Enerpac Tool Group Corp. ($EPAC)

Hello, and welcome to Enerpac Tool Group Second Quarter Fiscal 2026 Earnings Call. Please note that this call is being recorded. [Operator Instructions] I'd now like to hand the call over to Darren Kozik, CFO. Please go ahead.

Thank you, operator. Good morning, and thank you for joining us for Enerpac Tool Group's Earnings Call for the Second Quarter of Fiscal 2026. Joining me on the call today is our President and Chief Executive Officer; Paul Sternlieb. 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 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, Darren, and thank you, everyone, for joining us this morning. As we look back at our Second Quarter of Fiscal 2026 performance, there was a lot to be pleased about. Within our Industrial Tools & Service segment or IT&S, product sales accelerated growing 6% organically year-over-year. That represents the highest growth in products that we've enjoyed in 10 quarters since the fourth quarter of fiscal 2023. Through February, we saw some strengthening in the U.S. market with the [ PMI ] reflecting 2 consecutive months of expansion in the manufacturing sector. Likewise, U.S. industrial distributor survey data through February suggests improving sentiment. At Enerpac, we continue to see favorable trends with overall product order rates growing mid-single digits and gains in each of our 3 geographic regions. Within our Services business, which represented approximately 20% of the IT&S segment in fiscal 2025 we took decisive actions to address the market slowdown in the EMEA region that has weighed on overall growth and profitability. With the announced restructuring, we are rightsizing our [ Hydratight ] service operation in the region and reducing headcount to align with current market conditions. The restructuring will also support our strategic transition toward higher-margin service business and profitable growth objectives. At the same time, we are very pleased to announce a 5-year contract award with a major oil and gas company operating in the U.K. North Sea. Under that contract, which is worth several million dollars annually we will provide maintenance and pipeline service work. I'm particularly proud of the fact that we were able to secure this win against significant competition. Much like the Premium Enerpac Tool Brand our [ hydro type ] brand on the service side is synonymous with superior technical know-how, value-added support and world-class job performance. In fact, the customer indicated that [ Hydratight ] was selected for this critical work as they felt we are the only ones who could ensure reliably leak-free results. With that, let me turn the call over to Darren, who will provide more detail on our second quarter performance as well as geographic and end market trends. Then I'll come back to talk about our progress on the innovation front and our successful presence at ConExpo. Darren?

Thanks, Paul. As seen on Slide 4, Enerpac's second quarter revenue of $155 million expanded 2% on an organic basis. IT&S sales increased 1% organically as a 6% gain in product sales was offset by a 17% decline in service revenue. And while there's still softness in the industrial MRO end market, we continue to enjoy growth in power generation, infrastructure and defense end markets on a global basis. At Cortland, shown in the other segment, we continue to capture exceptional growth of 27% in the second quarter due to its ongoing success generating new projects. Turning to Slide 5, which shows our performance by geography. We delivered solid 4% growth in the Americas. Year-over-year growth of nearly 6% on the product side with particular strength in standard products was somewhat offset by an 8% decline in service revenue. On the product side, we were particularly pleased with gains we made with national accounts. Turning to the EMEA region. Let me first draw your attention to the pie chart on Slide 5, which shows the revenue breakdown between product and service for each region in fiscal 2025. Of note, it illustrates the greater relative importance of service in the EMEA region and how its performance significantly affects overall results. As such, while product revenue expanded 7% in the EMEA region, with gains for both standard product and HLT, second quarter revenue in the region was down 1% due to a 21% decline in service revenue. Geographically, on the product side, while conditions were soft in Northern Europe, Southern Europe enjoyed good performance including some project work on the power generation side. In Asia Pacific, we resumed modest growth, led by our products business. While we continue to experience weakness in China, there were several bright spots. In India, we had another strong quarter growing double digits due to strength in steel, process industries and heavy equipment manufacturing. And in Australia, we continue to benefit from recovering in the core mining sector as well as healthy demand from oil and gas. Turning to Slide 6. Gross margins declined 410 basis points year-over-year. While gross margins on the product side remain at healthy levels, overall gross margins were under pressure due to lower volume in our service business. On the other hand, SG&A expense continued to reflect a disciplined cost management and benefit from moving resources to our low-cost shared service model. As such, adjusted SG&A declined to 26.4% of revenue compared with 28.3% in the year ago period. As a result, the adjusted EBITDA margin was 21.3% compared with 23.2% in the year-ago period. We enjoyed margin improvement in the products business. However, that benefit was offset by pressure in the service business and to a smaller extent, an FX impact of roughly 50 basis points. On a per share basis, we reported earnings of $0.31 in the second quarter of fiscal 2026 versus $0.38 in the year ago period. On an adjusted basis, earnings were $0.39 in both periods. In the second quarter, we booked a restructuring charge primarily related to the service business, totaling $3.3 million. We expect to see the initial benefit of the savings in the third quarter and anticipate a payback period of about 1 year. Turning to the balance sheet, shown on Slide 7, Enerpac's position remains extremely strong. Net debt was $89 million at the end of the second quarter, resulting in a net debt to adjusted EBITDA ratio 0.6x. Total liquidity, including availability under our revolver and cash on hand, was $499 million. Cash flow was strong with year-to-date cash flow from operations of $29 million compared with $16 million in the year ago period. In addition, year-to-date free cash flow expanded by $18 million from $5 million in the first half of fiscal 2025 to $23 million in the first half of fiscal 2026. During the quarter, we returned significant capital to shareholders, repurchasing $51 million worth of stock. Out of the $200 million authorized by our Board in October of 2025, approximately $135 million remains, and we will continue to opportunistically repurchase stock. Looking ahead, while our product business remains strong, the service side of our business continues to experience pressure in the near term. Additionally, we recognize that the evolving conflict in the Middle East could have a direct impact on our business in the region as well as potential ramifications as it relates to global inflation and economic growth. As such, we have narrowed the guidance range for fiscal 2026. We are now guiding to a full year net sales range $635 million to $650 million that represents organic sales growth of 1% to 3%. But keep in mind that growth rate is composed of solid product growth in the mid-single-digit range or even a bit better, which is offset by projected service contraction in the low to mid-teens range. We are now guiding to adjusted EBITDA of $158 million to $163 million and adjusted EPS of $1.85 to $1.92. We held free cash flow guidance at $100 million to $110 million, given our strong cash flow generation year-to-date. As we look forward, the restructuring and rightsizing of our EMEA service operations will establish a more competitive cost structure and a platform for growth. In addition, through the execution of Powering Enerpac Performance or PEP, we see further opportunities to improve operating efficiency with our continued focus on procurement and the productivity of our manufacturing footprint, which supports our healthy product business. With that, let me turn it back to Paul.

Thanks, Darren. As you may know, we recently exhibited at ConExpo, North America's largest construction trade show. Attendance and engagement were extremely strong. At the event, we demonstrated our latest infrastructure lifting and smart transport solutions, including several newly launched innovations. The conversations with customers were very productive resulting in some meaningful orders booked at the show itself. And this was the first major U.S. trade show where we exhibited our [ DTA ] automated guided vehicles. Among featured solutions included on Slide 9 were a new line of split flow pumps, the diesel-powered split flow pump, which we added with the recent acquisition of the [ Hydro pack ] assets, enables operation without an external power source. As such, it provides greater mobility and application flexibility, which can be a significant advantage for customers across many end markets including infrastructure and power generation. We also introduced our battery split flow pump. Not only does it allow for operation without a power source, but it also enables to use and enclosed spaces by eliminating emissions and significantly reducing noise. And we also showcased and launched our Intelli Lift 2.0 wireless gantry controller. With this controller, Enerpac has introduced the world's first software-defined wireless and scalable heavy lift control platform capable of operating up to 8 hydraulic gantry legs in synchronous fashion, from a single control unit. It also provides the foundation for recurring software updates, multi-application expansion and long-term ecosystem value. In addition, we launched our new Cribbing Rings, our updated Skid Track system and a new Lightweight Toe Jack. These products are just a sample of what's come from our increased and more focused investment in innovation an effort that continues to respond to our customers' needs and build the strength of the Enerpac brand. Before we open the call to your questions, I'd like to thank our team across the globe. I applaud their talent and dedication. I also appreciate each and everyone's role in building a culture of ownership, accountability and teamwork here at Enerpac Tool Group, particularly rewarding on a personal note, is the way our employee engagement scores have improved every year since 2022 and now exceed industrial manufacturing industry benchmarks. It is our people and shared culture that make Enerpac a premier industrial solutions provider. With that, we'd be happy to take your questions.

[Operator Instructions] Your first question comes from the line of Will Gildea of CJS Securities.

Can you talk about how much of your business comes from the Middle East? And are you seeing an impact in the region due to the current conflict?

Yes, sure. So revenue from the Middle East by the way, including product and service is about 10% of our total revenue for the company. What I'd say on the impact, I mean, we don't obviously know how long this conflict will last and if it would materially impact our outlook for the year. But certainly, it does create a greater level of uncertainty, no doubt. We have seen, since the conflict with Iran, some pause and service work in the Middle East mainly due to inability to access facilities, customers shutting sites or deferring work. And I would say largely, we believe that's work that's been pushed to the right. That work will need to take place. In some cases, given some of the damage to facilities, there'll be more work post the conflict. But beyond the Middle East itself, of course, there are impacts more broadly from higher oil prices inflation general economic headwinds that the conflict has created. So what I'd say and what I've said to our team is we're working on what we can control, which is obviously keeping our people safe in the region which we are doing and have done, and certainly trying to proactively identify additional commercial opportunities on a global basis to mitigate any impact to our business.

That's super helpful. And on the updated guidance, can you provide some more detail on your expectations? And maybe talk about how you're thinking about the cadence from quarter-to-quarter?

Sure. Will, as we kind of look at revenue, I would say in the first place, as we talked about our product business is very strong. IT&S product in the first half is up 5%. We expect to see mid-single-digit growth for that business for the total year. So we've been very pleased with that performance. On service, we have continued pressure in the third quarter, okay? But we expect to see a little bit of a rebound in that business in Q4. And as you saw in our prepared remarks, we think that business for the total year will be down a decline of the low to mid-teens, okay? So that's the framework for a revenue perspective. As we look at gross margin, we expect to see sequential improvement into Q3 and then into Q4. That's coming off of roughly 46% and just north of that in Q2. So we expect to see that improvement in the second half. SG&A, when we look at that, obviously, our goal is simple, to maintain or improve SG&A as a percent of sales for the year. So I think that's kind of the framework we have on the lines of the P&L. Obviously, from a free cash flow perspective, strong, strong performance, $23 million, up $18 million year-over-year. So we held that guidance. As we step back, I think we look at the business, we still see opportunities to improve the margins, okay? We are looking at the service business. We've got ongoing initiatives and procurement that are manufacturing footprint. And obviously, we have [ hep-running ] to improve those margins in the second half. That's kind of the framework and how we think about the business.

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

This is [ Sam Carlo ] on for Ross. I guess starting on the HLT business. I'm curious, specifically, have you seen any project slowdowns as a result of the macroeconomic uncertainty over the past month or so?

No. Nothing to date, Sam. In fact, our HLT business remains, I would say, quite strong and healthy, good backlog. It's a product line where I would say we're extremely differentiated we continue to see really robust engagement with customers, good order rate activity. We are also encouraged by activity we see, particularly for HLT in the data center end market. Although still a relatively small portion of our overall revenue as a company today, we do see good upside opportunities, and we did have good engagement with customers at the ConExpo Show in Las Vegas, specifically around data centers, including some repeat orders.

Got it. That's good to hear. I guess switching gears a little bit. We noticed there was some incremental M&A costs as well as some sizable share repurchases in the quarter. Can you give us an update on what your M&A pipeline looks like and maybe update us on your near-term capital allocation priorities?

Yes, absolutely. I can talk about some of the M&A and Darren can talk more broadly around capital allocation. But I think clearly, value-creating M&A remains a very key focus and key part of the overall growth strategy for the company. We continue at any point in time to evaluate interesting opportunities that we think could be value creating and could have synergies and good strategic and financial fit with our company. Yes, we did incur some more significant costs in the quarter related to different opportunities that we've been evaluating. I would say that we continue to have and cultivate a fairly robust funnel. And at any point in time, we are having a good number of ongoing discussions at various stages of evolution with different target opportunities. Obviously, it's -- we can't really comment more specifically, but I do feel that the M&A environment overall is robust, that our funnel is extremely robust and that we're spending certainly appropriate time engaging on that in the marketplace and with particular targets. And of course, as you know, we've got a balance sheet to support from a capital perspective, really anything that we think would be appropriate for the company and our shareholders.

Yes. Thanks, Paul. I'd just add from a capital allocation perspective. Sam, our first priority is obviously investing organically back in the business. You'll see our CapEx trends there. We want to improve our operations, whether it be IT or in the factory footprint, we are doing that CapEx in the first priority. I would say then secondly, when we see an opportunity in the market for share repurchase, we'll take it. We obviously saw some of that in Q2. But that doesn't prohibit us from other activities. I mean you can see our leverage at 0.6x, you can see we haven't tapped the revolver. So we've got plenty of firepower left for M&A. So we're really consciously balancing all those activities across those 3 priorities.

Got it. That's good color. And then quickly one more. Maybe comment on the size and strategic fit of the Hydra Pac acquisition. It sounds like you guys have added some products using that platform.

We did. That was really effectively a small tuck-in. It was an asset purchase, really not material in terms of the cost for us to acquire that. But it is a partner we've worked with for a long time. And that particular product line is very additive to what we do. It is a specific gap we had in our portfolio on split full pumps powered through alternative sources, in this case, diesel for portability and remote site applications. So we're extremely pleased to get that across the finish line and to be able to announce and show it at ConExpo where we actually did get quite a degree of interest. It's been a product that's been in the market and successfully so for quite a number of years, but we do believe Enerpac's global presence, our distribution network and the -- just the strength of our brand overall that we can continue to grow that product line much more significantly. So we were super excited to get that over the line.

Your next question comes from the line of Tom Hayes of ROTH Capital Market.

Thanks, guys. Good morning. On the service business, I know you guys have taken -- I think you mentioned 2 restructurings in the past year. Can you maybe just talk about the scope, the payback and kind of where you have the service business position now?

Sure, Tom. We did take 2. Our first was in the third quarter of 2025. Now what I would say, that was roughly a $6 million charge, but only about $4 million of that was related to people. That was really global reductions and some of those activities just take time to mature through the business. So as you saw in Q2, our SG&A was rather favorable versus prior year. So we're starting to see some of that come through. Overall, that restructuring had about a 12-month payback, okay? Then just in this quarter, we announced another restructuring of just over $3 million. That was primarily tied to our service business. We've seen some pressure there, specifically in Europe and the Middle East. So we did make those adjustments. Now what I will say is that chart, the benefit of that will flow through both direct costs and SG&A just given the nature of our service business. So we think from a service perspective, we've got the right footprint now. Obviously, Paul talked about the big deal we've won. So -- and even in our guidance, we think 3Q is going to be tough, but 4Q should be a rebound in our service business. So we think we're in a good spot.

Okay. I appreciate the color. And it was a really nice catch up with you guys at ConExpo. The booth was great and seemed busy for the days I was there. But I was just wondering, can you provide a little bit more detail on the pace of the introductions? The new products kind of -- should we expect some impact to the top line this year? Is it more of a next year contribution from the new products?

Yes. Thanks, Tom. Yes, we were extremely pleased with the team's progress on innovation and our ability to launch quite a number of new products at the ConExpo Show, 6 in total. Those are all really new to market opportunities, not only for Enerpac but in most cases, new to the world in terms of differentiation on the product lines. And we talked about that in our prepared remarks, but some of these are really exciting, extremely differentiated technology that just isn't available to customers today until we launch. So the team has done a great job there. You can see that we're picking up and accelerating the pace of innovation. Last year, we launched 5 new products in fiscal '25. I think we said last quarter, we hope to come close to doubling that. Obviously, we're well on pace. First half of the year with 6 already launched. We do have more products planned for launch in the back half of this fiscal year. So stay tuned on that. But I think that is the benefit of our very focused investment that we've been making in innovation, the investments we made behind our innovation lab, [indiscernible] headquarters in Milwaukee, our pro type facilities, et cetera, that's really allowing us to dramatically increase the pace of innovation and reduce the time to market, just with the ability to do prototyping kind of on the fly in real time and effectively overnight in many cases on parts. So in terms of the incremental revenue as typical for our markets and Enerpac products. Most new products we launched, frankly, take multiple years to ramp for a few reasons. One, it's just the nature of our end markets seeding these products and customers taking time to understand them and then to trial them and then ultimately buy them in bigger quantities. Secondly, of course, we globalize them over time and commercialize them in different regions where we're operating in. And that does take time for us to be able to, in some cases, get certifications and get inventory levels at the appropriate amounts depending on the country or the region. Even with products that we've launched over the last 2 or 3 years, we continue to see those ramp commercially quarter-over-quarter. So we will see some revenue benefit, I believe, in the second half of this year from these products launch, but it's not going to be hugely meaningful. Again, we expect to see more significant benefit over the next 12, 24, 36 months.

Okay. Great. I appreciate the color. And maybe if I could just throw one more in there. Is there anything you can talk about a little bit about the new U.K. service contract, maybe timing of when that's going to begin and kind of any expected financial impact?

Yes. We were, again, very pleased with that, very competitive process, great customer. And as we referenced, this is a 5-year award that we were given that is worth several million dollars per year. And we were awarded really on the basis of our technical proficiency and world-class performance. And so -- that is, I think, extremely exciting. We do expect to start to see revenue flow from that contract in Q4 of this fiscal year. And as I said, that will run for about 5 years. And of course, that's not the only thing, obviously, in that market we've been working on as we referenced in last quarter's call. Although we've had our challenges in the service business in EMEA, particularly, our team commercially has been hard at work and trying to offset that with additional opportunities. And this is just one great example we wanted to highlight that we thought was quite meaningful.

[Operator Instructions] Your next question comes from the line of Steve Silver of Argus Research.

Paul, it was great to hear about the strong leads and the industry response coming out of ConExpo. I'm curious, including the new leads that you've also previously discussed coming out of the DTA acquisition, can you discuss a little bit about the current lead pipeline versus any historical trends there?

Yes. Steve, thanks for the question. Yes, I would reference back actually to our Enerpac Commercial Excellence or ECX program. And that has really been the foundation that we've set for Commercial Excellence and how we drive kind of lead management lead cultivation here at Enerpac globally across all our regions. And we've really seen that significantly strengthen, I'd say, over the past year. That's a program that we built proprietary for Enerpac. We first rolled out in the Americas region and then over the last year or so more globally. We use that to manage our funnel process and drive lead conversion. But with our CRM, we use [ Salesforce.com ] to track all of our leads globally. We can get real-time dashboards on quantity, quality of leads, conversion rates, days on stage, all sorts of interesting stats that give us kind of some leading indicators around health of our pipeline. And what I'd say broadly is that's looking quite favorable. And then, of course, you see that more of a lagging indicator in order rates, which again, we referenced in our prepared remarks, the order rates in the quarter were strong with strong growth in every single region year-over-year. So I'm really encouraged by the progress that our team has made commercially on ECX. I think it is having a real impact for us is driving focus on our commercial team and it's making sure that we follow up in a timely manner as we generate new leads. We also have some interesting opportunities, by the way, where we're piloting some implementation of AI in our business, specifically on the front end around lead generation. And I think we'll see that continue to bear some additional fruit for us in terms of new lead identification qualification over the next few quarters.

Great.And one more, if I may, for Darren. The tax rate -- the tax guidance range for fiscal 2026 is pretty fairly wide at this point. While you narrowed the guidance range operationally is there anything you can discuss in terms of jurisdictions or any puts and takes around the tax guidance range at this point of the year?

I think from an overall tax guidance perspective, we kept the range. There's obviously tax planning that's underway and it's always difficult to determine when some of those things will happen. So we do keep that range a little bit wider. From One Big Beautiful Bill perspective, we don't see a significant impact on rates, a little bit of benefit on cash there, which we baked in our guidance, but we did hold that rate at 21% to 26%.

Thank you. I'd now like to hand the call over to Paul for final remarks.

Okay. Well, thank you again for joining us this morning, and if you have any follow-up questions, please feel free to reach out directly to Darren, and have a great day.

Thank you for attending today's call. You may now disconnect. Goodbye.