be able to ship from different facilities around the world. And finally, you know, in addition, I mean, we certainly will and have taken pricing actions as necessary to offset inflation that we can't otherwise mitigate.

I appreciate that. Maybe just lastly, I think it was you and Darren both mentioned the expectations for some new product rollouts this year. Is that pace different from the last couple years? I know you were pretty robust in rolling out products last year. Just wondering if there's any more color you can provide on, I don't want to steal your thunder, on the new product rollouts, but just kind of the pace of the rollouts right now?

Yeah, no, I wouldn't say different. It's a bit episodic on the timing and the complexity of the development efforts, but we have a pretty robust innovation program. We continue to invest, we believe, appropriately in it. I'd say the first half of this fiscal year has been more focused on commercializing the new products that we did launch in fiscal 24. And we have seen, you know, good customer reception and good commercial ramp from those. And then, you know, I think you can expect to see more innovation launches in the second half and obviously more into as well the first half of fiscal 26. But we certainly remain committed to bringing innovative products and technology to the market for our customers. And we're pretty excited about the pipeline that we've developed.

I appreciate it. Looking forward to seeing your new offices this year. So best of luck. Appreciate the time. Or a week.

Yeah, we'll be there in a week or less. Thanks, Tom. Thanks, Tom.

Again, if you'd like to ask a question, please press star 1 in your telephone keypad. Your next question comes from a line of Steve Silver from Argus Research. Your line is open.

Thanks, operator, and good morning. And congratulations in advance on the new headquarter opening next week. You guys talked about... Thanks, Steve. Good morning. Good morning. How are you guys? In the prepared remarks, you touched on ECX and the positive impact that it's having in the Americas. I'm curious as to whether there's any color you could provide on the implementation progress in Europe and maybe where you are in the process as compared to in the Americas.

Sure. So we actually started the rollout and implementation of ECX in your, I guess, about one or two quarters ago now. And so I'd say we're pretty pleased with the progress we're making there. We've actually leveraged one of our senior leaders who was deeply involved in the rollout of ECX in the Americas region. And that person has now been charged with leading and directing that program as you roll it out in EMEA as well. So I think because of that, we've seen really you know, faster uptake. And obviously, we've taken the lessons learned from, you know, the rollout in the Americas as we apply it into EMEA. So, overall, you know, I think we're pleased with the progress we're making, and we expect that it'll ultimately, over time, drive similar levels of impact in the European region. I just, maybe to recount, you know, what it's about again, I mean, it's really about Aligning our growth focus with our strategic direction it's around this consistent commercial commercial approach that's driven by very focused sales activity, I would say, particularly end user focused. calls from our sales team, as opposed to kind of managing the channel, if you will, we have seen a drive what I would classify as really winning positive culture that's driven in the case of ECX really by data by discipline collaboration. And frankly, it's allowing us in the business to deliver more predictable performance because we can now track from actions to results. And so, you know, there's a lot more detail behind what ECX is and the program and how we've implemented it. But I think those are some of the key benefits that we're seeing come to the fore.

That's helpful. Thanks. And one more, if I may. On previous calls, you discussed the digital transformation in the business and progress in your e-commerce initiatives. Curious as to whether there's any update that you could give on the direct business.

Yeah, yeah. We're actually absolutely quite pleased with the progress. So if you recall, I mean, we essentially rolled out our e-commerce program direct to end users just about three years ago now. And that has grown, I would say, substantially over that period of time, admittedly off of a small base. And we remain, I would say, quite bullish about our e-commerce business. In fact, in Q2 of this fiscal year, our e-commerce business was up 43% year over year. And through the first half of fiscal 25, e-commerce revenue was up 36%. More recently, we've done a lot of work to roll out e-commerce in other parts of the world. So last year in multiple markets in Europe, and more recently in Australia. And then just in the last quarter, we actually invested behind and turned on digital advertising in both of those markets, UK and Australia, which we saw drive very significant growth in website traffic, which is a pretty good for us leading indicator of what we expect to see in terms of order inflow in the months to follow. So overall, I think quite positive and we're pleased with the progress we're making there.

Great, thank you so much for all the color.

Thank you.

Your next question comes from a line of Will Gildia from CJS Securities. Your line is open.

Just to follow up and thank you for your time today. With two quarters left, how should we think about the cadence of revenue margins and profitability from Q3 to Q4 embedded in your FY25 guidance?

Yeah, so you think about our second half. you know that is incremental revenue and it's heavily weighted towards the second half so typically you see about that 52 percent of revenue in the second half so with that comes the volume leverage and we'll see an increase in our ebitda margins typically if you look at history when you look at our guide we'd expect to see our strongest margins in q4 so we will ramp as we go through the second half of the year here very helpful thank you and then just one more

Do you have any incremental updates on the M&A pipeline, and what parts of the portfolio are you most focused on enhancing? Thank you.

Sure, yeah. I would say, you know, we continue to spend a fair amount of time on M&A activity, and And we have what I would classify as a pretty good kind of quantity and quality of targets in our funnel with good active conversations. So I'd say that's fairly robust. The process that we've developed is also quite robust. So, you know, I continue to be pleased with the activity there. Obviously, by its nature, it's episodic. So, you know, things will come and go depending on asset availability and timing and the like. I don't know that we've really seen anything in terms of material changes in valuation expectations at this point in the market, but we remain focused on the same sort of targets that we've talked about previously. Certainly, very high-quality businesses, strong gross margins with ability to drive accretion of those gross margins over time. Obviously, core strategic fit with Interpac. Not necessarily mirroring the exact things that we do today, but more complementary products or services to what we offer today, where we can sell a broader basket of goods and services to our existing customer base. And I think DTA would be a real prime example of that, very simply. complementary to HLT and that we offer now a TTA horizontal movement of heavy loads, whereas before it was only vertical lifting and we have customers that need applications for both. So I think the funnel remains robust. We're spending a lot of time there. And, you know, obviously if and when we can announce things, certainly we will. But it's a key part of our overall growth strategy, and we're excited about that. And finally, I'd say, you know, of course, we continue to have a very healthy balance sheet that is there to be able to support, you know, anything we need to do fundamentally from a capital allocation perspective, including M&A activity.

Thanks again.

And that concludes our question and answer session. I will now turn the call back over to CEO Paul Sternly for closing remarks.

Okay, well, thanks again for joining us this morning. We'll be presenting at the Wolf Research Smith Conference in New York in early June, and we hope to see you there. Thank you again, and have a good day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.