Enerpac Tool Group Corp. (NYSE:EPAC) Q4 2023 Earnings Call Transcript

Enerpac Tool Group Corp. (NYSE:EPAC) Q4 2023 Earnings Call Transcript October 17, 2023

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Enerpac Tool Group’s Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded, today, October 17, 2023. It’s now my pleasure to turn the conference over to Travis Williams, Director of Investor Relations. Please go ahead, Mr. Williams.

Travis Williams: Thank you, operator. Good morning and thank you for joining us for Enerpac Tool Group’s year-end fiscal 2023 earnings call. On the call today to present the company’s results are Paul Sternlieb, President and CEO; Anthony Colucci, Chief Financial Officer. Our slides and recording of today’s call will be available on Enerpac’s website in the Investors section. In today’s call, we’ll reference non-GAAP measures. You can find a reconciliation of GAAP to non-GAAP measures in the appendix of the slides as well as 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 filings. Now, I will turn the call over to Paul.

Paul Sternlieb: Thanks, Travis, and good morning. It’s a pleasure to be here to talk about Enerpac’s strong financial performance in fiscal ’23. We also have a lot of good news to report in terms of the success of our ASCEND transformation program with our first full year of implementation now behind us. As you can see on Slide 3, full year revenue of $598 million exceeded our initial guidance and came in at the high end of the guidance we revised upward last quarter. Reported revenues expanded 5%, while core sales, which exclude the impact of foreign exchange and dispositions, were up 8% over the prior year. Free cash flow also exceeded initial guidance and was toward the upper end of our revised guidance, and adjusted EBITDA of $136 million well exceeded our expectations and expanded 65% year-over-year.

In fiscal 2023, we moved into the implementation stage of our ASCEND transformation program designed to accelerate Enerpac’s growth and profitability. To date, I’m pleased to report that we are ahead of schedule in terms of the timing and benefits of ASCEND. Originally, we anticipated total annualized adjusted EBITDA benefits of $40 million to $50 million by the end of fiscal 2024. In the second quarter, we raised that guidance to $50 million to $60 million. In fact, in fiscal 2023, we achieved our goal, capturing ASCEND benefits of $54 million and a year ahead of plan. While ASCEND remains an important part of transforming the company, given that we are well ahead of schedule, we intend to leverage the power of ASCEND to transition to a focus on continuous improvement.

As noted in our earnings release, we have issued our guidance for fiscal 2024, keeping it on the fairly cautious side. This is due to the continued uncertainty in the macro environment. However, we firmly believe Enerpac is well-positioned to continue to outperform the industry and gain share, based on the success of our four-pillar growth strategy, which includes expansion in key vertical markets, digital transformation, customer-driven innovation, and expansion in Asia Pacific. I’ll let Tony review our fiscal 2023 performance and cover our guidance for fiscal 2024. Then I’ll return with more details about ASCEND and our growth strategy and the ongoing benefits to the top and bottom line. Tony?

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Q&A Session

Anthony Colucci : Thanks, and good morning. As Paul said, Enerpac enjoyed solid growth on the top and bottom line in fiscal 2023. Core revenue, which excludes divestitures and the impact of foreign exchange, expanded 8% from fiscal 2022. On a core basis, product revenues expanded 12% year-over-year. At the same time, service revenue declined 7%, due to the previously discussed implementation of a more selective quoting process, particularly in the Middle East region. We anticipate we will see this impact for another two quarters as we began implementing this process in the back half of fiscal 2023. Within the Industrial Tools & Service segment, three of our four geographic regions, Americas, Asia Pacific, and ESSA, which includes Europe, Sub-Saharan Africa and India, generated double-digit growth in fiscal ’23.

As for the MENAC region, which includes the Middle East, North Africa and Caspian, revenue declined in the mid-teens as expected as a result of the just mentioned selective exit from certain projects in our service business. The ESSA region enjoyed healthy demand from wind, rail, and infrastructure. However, dealer sentiment is neutral to cautious. In Asia Pacific, dealer sentiment is most positive in Australia, driven by demand from the mining industry. Other positives include infrastructure spending in Japan and shipbuilding in Korea and Japan, somewhat offset by softness from China’s steel mills and manufacturing sectors. Overall channel inventory is appropriate. In the Americas, sales growth was broad-based, with particular strength in infrastructure and wind markets.

Channel inventory is stable. However, our dealers have expressed some caution with a slowdown in the rate of growth due to general economic conditions. In the MENAC region, investment in oil and gas and renewable energy projects remain strong. Overall dealer sentiment is neutral and inventory is appropriate. We know these acronyms for our regions are mouthful. They have also added an unnecessary layer in terms of how we manage the company from a commercial perspective. Beginning in fiscal ’24, we streamlined our geographic reporting and consolidated it into three regions: Americas; EMEA, which includes Europe, Middle East and Africa; and Asia Pacific. As we mentioned last quarter, we welcomed Phil Jefferson to lead our new EMEA region. Phil joins us with an extensive background leading industrial businesses including senior roles at Motorola Solutions and most recently, Honeywell International.

We are pleased to have him on Board. As you can see on Slide 7, showing the 2020 to 2023 period, we have consistently grown revenue and greatly improved profitability. In fiscal ’23, gross margins expanded to 49.3% from 46.5% in fiscal 2022, an increase of 280 basis points. This was driven in part by the success of our Lean initiatives and our continued focus on operational excellence. We are excited about the operational improvement plans we have in place and the broad operations team engaged to lead and implement them. Similarly, our initiatives to improve operational efficiency and productivity in SG&A prove beneficial. Adjusted SG&A expense, which excludes ASCEND and other onetime charges for both periods, improved 550 basis points to 28.2%.

Our goal is to further improve the efficiency of our SG&A spend as a percentage of sales, and over time, bring us in line with best-in-class industrials. For fiscal ’23, adjusted EBITDA was $136 million, an increase of 65% year-over-year. With that, adjusted EBITDA margins expanded from 14.5% in fiscal 2022, to 22.8% in fiscal ’23. Diluted earnings per share from continuing operations totaled $0.94 in fiscal ’23, up from $0.33 in fiscal ’22. Adjusted earnings per share increased approximately 80% to $1.45 compared to $0.81 in the year ago period. For the year, we generated free cash flow of $70 million, driven by strong EBITDA growth and working capital improvements, partially offset by onetime ASCEND costs. This is a substantial increase over fiscal ’22’s free cash flow of $44 million.