Enerpac Tool Group Corp. (EPAC) Earnings Call Transcript & Summary

Tom Gardner?

Very much looking forward to this hour as we will be welcoming in just about 15 seconds, the CEO of Enerpac Tool Group, ticker symbol EPAC, a market cap $2 billion, a company that we've recommended and put real money behind in our Motley Fool portfolio, the Moneyball portfolio. And so it's going to be a great conversation. Any reflection you want to have before we bring Paul on, Andy?

Any company that has a ticker that has my initials in it, I'm all for. So there we go.

I like it.

No, I'm excited. Enerpac is, it's a small company, but they do a lot in the industrial commercial space, and it's a pretty exciting time to be talking to Paul. So.

Very much look forward to it. So why don't we just bring in Paul Sternlieb right now, the CEO of Enerpac Group.

Paul, thank you very much. I assume you're sitting in the headquarters of your organization in Downtown Milwaukee, where you moved your headquarters recently.

That's right. This is week 3, I think, in our new office, Tom. We're super thrilled to be here. So far, nothing has fallen off the walls, as you can see. So it's been a great move. Terrific for our employee base here to be in a vibrant downtown Milwaukee. So we're thrilled.

Well, I'm going to start, Paul, by just starting to recite things about Enerpac Tools and stop me when I've delivered something inaccurate. And I mean it, because I will.

Okay.

And that then we'll turn it over to you. Okay. So Enerpac Tool Group is actually part of a company that was founded in 1910 and has had its name changed multiple times. Its hydraulic systems were used to place the Bird's Nest roof on the Beijing National Stadium for the 2008 Olympics. Its technology was used for the build-out of the stage for U2's 360-degree music tour. It helped repair the movable roof stadium at Miller Park right there for the Milwaukee Brewers. It played a key role in the construction of the San Francisco Bay Bridge. It operates -- the company operates in over 20 countries and does more than 60% of its around $600 million in sales outside of the U.S.

Over 100 countries, actually...

Over 100 countries. Okay. That was it. Now we turn it over to you and say, perhaps give us a little bit of the overview of rail infrastructure, wind and industrial MRO, those core components of your business for all of our members, many of whom own the stock. So maybe know a little bit about it, but would like to hear it from you.

Yes, sure. Well, thank you, guys, for having me. Great to be here with you today. So, yes, Enerpac, we are a premier industrial solutions provider, as you pointed out, Tom. I mean, our specialty, what we're probably most well-known for in the majority of our business is high-pressure hydraulic industrial tools. By high pressure, we mean very substantial, like 10,000 psi. And our products and technologies and the services we offer that are complementary to them are used for the precise positioning and placement and lifting of very heavy loads, industrial sized loads. So really, everything we do is truly industrial. It's nothing I would call professional or commercial, certainly nothing at all in the realm of the consumer world. Although ultimately, of course, our products are used by end markets that end up, of course, serving consumers every day. So we operate all around the world, as you referenced, in over 100 countries, and we operate really in dozens of end markets. Some of the more, I would say, traditional larger markets for us would be infrastructure, civil construction, power generation, industrial MRO, oil and gas, but really predominantly, we call it refinery and petrochem, it's largely downstream and tied to maintenance activity where we generally tend to play and operate. We're active in the military, aerospace sector, mining, manufacturing, machining, industrial MRO. So it's truly dozens of end markets. I would say we're not, from my perspective, overly reliant, frankly, on any single end market, and that's kind of the benefit of the diversification of how Enerpac operates. More recently -- I joined the company about 3.5 years ago, and we put in place when we launched our Investor Day in November 2022, a new organic growth strategy that has four key pillars. One of those pillars is a focus on four key vertical markets to drive accelerated growth. And those are the markets that you referenced, Tom. So it's infrastructure, rail, industrial MRO and the wind sector. So we'll continue to serve customers, and we do every day in all these dozens of end markets that I referenced. But those four markets, we feel really have a lot of potential in terms of end market fundamentals, the secular dynamics that work there and also our right to win and be successful in gaining share. We're already present in those verticals. We have products and technologies to serve those customers. We have a sales channel that's very active in those end markets. and we're continuing to drive execution through our accelerated organic growth agenda. So infrastructure is one of those markets. We're obviously super excited about for many reasons, as you can imagine, but certainly, substantial investment going on in that sector now for the last couple of years and probably for the next decade plus to come. And we all know about the Infrastructure Bill here in the U.S. and certainly, significant funding has been and will continue to be underway there that I think will play as a nice tailwind for us. But the reality is that same level of infrastructure activity we see playing out in many parts of the world in Europe and in Asia as well. And we're right there and ready to support those customers.

Paul, Andy Cross, thanks for being here to talk to us a little bit more about Enerpac. Just for some scale, I think it's somewhere around like maybe 30,000 SKUs.

Yes.

There's lots and lots of products you offer. And so -- and also a service component to that. So two questions. Just -- these are small products and large products. So maybe just give us some actual examples of whether it's a cutter or a heavy lifting tool that Tom mentioned some of the heavier ones, but then also talk a little bit about the balance between product and service revenue breakdown.

Yes, absolutely. Yes. Thanks, Andy. So first off, about 80% of our revenue is product, about 20% is service. If I take product first, the bulk of our products are, I would say, OpEx style products. They are price points of a few thousand, $5,000, $10,000, maybe $20,000 for one of our more sophisticated pumps. That's generally our bread and butter. And as I say, it's really not capital equipment intensive. And it tends to be more short-cycle book-and-bill business, frankly. We have a catalog of about 400 pages that is comprised of, as you referenced, about 30,000 SKUs that we offer that are our design, our products, our technology, we manufacture for our customers, and we sell that through channel globally. Now those products, as you referenced, can be things like hydraulic pumps that provide ultimately the power that's used to drive a lot of our tools, but also what we call, for example, cylinders or people may think of as jacks, those used to apply pressure to lift things in many cases or precisely position heavy loads. We also operate in the bolting category where customers -- that's one of our battery torque wrenches, our newer products. Customers need to apply very specific torque and tolerances to bolting applications to make sure that very large bolts are precisely positioned and tightened appropriately for their applications. We also offer cutters. We do work holding equipment, pullers, spreaders. We have a specialized line of on-site machining equipment. So customers can use when they can't bring a part to a machine shop, they can bring the machine shop effectively to the part and do on-site machining. So we believe we have really the broadest and deepest product portfolio and product offering of really anybody, frankly, in our space. And that's just what we call our industrial tools. In addition to that, we offer, as you referenced, what we call our HLT or heavy lifting technology tools. And that's a product line today that are capital equipment, those can be a few hundred thousand, $500, $1 million, maybe $2 million price points. But those are really effectively alternative technologies for traditional cranes where you need to move something heavy in the field and precisely position it. But for whatever reason, a crane won't allow you to do the job or you don't have the space or you can't get the precision. And so we actually just got back last week from a major every 3-year trade show in Germany called bauma, where we exhibited our HLT equipment for the construction and infrastructure space. It was extremely well attended, several hundred thousand visitors. And so we always love that show to be able to show off our products and technology. We're really known as basically the premier premium player in our space in all of our tools, including our HLT product lines. So that's the products that we offer. We manufacture them in multiple parts of the world. We sell them globally. And I would say what Enerpac is most well-known for its durability, reliability, quality and safety. As I said, we're a premium player. You can also see that, by the way, reflected in our gross margins, which are north of 50% as a company. And by the way, our products are accretive to our overall gross margins. Now on the service side of the business, that's about 20% of our total revenue globally. And the service business is split roughly half-half. So about half of our business is actually a rental business, a pretty nice business where we have our own rental fleet of largely our own tools, and we will rent those out to customers who may use them to perform a job at their own site where they need it for a short period of time, a week or a month or what have you. We also have what we call a manpower business, where we have specialized engineer field -- Enerpac field service engineers and technicians performing a job at a customer site, utilizing our tools that drives through revenue from rental income as well. And the benefit of that is our service business is extremely, as you can imagine, complementary. We have our own folks out in the field using our tools, gathering insights and what we call VoC or voice of customer as they do those applications. And that drives also great input in terms of our innovation pipeline and process development as well.

How do you track your gains in market share? And where do you see the greatest opportunities to take share going forward?

Yes. So great question. So I think like a lot of industrial world, it's not a perfectly transparent market. There's a little bit of opaque nature to it. But we do our best to try to track what we can from our direct competitors, certainly. Now most of our competitors said it's a pretty fragmented market, right? You mentioned at the top of the call, we're about $600 million of revenue. We operate in a market that we think is well north of $5 billion. When you add the service component, we're talking $7 billion to $8 billion. So it's an extremely large, pretty healthy end market for us in set of end markets, but extremely fragmented set of competition. So hard for us to track precisely. But what we do get is some good data through our channel. We go to market for our products primarily through a channel of about 900 global distribution partners. Those are relationships, by the way, that have been built up over decades with Enerpac and are really steeped in Enerpac technology and how to sell our products. So we get good insight from them on market dynamics. We get some data from them as well. In the U.S., we're not exclusive. So a lot of our distributors will sell competitive product. Outside the U.S., I'd say by practice, not by contract, we tend to be more exclusive. But we also do track, I'll say, a broader set of industrial public company peers that may not be direct competitors, but we think are good proxies for kind of representative of what Enerpac is doing, selling kind of industrial style OpEx product through a channel to a diverse set of end markets. In fact, we track about 28 of those companies or specific segments that we think mirror us most closely, and we track their performance on a quarterly basis, and we mark our performance against that. I would say, by and large, now for quite a number of quarters, probably 2 years plus, we see that we continue to outperform generally the median of that peer set by 200 to 300 basis points, which is really based on the execution of our organic growth strategy.

Paul, talk a little bit about the sales strategies. You made some changes recently about this, which are kind of exciting, but I want to get your thoughts on about this. The challenges and the balance between, say, direct or channel partners with distributors, give a sense of how you're thinking about the deepening the sales channel at Enerpac.

Look, yes, we've made a number of key changes, Andy, I think, for the positive. I'd start first and foremost, as I referenced, we have a great channel. It's a huge key competitive advantage or moat for us. It's not easy for anybody to just come in and replicate that overnight. Again, these have been relationships that have been built up literally over decades, right? You referenced at the top of the call, Enerpac was essentially started in 1910 as the formation of the company. We've been around a long time. So we've got a lot of heritage and a lot of channel partners who really understand what we do and how to bring our value to customers in the marketplace. So we value that a lot, and we'll always have a place for the channel and what they do and the value they add. By the way, they all stock inventory as well, hugely important in terms of being able to deliver very quick lead times for our customers in the marketplace. Our distributors also provide some direct technical support to their end customers, right? They provide, in many cases, integration and engineering capabilities. They tend to be more specialized, I'll call them, value-added resellers than kind of warehouse type distributor model. So there's a real advantage to that. But at the same time, one of the hallmarks of Enerpac is that we do have very substantial technical and applications expertise, and we've been building that up for a long time. So customers -- end customers will call us and say, here's the job I'm trying to do, help me specify the equipment I need to do that. We don't -- we make that available at no charge to our customers. We tell them the specific products they need and they may go transact with a distributor, and that's fine. So that's one way that we interface directly with end users. But over the last couple of years, we've also built up a direct program with our e-commerce channel, small but growing, growing significantly. First year, it grew 3x. The last 2 years now, it's grown about 40% to 50% a year. And that's a way where we sell at full list price to anybody who wants to transact. We want to be available where end customers want to find Enerpac product and purchase it. So we have our full lineup, not HLT, but all of our other products available for-sale directly on our Enerpac website. We started that in the U.S. We rolled out into, I think, 18 or 20 countries in Europe. We've now rolled that out in Australia. So that's a great way for us to have some more direct interface with the end customer and build that ongoing relationship with them as well. So we've got our traditional distributor channel will always be relevant. We've got the e-commerce channel. And we've got our sales force. Traditionally, our sales force has called on the channel and been a support provider to them. In the last few years, we've redirected a lot of our sales channel -- our sales team's time towards calling on end users jointly with our distribution partners. And what we've put in place is we've built a very proprietary sales management program we call CX, Enerpac Commercial Excellence, which is the process that we use to manage our sales force, their activities, all the funnel management process as well. And that's been hugely impactful in driving share gains for us.

Do you see -- just a quick follow-up there, Tom. Paul, do you see the -- over the next few years being a pretty healthy balance between the two channel, ECX and direct? Or will channel always be the bigger part to it?

Yes. Look, channel is still, by far and away, the biggest portion, 75%, 80% of our sales, and it will be for a very long time. Just to be able to have the kind of reach and locality to get to customers where they are, there's always a role for sophisticated channel partners to play. At the same time, we also have reduced the number of channel partners over the last few years. When I joined almost 4 years ago, we had 1,500 channel partners. Today, we talk about 900. What we want to do is win with the winners, right? And so we want to -- and that's a positive message to our channel partners that we're continuing to hone that and focus on fewer, more meaningful players that are really investing behind growing the Enerpac brand together with us.

That's great. Well, now we're going to play a game in the -- we'll see if the numbers show up in the screen share in a way that is visible to you on the device you're looking at. And these are the financial statements of Enerpac through the second quarter of this year. We can all see that we're on the income statement. What we're going to ask Paul to do is just to pick out one thing, one or two things from the income statement and the balance sheet and the cash flow statement that you see as illustrative of the work that you're doing or an important factor that investors might want to consider, I will say, in a backdrop and questions we will have coming up after this are about the amazing gains of the ASCEND transformation program, lowering the SG&A spend at the company by $40 million over the last handful of years. So some real gains, but we'll let you go in any direction you want to here on the income statement, what stands out that you'd like us to be aware of.

Yes. Well, boy, where do I start? I mean there's a lot of good things to be proud of in terms of what our team has been able to execute, frankly. I'd say, first and foremost, we continue to be extremely focused on profitable growth. We were frankly super pleased with our second quarter results. So -- and by the way, for those who aren't very familiar with our fiscal year, we do have this odd fiscal year timing that ends end of August. So yes, our most recent quarter that we announced was Q2. And actually, in that quarter, we reported organic growth for the total company of 5%. And we were extremely pleased with that. I think in the current macro environment in the industrial sector, which is relatively anemic and we believe is really a negative single-digit decline territory, we are, as a team, continuing to outperform. So you can see that represented at the end of the day in the top line. I think the second thing we're really proud of as a team is the premium nature of our products, and we enjoy that in the gross margin. Obviously, if you do the math there, you'll see that we enjoy extremely strong gross margin profile north of 50%. In Q2, that was no exception, 50.5% in the quarter. And again, that, I think, speaks to the volumes of the quality and the power of the brand. But frankly, also speaks to the nature of the mission criticality of how our customers use those products and applications every day to get their jobs done effectively, safely and efficiently. And then I think the other elements I'd point out is we are a strong cash generator, always have been. That is -- typically tends to be back half of the year weighted for us. So you'll see certainly lighter cash generation in the first half. But generally speaking, our go-forward targets are really to be driving free cash flow in our kind of fiscal financial framework, I'd say, in excess of 100% of net income, certainly in fiscal '26 and beyond as we've moved away from some of the onetime ASCEND investments, but also just our HQ investment move this year. And then probably the final point I'd make is what you referenced earlier, which is SG&A, right? I mean now we've made great strides on continuing to make productivity gains in SG&A as a percent of revenue as a company. Nevertheless, if you do the math, I mean, we're still high, right? We're at 27%, 28% as a percent of revenue. And we know when we do our own internal work and look at our opportunity set and also when we benchmark ourselves against what I would say are best-in-class industrials, we continue to believe that we have ample opportunities to drive more efficiency there. So while we've made and our team has made great progress, and I'm really pleased and proud of that, I'm also just as excited, if not more excited about the progress yet to come. And that's what I referenced here in terms of more gross margin expansion through productivity initiatives and sourcing, et cetera, we can talk more about those, but also through driving efficiency gains in SG&A.

Excellent. We'll go to the balance sheet. Now as we're moving towards the balance sheet, I will at least note that this is a company, Fool is out there, whether you're an investor in Enerpac now or not, that has lowered its share count by 5 million to 6 million, maybe 6 million shares over the last 5 years. So buying back about 10% of the company through share repurchases, we can come back to that. But now we'll come down to the balance sheet. Okay, what sticks out for you here on the balance sheet? We see about $120 million in cash and equivalents. I'll just say down here at the debt line, about $190 million in debt, but that is not a -- the cash generation of the business makes that a very manageable, not to take your job from making these comments, but I'll also call out the goodwill. This is a company that is acquisitive and in a fragmented category, as you've noted, Paul, you have opportunities, I'm sure, looking out and continuing to look out at the opportunities to make some acquisitions. But what stands out for you on your balance sheet?

Yes, sure. A few things. I think you're right. First and foremost, at a high level, I think we have what we believe is an exceptionally clean and healthy balance sheet. And at the end of the day, if you do the math, we've got roughly 0.5 turn of leverage. That's a good spot to be in, frankly. I mean that affords us incredible flexibility to really do all the things that we need to do to continue to invest appropriately in our business. first and foremost, but then to also look at other uses of capital, right? So certainly, you referenced, we have been fairly focused on share repurchase over the last several years. In fact, shortly after I joined the company, our Board authorized a $10 million share repurchase program. We've gotten after over 7 million shares of that to date. So we have more opportunity to go, but we've made great strides. I think average price paid for a good chunk of that has been in the low to mid-20s, frankly. And I don't know what we're trading at today, but $38 to $40. So it turned out it was a pretty good investment is our view for our shareholders. And we continue to look at share repurchase opportunistically every single quarter as one outlet for our capital allocation. But to your point, we are maintaining a lot of dry powder. Our company has been historically acquisitive, and we have -- I'd say we're intently focused on continuing to look at complementary acquisitions that would allow us to be a better solution provider to our customers and offer a greater basket of goods and services. In fact, we completed our first more significant acquisition in September of 2024 when we executed the DTA acquisition, which was a business that we acquired based in Madrid, Spain, and we can talk more about that, but that was certainly our acquisition program at work. Beyond that, obviously, we've got our regular working capital. We try to be pretty disciplined in that. But we still believe we have opportunities to drive more working capital efficiency, I'd say, particularly in our inventory, where we've made some progress, but we have more work to do. So overall, the balance sheet is in very strong shape and affords us lots of flexibility, so which is a great thing in this current environment.

Okay. And finally, the cash flow statement. Thank you for walking through this. It's so helpful to hear your thinking on it. So what do you -- what stands out here?

Yes. Look, at the end of the day, we have historically been known as a very strong cash generator. That's a key focus for us. And by the way, to remind your viewers, I mean, we are compensated in a meaningful way on cash flow. So actually, in our short-term annual bonus program, we have four key metrics: organic growth, EBITDA dollars, EBITDA margin and free cash flow conversion. We think those are all really important and meaningful for shareholders. So we're intensely focused on driving strong cash generation and managing the balance sheet accordingly. And so as I referenced, our targets are we've laid out our guidance here for this fiscal year. But our -- in general, our targets going forward over the next several fiscal years will be to drive a free cash flow conversion that's in excess of 100% of net income. And we think we're very well positioned to be able to do that. The company is, I would say, relatively light in terms of capital intensity. You can see that here in the CapEx line. In any given fiscal year, on average, it's about -- we spend about 2% of revenue on CapEx. This year, we did guide a little bit higher because of some of the investments we were making as we talked at the top of the call about our HQ move here. But the company is not a big cash hog in terms of CapEx. And yet, we continue to stay up to date and invest appropriately in our facilities, in our IT assets in our key capabilities in the business.

Thank you so much for that, Andy.

Paul, let's just talk a little bit about the DTA acquisition as you're thinking about acquisitions globally versus in the U.S. You mentioned the importance of the global markets. They're also far more complex with just the different markets. Each markets in of itself may not be as complex, but overall, talk a little bit about the strategy behind that. It was about a EUR 25 million acquisition, I think, around there. And just the expectations going forward about the acquisitions that Tom had referenced about, just how you're thinking about those strategically.

Yes. So we talked a little bit earlier about one of our kind of organic growth pillars on vertical market focus. And we have three others, and we can get to those in time if we have the time available. But beyond that, we are, as I said, very focused on our M&A program as well. Because what I referenced earlier, we operate in a very large fragmented market. Our customers have lots of needs. We feel like we offer them a great set of products and technologies today, but there's more that we can do. Part of that, we can solve through innovation on our own. In part, we can get there quickly or more effectively through acquisition. And so we've built an acquisition program now over the last couple of years with what I consider to be a very strong, large and very high-quality pipeline of targets, and they're global. So our focus is continue to be a pure-play industrial tool player, right? We're not looking to be kind of a diversified player, but stay relatively close to our knitting and focused really on solving key customer needs, pain points and unmet needs in targeted verticals, right? We've built, as I said, this very strategic pipeline I would say, focused on the infrastructure, rail, industrial MRO and wind sectors, not exclusively, but predominantly. And we're looking for targets that would help us either fill a product line gap or white space in our current product offering that would allow us to tap into a market or vertical or geography where we feel we need to drive or have the opportunity to drive more penetration and/or that bring us some novel technology or capability that perhaps we can apply to other parts of our existing product portfolio. Probably the most important element of our M&A program, though, is discipline. We are extremely disciplined because anything we look at, obviously has to meet strict strategic criteria in terms of fit and complementarity, but it also has to meet strict financial and operational criteria. And at the end of the day, we have to have extremely strong conviction in the business case that we build in the deal model that we're going to be able to drive extremely strong returns for our shareholders. And generally, if you look at some of the metrics that we're targeting, we're looking for high-quality businesses, not sort of distressed assets or turnarounds. We're looking at businesses that have already a strong gross margin profile that maybe we can help them get better over time. We're looking for businesses that would allow us to drive revenue synergies, perhaps by leveraging our existing channel and sales capabilities, but also operating cost synergies by bringing the best of what Enerpac can do sourcing, manufacturing, operationally to perhaps a smaller, maybe less mature business. And then fundamentally, from a returns perspective, we look at many metrics when we model it out. But probably the most important for us is ROIC. By the way, we are compensated on that. It's one of our key LTIP components that the management team and anybody who receives equity in our company is compensated on at the end of the day. And we're looking to generate for smaller deals, kind of year 3 cash ROIC well in excess of our WACC. And we have internal hurdle rates. We haven't disclosed externally for competitive reasons. But that's generally how we think about these deals. So DTA, in the context or the lens of everything I just described is probably a perfect example. DTA was a family-owned business that was highly successful, growing double digit the last several years. We acquired them for about EUR 24 million plus a potential earn-out after year 3 depending on financial performance of the business. It's a combination of -- what it does is they make automated guided vehicles and electric equipment that moves heavy loads horizontally. And so it's extremely complementary with our heavy lifting technology business, which moves things up and down vertically. And so as you can imagine, there are really strong revenue synergy potential there from a customer base and channel and our sales network. The company was also highly European focused, about 90% of their revenue, whereas obviously Enerpac global when we can and are helping DTA globalize quite literally. And then there are many opportunities for operational and cost synergies as we help implement Enerpac's kind of disciplined operating processes and also leverage some of Enerpac shared procurement and back-office efficiencies. We haven't talked a lot about how we got some of our SG&A benefits that we did. But as an example, we set up a shared service center in Bangalore, a captive to us and now we can use that as we bring on other acquisitions in the Enerpac fold. So we're super pleased with the progress we've made on DTA. The integration is well underway. We're already seeing benefits both commercially and operationally.

In terms of DTA and where you're going, strategic future acquisitions and organic growth, do you see more and more automation and mobile robotics and the opportunity to technological advancements that we're all thinking about seeing and reading about, are those going to play a major role in the future of Enerpac development of existing products internally and also acquisitions?

Yes. So absolutely, Tom. Certainly, we bring technology to fore in everything we do. I mean we try to do things especially in our innovation pipeline that I say it's only Enerpac could do, right? So we're not -- we don't consider ourselves a me-too player, certainly far from commoditized, right? And we're trying to bring very differentiated solutions to the marketplace that create real value for our end customers. And so DTA has some very unique technology in the way they do things, and that's what's made them successful in the marketplace. Automation is one key element of that, right? They make products that you can operate remotely with a human interface, but they also make products that operate entirely autonomously and do things for customers they wouldn't have been able to otherwise do. And sometimes that creates a cost advantage for customers. But a lot of times, actually in customer environments these days, especially in the four walls of manufacturing, it's frankly just solving a labor challenge that otherwise you just don't have access to the people to be able to do the work and you need to find autonomous solutions to help you solve that labor shortage issue. And that's true really increasingly around the world, and we see our customers struggling with those issues. So DTA is well positioned to help customers solve those problems. We do that in our own innovation pipeline. We are building a lot in terms of connectivity solutions. We have our IoT solution called Enerpac Connect, and that's our way of allowing customers to connect with our products to gather insights, data, operating logs, ultimately to be able to do more operational control, cross-platform, multi-tool and synchronization control. And those are all super exciting things that we -- our innovation team is actively working on.

Out of curiosity, does the -- do you expect or does the leadership team of the company acquire stay or it's generally an exit and they become more of an advisory role?

I'd say it's case by case. But generally, our preference is to keep the top talent, including the leadership, and that's absolutely the case with DTA. We wanted to keep and we have really kept the whole team. I mean they made the company successful. There are two brothers that were key to driving the business, and they remain. They are actually running the business today. Every time I talk to those guys, they're honestly thrilled to be part of Enerpac. There's not a week that goes by that they don't see the benefits of coming together. And by the way, they were not for sale. When we originally had the very first conversation with them, the whole process took about a year. They hadn't even considered a sale of their business. They were happy doing what they were doing, but they do -- they knew some of the limitations of being a small family-owned business, maybe not having access to the capital for investment or to some of the more leading edge kind of productivity solutions and access to technology and our team, et cetera. And so they see that every day, and they see the benefits of being part of us now, and it's great to have them on the team. So I'd say our general bias is we like to have that talent because it adds richness and diversity and brings new capabilities to Enerpac overall.

And how do you build out the process of finding DTA? Is that an internal R&D -- sorry, internal M&A team that's out researching all the competitive landscape do you have outside firms that are doing that work for you?

Yes. So it's all of the above. So first, we do have a dedicated team and a key leadership resource. We brought on now nearly 2 years ago, who's focused fully solely dedicated to inorganic growth in terms of target identification, outreach, cultivation. Obviously, some of these conversations can take years, right? And so that's the process that this leader works on every single day as well as, of course, diligence and transactional work. Of course, we'll bring on third parties to help us as we ramp up on any key diligence or integration. But beyond that, yes, we rely on many other folks, right? So first and foremost, there are many folks across the Enerpac world that are actively feeding our team and our M&A leader insights into the funnel. I'd say most notably, our regional leaders and our commercial team. And in fact, actually, the way that we found DTA, believe it or not, was through one of our sales folks in Spain, who knew of the company and thought it was very interesting, brought the idea to us, and then we started investigating it. And by the way, we have a reward program internally for people to bring ideas and they're compensated if we're able to close on a deal. So -- and in this case, that individual benefited from that. So we have folks out in the field all the time looking for these ideas and bringing us these ideas. And then yes, of course, we work with third parties, banks and other folks in the M&A space that we're having dialogues all the time every single month and tracking different opportunities.

Paul, just very quickly, we can talk a little bit -- I want to get to the SG&A point that you made just because to hear what you believe is driving so much of the performance. Quickly, what are you seeing about -- when it comes to M&A, what are you seeing about valuations? Of course, valuations today is much different than it was even just 2 months ago. But just in general, maybe just talk a little bit about what you're seeing the expectations are from -- because you talked about that discipline and how important the ROI is on those investments.

Yes. Sure, Andy. I think -- look, I mean, at the end of the day, we -- first off, we -- as I mentioned, the ROIC has to work. And so we consider ourselves to be DCF buyers, discounted cash flow. We're not a multiple buyer. So we build a model based on what we think an individual company on a stand-alone basis can do and then what would be those synergies operationally and commercially. And therefore, what is it worth and what do we think we can pay for it and still generate a nice return for our shareholders. Now we're looking for high-quality businesses, as I said. So fundamentally, we're likely to pay, I'll call it, market rates. We're not looking for distressed assets that we can kind of buy at a bargain sale, right? I mean, sure, we'll take a deal if we can get one, and we'll work hard to do that. And we negotiate, of course, as you'd expect, like it's our own money at the end of the day, and we're all shareholders in the management team. But at the end of the day, we're buying top-quality businesses and there's a market rate to pay. I'd say from a valuation perspective, I'm not sure we've seen that meaningfully change even in my time here. I think the expectations are still fairly strong. And now we'll see in the current macro environment, how that evolves. But I think there was even a period in time during COVID when there was an expectation it was going to be great hunting, hunting ground. And I'm not sure that proved to be true as expectations for valuation didn't maybe meaningfully change. So we remain, for that reason, extremely disciplined. But I still feel very good and very confident about the funnel that we have developed. We have a lot of good ongoing dialogue and discussions at any given time, and we'll maintain that discipline. But we're also ready and prepared to do deals when the opportunity presents itself.

Well, as a shareholder, I'm glad to hear that. So thank you very much. Just very quickly on the SG&A, margin side and on the gross margin side. So SG&A margin or the SG&A cost as a percentage of revenue has gone from, gosh, like mid-30s down to high 20s or so over the last few years and gross margin has moved the other direction, gone up 10 basis points or so. Talk a little bit about the success there. What, in your mind, has been the big driver on both those levers?

And I kind of want to add. I want to add a second bullet to that question just for the fun of it, sorry to interrupt. But if I apologize when I interrupt, it means I shouldn't do it again. So maybe I'm going to do it again in life, so. Okay. I really love your background at Illinois Tool Works and Danaher and also wondering how that informs some of your financial mindset and how you run the business.

Yes. No, thanks, Tom. Yes. I guess, look, what I -- I'd start with the context of when I joined it was evident there was a really clear opportunity for us to drive substantial and sustained performance improvement in the business. That was kind of my core thesis or hypothesis coming in. And I think that's proven to be true, and we believe there's plenty of runway ahead. And at the end of the day, we launched our transformation program that we called ASCEND in March of 2022. And that was a program that ran for about 2.5 years, took us through the end of fiscal '24. And ASCEND was really focused on powering performance in the business and sustaining that. And there were three key pillars. The first was accelerating sort of near-term organic growth strategies. The second was driving improvements in operational excellence and production efficiency. And the third was driving greater efficiency and productivity and SG&A. And through the execution of ASCEND, great performance by our team globally, 2,000 people strong, right? Over that period, over about 3-year period, we added about 1,100 basis points of margin expansion to our adjusted EBITDA from roughly 14% to roughly 25% at the end of fiscal '24. How did we do that? To your point, we added a little over 500 basis points on gross margin, and we drove down about 650 basis points on adjusted SG&A as a percent of revenue. By the way, we say adjusted because we had some sizable onetime investments for the ASCEND program that's now completed. But in total, we nearly doubled the EBITDA or adjusted EBITDA of the company from roughly $75 million to $147 million. So some of the efforts behind that on the operational side, a lot around business simplification. And Tom, when you talked about the background of some of the companies where I've been and some of the folks in our team, we've had the benefit of seeing the power of both lean and how companies apply that. And we have our version of that now through Powering Enerpac Performance, which is really the continuation of ASCEND and also the power of 80/20. And there are many companies that utilize that approach, but I've worked in one that's strongly noted for that. And so we've applied a lot of simplification in our business. Back at the top of the call, we talked about 30,000 SKUs. Well, when I joined, we had close to 40,000. We've made dramatic simplification, and we will continue to do that. Our supply base, similarly, our channel network, I talked about, we've continued to simplify. So as we drive simplification, we can drive more efficiency in how we operate in our plants, in our inventory levels, warehouse, et cetera. We've also driven a lot of acceleration in global strategic sourcing and indirect spend. We have an incredibly complex supply chain for the size of business we are, multiple thousands of suppliers. One stat that I've talked about previously is just for machine components alone, we have over 400 suppliers globally. That's crazy, right? I'll be the first to say it. But it's also a phenomenal opportunity for us to continue to drive vendor consolidation and everything -- all the benefits that come from that. And then we've done some footprint rationalization. So through the ASCEND program, we did some site consolidation in Europe, but we're not done, and we've got more opportunities ahead to drive that because we operate globally in a network. But I would say we have excess capacity. That's a good thing because we don't need to invest more capital to drive additional capacity, but we can also look for further consolidation opportunities, and we will over time. Now on SG&A, we've driven benefits by a lot of means. So I talked about one of them. That was just an example, which was we've taken what we had, which was disparate financial transactional processes, AP, AR, general/ledger work that was happening all over the world in many high-cost locations, but relatively kind of basic transactional work, and we consolidate that. We did what I would call lift and shift operation. We stood up a shared service center at our captive site in Bangalore, India, where we now have over 100 Enerpac employees and that they're doing that work for us extremely effectively and efficiently. And we also aren't done. That was step one, but we have more opportunities to standardize and harmonize and ultimately drive more automation and process improvement in RPA or robotic process automation. We've done simplification on our legal entity work, right? We brought that down quite significantly, but we have more opportunities to go because every legal entity that you have, you got a balance sheet, you got to close the books every month. You got to do reconciliations and you got to do variance analysis, all this stuff. And there's just opportunities for us to drive cost out on that, and we continue to focus on that as well. We've done a lot of work on sales force efficiency. I talked early on about Enerpac Commercial Excellence Program, or ECX. We've applied process improvements to that. We rolled out our CRM system, and we have Power BI dashboards now where we can manage and monitor our sales force effectiveness and productivity down to an individual contributor level on a given day of the week. And we can do that in the U.S. and across our EMEA region now. So those are all programs, and we've invested behind them, right? We've invested appropriately. Some are IT investments to drive improvements in our system to automate and create those capabilities. And we're happy to do it because these are projects, internal projects that for us have had really great return profiles.

We have a couple of questions from our members. I'm going to merge two of them together and then ask a second one after. This is a merger of Ehan and Cyber Mike's question. How is Enerpac differentiating itself from competitors like Helios, SPX and ITW? What are some of the differentiating factors for you?

Yes. Well, first and foremost, I mean, those are great companies, and one of them is a former employer of mine, just to be clear, generally speaking, they're not direct competitors. They operate in similar spaces to us. But for the most part, they're really actually not direct competitors to us. But I think what I would say differentiates us at the end of the day, first off, first and foremost, versus our direct competitive set is that the power of the brand and the quality, the durability, the reliability, the safety, which comes through the design of what we do for our customers and our products and services. And I could tell you a good anecdote about that. Probably a couple of years ago now, I was out on the West Coast in the San Francisco Bay Area and visiting a major bridge renovation project. And we were actually standing under this bridge that still had traffic running over it while they're doing bridge repair work. It was probably 1- or 2-year project. This is like a $30 million budget for this project. And I think maybe we had sold $0.5 million of tools and equipment into this. And it's -- you can imagine, mission-critical, right? This has to be on time. It has to be on budget. And most importantly, it can't fail. This is -- lives truly depend on it. You have traffic literally running over this bridge with our cylinders holding it up. And we're standing under it, and I said to the field engineer, our customer, why did you choose Enerpac? He said, we're standing under it. And I mean, I think that says everything, honestly, because at the end of the day, our customers don't want to mess around, Tom. I mean they're extremely serious. They're dealing with what they consider to be mission-critical applications. They're trying to drive efficiency and productivity in their process. They're trying to get these jobs done extremely safely and effectively. And they know that Enerpac will help them do that the most effectively. Could they have saved money by going to a different competitor and knocked $100,000 off the price? Maybe. On a $30 million bridge project, does he really want to risk that? He didn't. And so I think at the end of the day, that's a key competitive advantage for us is just what we're known for, but what we stand behind, and that's reflected in the premium nature of our price position in the markets, and you can see that in our gross margins. And then there are many other aspects to our competitive advantage beyond that, right? Our product portfolio, as I said, 30,000 SKUs, 400-page catalog, really unparalleled, right? So in terms of breadth and depth of offering. And customers, all else being equal, they prefer to have a one-stop shop and go to one company to get all that stuff. Well, the chances are best, they're going to find that all with Enerpac versus any other one of our competitors in the marketplace. And by the way, the channel partner network, hugely relevant key competitive advantage I talked about earlier for us, our global coverage. I mean, we operate in over 100 markets globally. We're there where customers need us. And probably the most underrated but really important critical element of our competitive advantage is that technical and applications expertise. So again, that is something a lot of our end customers rely on because in the world of high-pressure hydraulics, this is not a space that a lot of customers interact with on a daily basis and don't know a lot about. They're not -- they don't consider themselves experts. So when they need to understand how to get a job done, they call our folks to do that. We're extremely well-known for our technical and applications expertise. And at the end of the day, when they call us and we specify it, then they know exactly what to go buy and chances are they're going to go buy Enerpac.

One more member question from OP asking about your expansion acquisition, European market focus, operating in over 100 companies. Is the world order being rewritten right now with tariffs? And what are the implications for you and the impediments if deglobalization policies continue, what way does that impact Enerpac to the extent that you are able to even project what the policies will be?

Yes, sure. I mean, obviously, a lot of that is unknown, right? But what I can tell you is we are a global company, but we operate globally. So we have teams of sales and service people around the world. We also offer -- manufacture globally, right? So we have manufacturing facilities here in the U.S., in Europe as well as in Asia, and we do a lot of regional for regional work. I think we're relatively well positioned to be able to respond to market needs and the changing market forces and the different dynamics that we see that are currently out there. So certainly, could we face challenges? No doubt. I think our team is probably as best placed as anybody is my personal belief to deal with them. Certainly, from a cost, supply chain, manufacturing perspective, we do have the opportunity when it makes sense to be able to move supply chain components, sourcing and manufacturing elements around, and we'll respond appropriately as we need to. We won't be knee-jerk about that, of course. We need to have a little bit of clarity around the rules of the game that we're playing to make those decisions. But I think we'll certainly be able to -- we are prepared to be able to operate in different markets and manufacture in different parts of the world. And then from a commercial perspective, again, I think we've got an offering and a value proposition that is, in my view, unparalleled. So I think customers will continue to seek that out. If we need to cover the on cost that we see from a more tariff-heavy environment, and we can't absorb that directly through productivity initiatives, we'll certainly look to pricing where we need to do that, and we have in the past, where we've seen tariff or other inflationary pressures, we have moved to pricing. And typically, I will say Enerpac is pretty well positioned. Obviously, nobody is immune to these sort of environments, and it's not like we're inelastic. But given the mission criticality of where our customers use our products, given the premium nature of where Enerpac plays in the market and the strength of our brand and product portfolio and our positioning today, I think we're pretty well positioned to be able to react through pricing actions if we really need to.

Paul, just putting on your crystal ball -- looking into your crystal ball here, the next 3 years, how do you see your markets rail, infrastructure, wind, whatever it might be, how do you see them shifting in the biggest ways? What are the things that when you look ahead for the next few years, you're already starting to think about strategically to prepare for?

Yes. Well, I mean, we're bullish about a lot of our end markets. And I think, again, that is the benefit of Enerpac is even one market may not be performing as well. We're so diversified that we can offset that oftentimes in other parts, unless obviously, if we're in a global recession, maybe all bets are off like it is for everybody. But the reality is we're not overly exposed in my view to one single end market. So I think what we're most bullish about are the key verticals that we're focused on. So infrastructure, we've sized that SAM, served addressable market to be close to $1 billion. We think that's a high growth, high single-digit growing end market for all the obvious reasons around government investments. infrastructure upgrades that are happening in so many parts of the world, and we're extremely well positioned to continue to serve customers and gain share. The rail sector likewise, I mean, there's a lot of investment activity happening in rail, not only here in the U.S. but in many parts of the world for aging infrastructure, similarly, maintenance away, but also for safety, for performance improvement. And one of the interesting things that you see in the rail sector is particularly in maintenance is there's kind of a whole cohort of maintenance and production folks that are sort of retiring and moving out of that world. And they can't necessarily find the same level of talent and capability to backfill that or said differently, not the same people that want to do the work the same kind of way that the previous generation did. I mean we have customers in the rail space that are literally performing jobs like in kind of stone-age fashion. I mean, with sledge hammers and fire, like literally, right? And when we can and we do and we have brought technologies that allow them to eliminate all that nonsense and to do a job much quicker, much more effective, much more -- much safer fashion, customers leap at the opportunity to adopt those technologies. And the new generation of cohort that's coming into these sectors like rail that's working on maintenance, they don't want to swing a sledge hammer and do things the way it was done 50 years ago. They just want easy button with the new safer, more effective technology. So we like the rail sector for that reason. Frankly, even the wind sector. And I know in the current climate, the outlook may not be as robust here in the Americas market. But I think abroad, it's still incredibly strong. There's still a need for more energy and more clean energy. We see continued investments and ramp happening in the wind sector in Europe and even parts of Asia. And we think that's a sizable growing market that we continue to be very successful in.

We're going to close with the game, like the prior game that I played, I'm bringing up a screen share here. And this -- what you're looking at, if you can see these numbers is your entry in a field of 2,500 companies capitalized under $3 billion that our AI-powered systems have scored. So we have AI engineers around the world. We're processing thousands of financial filings simultaneously. I mean, over minutes, right? And we're able to prompt against them, organize our formulas for how we evaluate the business. So there's the blend of our human analysts and investors with our styles of investment and our beliefs around cash flow generation, valuation, product quality, market share gains, et cetera, et cetera. So we have our whole system scoring it. And so here are Enerpac scores. I want to walk you through them in here. Any reflections you have on them, you don't have to have any. But first of all, your super score, which is the unifying score across all is 92, 92nd percentile actually out of 2,500 companies puts you in 26th place overall or 27th place overall out of 2,500 companies in the overall score. So that, in part, is how I found -- actually, that is how I found Enerpac. I would not have found Enerpac without AI systems using our formulas to score across thousands of companies, how could I go through all those businesses. So it's a different world of investing now. Your financial score is 89th percentile, governance, 90th percentile. Governance is looking at off-party, off-balance sheet related party transactions, executive compensation, accounting standards, et cetera, et cetera. Your growth is in the 83 percentile, round it is actually a formula, return on unlevered net tangible assets, telling us how much operating income you draw out of your physical asset base. Ownership, 78th, which is one of your lower scores because you don't have a founder that owns 23% sitting as CEO. We would actually love it if your comp package gets you to 23% ownership because we'll know what has happened in that case, given the great exec comp structure that you all have at the Board level. Command is really speaking to the fragmented nature of the market, right? It's difficult to have a high command score in a fragmented market. So actually in the 49th percentile compared to other companies, actually because there are small companies that dominate very small niches. So that's just a little context on that. And then obviously, you have your dividend and in the category that you're in. We can actually compare you against other categories in the industry, but I'm not doing that now, and we're running out of time. But any reflection on any of these scores, Paul?

Well, I would say, first and foremost, thank you. And we're pleased with the progress we've made, and I think that's certainly reflected here in some of the analysis that you and your team have done. And that's great. So that's wonderful to see, but that's all in the rearview mirror. We're super excited around what's to come for Enerpac. We believe we have an extremely strong and ambitious growth agenda, both organic and inorganic. We think we've got a great story to tell. We think it's really an exciting investment thesis for both current and prospective shareholders. my team would probably be remiss, they know I'm competitive. So I'd say it's great that we're at #25. I want to know who the other top 25 are above us because we've got to do better to climb that rank a little bit more. But that's what we get up every day, and that's what our team goes to work to do, to work for our customers, to work for our shareholders. We've driven substantial cultural change in our company for the positive over the last 3.5 years. We have a winning culture. People enjoy what they do here. We have fun along the way. We like making things happen for our customers. We love delivering value for our shareholders, which at the end of the day is one of the key reasons we're here. And so yes, we're just thrilled with what we've done, but also, frankly, more so, what's yet to come.

Well, Paul, thank you so much for this hour. We came in with strong conviction about Enerpac, and that has only increased, because Andy and I have been slacking behind the scenes as you've been providing your answers talking about how aligned we feel with what it is that you're creating together with your team at Enerpac. So thank you so much for the hour and continued best of good fortune for you and your company there in downtown Milwaukee. Maybe we all need to go to a brewers game at some point.

You're welcome any time. Come visit.

Thank you, Paul.

Thank you, guys. Thank you for having me. Appreciate it.

Thank you. Cheers.

All right, Andrew. I know we have Jose coming in and Toby, and they'll just enter in the game here. But maybe we'll eat up a minute and 28 seconds of your time just to hear Andy's reflections on Enerpac. And I don't know if either of you had an opportunity. I know you've got full schedules otherwise, so you probably weren't able to see that interview. But we'll start with Andy and then see if we have any closing reflections.

Yes, I thought it was great. He...

Would you say if you didn't? That's one of the difficult things, right? Would you actually say -- I thought that was a really lousy interview and I'm troubled.

We've had not great interviews before. And I mean, right? Yes, I think I would, yes, like just the fact that he continued to demonstrate the -- and showcase some of the factors of the success he's had since he and that team came in a few years ago and started to transition some of those financial and strategic and cultural changes that they put into in a very fragmented market, very international, which was a surprise to me before Tom, I started studying with you. So I thought he provided the context that I was looking for, especially some of the details around their strategies around acquisitions and the way they've operated the business. So I really enjoyed and definitely learned some things that continue to boost my confidence in the company.

Now we put them on the spot unfairly. Toby, Jose, were you able to see any of that? If not, that's fine.

No. I caught the tail end of it. And it's not a company I know a ton about yet, but it seems like a very interesting company to look into. I wonder, I don't know if you guys talked about the tariff situation at all during the course of the day.

A little bit.

Is that how it impacts them going forward. It could be an opportunity, right? It could be an opportunity for a company like this to pick up some market share and -- that would be good.

I'll close by saying, oh, Jose.

I was just going to say the thing I found pretty interesting was just the way you found this company and how AI is just changing this whole investing game and the kind of full tool you mentioned there.

Well, we use in hidden gems, the PGI, the potential growth indicator, which is our market indicator, which actually is leaning more favorable for long-term investment now, up around 13%, which would suggest there's more cash on the sidelines than normal. We could actually play a little bit of offense here while the world is getting nervous about the immediate scenario simulations that they're running. But if you look out 5-plus years, and believe in the market system, then you have a little bit more cash on the sidelines than normal. And that cash is going to come back in the equity markets at some point. So you might be getting some nice valuations. Okay. All of that is to say that I found Enerpac when the reverse was true when there was a little bit less cash than normal on the sidelines, and Enerpac is qualified by our quant team as a moderate investment. And that's how I close our time together, Andy, and hand the hour back to Jose and Toby and looking forward to this hour so much is just to say that if you're looking for moderate investments or even cautious investments, use those classifications at the full. They're helpful that they're there. Obviously, they're just a starting point. But in the case of Enerpac, I think you're kind of looking at a company that could do 11.5% to 13% annualized returns over the next 5 years. Maybe lower, obviously, global recession, like bets are off on what -- but I think it's a mild market beer. I think it going to be like 12.2% a year and the market is up 10.2% a year, right? And that's 2 percentage points of outperformance and -- which is wonderful on its own. What you get alongside it is a lot of stability in the operating model and the cash flow. So it's not a wild ride. It's not like, oh, I hope this such and such AI company that's coming public is going to be a 30 bagger. You're not going to get that from Enerpac. But if you're looking to stack some of your portfolio or a significant section of your portfolio around a moderate, stable business that is run so effectively and so strong -- such strong financials, I think Enerpac is definitely a worthy candidate. So...

By the way, just very quickly, Bard, if you want to just share my screen, I'll pop that up. So you can just quickly see what Tom was talking about. This is Enerpac on our ticker page, the moderate down here to the left, estimated annualized returns of 1% to 22% with an estimated max drawdown of minus 37%. Of course, they're all estimates, not predictions. Nothing is guaranteed, but just give some idea, some context that Tom was talking about specifically about our Enerpac recommendation there.

1 or 2 percentage points of outperformance over 20 years, that adds up.

Absolutely. I'm sure the Bordelon portfolio has demonstrated that with a number of positions.

Indeed, indeed. There are some winners in there. There are some losers, too, that's the way it goes.

We'll take that math though. We'll take that math. All right, gentlemen, thank you very much for this hour ahead. And Andy, thank you so much for all the prep work in the interview.

Thanks, Tom. Have a great show you guys. Thanks a lot.

All right. Thank you.