Ladies and gentlemen, thank you for standing by. Welcome to the Enerpac Tool Group's Second Quarter Fiscal 2024 Earnings Conference Call. As a reminder, this conference is being recorded, March 21, 2024. It's now my pleasure to turn the conference over to Travis Williams, Director of Investor Relations. Please go ahead, Mr. Williams.

Thank you, operator. Good morning, and thank you for joining us for Enerpac Tool Group's second quarter fiscal 2024 earnings call. On the call today to present the company's results are Paul Sternlieb, President and Chief Executive Officer, and Shannon Burns, our Interim Principal Financial Officer. Our slides and recording of today's call will be available on the Enerpac website in the Investors section. Today's call, we'll reference non-GAAP measures. 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 filings. Now, I will turn the call over to Paul.

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 second quarter margin expansion as we made further progress in improving our operating efficiency and SG&A productivity. Moreover, we believe organic sales growth in our Industrial Tools & Services, or IT&S segment, of 3% continues to outpace the marketplace. At the halfway point in fiscal 2024, with organic revenue growth of 4%, and adjusted EBITDA growth of 18%, 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. I'd like to welcome Shannon Burns to the call. Shannon is serving as our Interim CFO as we continue the search 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 second 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?

Thanks, Paul. Paul mentioned our team executed another solid quarter within our Industrial Tools & 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 work in the prior year. In addition, through our 80/20 approach, we continue to focus on higher quality, more differentiated projects and service lines. IT&S growth was partially offset by a 25% decline at Cortland Biomedical. As we finalize commercial negotiations with a key Cortland customer, some shipments were temporarily on hold. 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 midterm 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. On an organic basis, which excludes the divestitures and the impact of foreign exchange, sales increased 1.8%. Slide five reflects the continued progress we've made improving operating efficiency and SG&A productivity. In the second quarter, gross margins expanded approximately 200 basis points year-over-year to 51.6% despite the aforementioned volume-driven decline at Cortland Biomedical. The improvement in margins was driven by operational improvements related to the ASCEND transformation as well as pricing actions of favorable sales mix and the disposition of Cortland Industrial. Similarly, we continue to benefit from the initiatives that improved our SG&A efficiency.…

Thanks, Shannon. Turning to the regional performance of IT&S. In the Americas, we saw a 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 and a few distributors, our Heavy Lifting Technology business, or HLT, has a solid funnel going into the third quarter and the service business is starting the quarter with a strong backlog and momentum. In the EMEA region, we saw solid mid single digit growth in the quarter. 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. 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 two 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,…

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

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

We can hear you. Yes. Good morning.

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 kind of discuss what you saw coming out of Q1 and kind of what you're seeing now? I think that would be helpful.

Sure. Thanks, Tom. Yeah. 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. 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 Enerpac, but more broadly. 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.

No, I appreciate that. And 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 was more the Australian customer-driven versus some broad change in demand. Did I get that right?

Yeah. 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. It does tend to be lumpier. And we were lapping 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 help otherwise in the region.

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

Sure. Yeah. As you mentioned, that's one of our four key growth pillars is our focus on the 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 acquisitions late -- last fiscal Track Tools to add to our portfolio. We referenced here in the call today. We continue to drive forward on our innovation pipeline in the rail sector, including the launch of one of our new products this quarter. The engagement levels with 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. And although, I would say there probably has been a slowdown in wind over the last six 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 to 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.

I appreciate the color. Maybe two more, if I could. One, I noticed your service revenue was down year-over-year. Just wondering was -- because I believe -- I didn't go back and double check, but I think Q1 was up nicely. Was that just a timing or a seasonal issue?

Yeah. 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. 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.

Yeah. And I also mentioned in the comments that our 80/20 philosophy, we're still working through some of that this quarter and that did have an impact.

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

Okay. Thank you.

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

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. Just trying to get any updated thoughts you might have on the M&A environment, given the macro challenges.

Yeah. Thanks, Steve, and good morning. Yeah. I think our team continues to execute well, managing our balance sheet responsibly. I 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. 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 maintained 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. And we'll continue to look at share repurchase opportunistically. But on the M&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. 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.

Great. That's helpful. Thanks. And one last one, if I can. Last quarter, you guys highlighted the advancing rollout of the Larzep brand. You cited some new distributor deals and some promising early order flow. Just curious if there's any update on that front this quarter.

Yeah. Sure. So, again, one of our key growth initiatives is driving the second -- what we call a second brand initiative, which is really targeting essentially the mid-tier segment of the market, particularly in Asia-Pacific and parts of Latin America, where historically, Enerpac has not really played. I mean, we're more of a premium player, generally speaking, in the space. But there is a need in those markets for a really good quality product, but not necessarily follow the features, functionality and performance of what Enerpac offers. And so, we've utilized our Larzep brand, which we already own and built a range of products. It's 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 already getting some nice sales progress there. 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 rollout. 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 a premium-tier of the market. 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.

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

Thank you.

This concludes our question-and-answer session. I would like to turn the floor back over to Paul Sternlieb for closing comments. End of Q&A:

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 & Building Products Conference in New York on Wednesday, June 5. We hope to see you there. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.