Ladies and gentlemen, thank you for standing by. Welcome to Enerpac Tool Group's First Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, December 19, 2019. It is now my pleasure to turn the conference over to Barb Bolens, EVP, Corporate Strategy, Investor Relations and Communications. Please go ahead, Ms. Bolens.

Thank you, Donna. Good morning and thank you for joining us for Enerpac Tool Group's first quarter 2020 earnings conference call. On the call today to present the Company's results are Randy Baker, President and Chief Executive Officer and Rick Dillon, Chief Financial Officer. Also with us are Bobbi Belstner, Director of IR and Strategy; Fab Rasetti, General Counsel; and Bryan Johnson, Chief Accounting Officer. Our earnings release and slide presentation for today's call are available on our website at enerpac.com in the investor section. We are also recording this call and will archive it on our website. Please go to Slide 2. During today's call, we will reference non-GAAP measures such as adjusted profit margins and adjusted earnings. You can find a reconciliation of non-GAAP measures to GAAP in the schedules to this morning's release. We would also like to remind you that we will be making statements in today's call and presentation that are not historical facts and are considered forward-looking statements. We are making those statements pursuant to the safe harbor provisions of federal securities law. Please see our SEC filings for the risks and other factors that may cause actual results to differ materially from forecasts, anticipated results or other forward-looking statements. Consistent with how we have conducted prior calls, we ask that you follow our one question, one follow-up practice in order to keep today's call to an hour and also allow us to answer questions from as many participants as possible. Thank you in advance for your cooperation. Now I will turn the call over to Randy.

Thanks, Barb, and good morning, everybody. We are going to start today on Slide 3, but before Rick reviews the first quarter results, we would like to take a moment to recap our Investor Day on November 14. Our first quarter marks the beginning of our new pure-play tool company with 110 years of history, outstanding employees, and more than 2,000 dealers dedicated to serving our customers worldwide. The Enerpac brand strength and reputation of precision, quality, and safety is the cornerstone of our company and fundamental to our command in market share. The strength of our profitability lies in the composition of our revenue coming from high margin tool and rental sales, representing over 80% of our business, and the combination of a strong brand, participation in 13 vertical markets, and financial results has created a top-performing industrial tool company. Now turning over to Slide 4. Our strategy to achieve sustainable growth through disciplined capital allocation remains consistent. Our investment in organic growth continues to deliver results, and as we enter a more challenging market conditions, these investments are even more important. Our new product contributions to sales in the quarter increased over 10% and has moved quickly towards exceeding our 10% goal. Achieving sustainable growth above market conditions is fundamental to a great company, and we have made significant progress towards this objective. During the quarter, we repurchased 840,000 shares, returning value to shareholders, and repaid our term loans. As a result, our net debt position is at a low point, providing future flexibility for both organic and acquisitions growth. As described during our Investor Day, we have developed a strong pipeline of potential acquisitions which support our tool growth objectives. However, acquisitions will always be subject to strict investment criteria and evaluation of the impact of the…

Thanks, Randy, and good morning, everyone. Before we dive into the results for the quarter, I wanted to call out a few of the items included in the adjustments for one-time items on the GAAP to non-GAAP reconciliation in the appendix. First, we've completed the sale of ECS and all of the strategic exit product lines discussed last quarter. Our portfolio actions are complete, and we are positioned to focus on strategy execution going forward. We received $9 million in proceeds from the product line divestitures during the quarter. These proceeds were offset by the net assets associated with the product lines resulting in a net gain of $1 million. Let's move on to the fourth quarter results on Slide 6. Sales of $147 million were higher than our guidance for the quarter. Core sales were flat in the quarter and in line with our expectations. As Randy mentioned, we exceeded our new product vitality goal of 10%, and we believe this achievement along with the improvements we have made in our overall commercial effectiveness is allowing us to outperform the market. Globally, tool sales remain challenged, consistent with global economic indicators and our market outlook for fiscal 2020. Adjusted EBITDA margin improved in the quarter by 100 basis points. The effective tax rate for the quarter was approximately 12% higher than the prior year, but lower than our guidance. The rate for the quarter reflects the timing of new regulations, which had been expected later in the year, so our guidance for the year remains 20%. Despite the higher effective tax rate and the lower sales volume, strong year-over-year margins delivered slightly higher EPS compared to 2019. At $0.12 per share, we were at the top of our guidance range. So turning to our sales waterfall on Slide 7.…

Thanks, Rick. Let's move over to Slide 11. Market conditions continue to be volatile due to the uncertainty in a trade agreement and the exit of the UK from the European Union. In the quarter, PMI index has improved slightly from increased order demand, but forward trends remain consistent. The European trade area is the weakest performing market, while North America experiencing sluggish growth. Enerpac dealers remained very conservative and actively constraining new product inventory. Of the 13 vertical markets, three are positive while the remainder are experiencing a moderate decline. As a result, our forward core sales expectations remain unchanged from the fourth quarter guidance. On a consolidated basis, we expect full-year results to be down 3% to up 1%. Now moving over to Slide 12. Our 2020 fiscal full-year guidance remains unchanged at between $575 million and $600 million with adjusted diluted EPS of $0.68 to $0.81 per share and free cash flow between $50 million and $75 million. The second quarter is traditionally our weakest sequentially and we experienced tougher service comparisons due to large projects in Q2 of 2019. Based on this, our second quarter sales are expected to be in the range of $133 million to $140 million, which includes the impact of $12 million of strategic exits. Adjusted diluted EPS will be in the range of $0.08 to $0.12 per share, and our tax rate assumptions for the year remained consistent at 20%. In summary, we are off to a good start in our new fiscal year and the launch of the Enerpac Tool Group. We are making significant progress towards cost reductions and creating a more efficient and profitable company. And with that from all of us here at Enerpac, we'd like to wish our investors and employees a safe and happy holiday season. And Donna, let's open it up for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Ann Duignan of JP Morgan. Please go ahead.

Hi. Good morning, everybody and happy holidays to you guys.

Good morning, Ann.

I guess, Randy my question of you – my first question would be, could you give us a little bit more color in terms of the 13 verticals, only three are positive? Was that a North America comment, or was that a global comment? And then how did you see end market demand progress kind of the cadence as you went through the quarter would be helpful. Thanks. And then, obviously, address the Boeing 737 MAX both direct and indirect, and I'll leave it there. Thanks.

Okay. All right. Thanks, Ann. So from the 13 verticals, the markets that’s still seem pretty good is obviously aerospace. We see still quite a bit of growth in our aerospace markets. We also see pretty good activity in the civil construction, civil engineering realm. There's still a lot of activity in Europe in that area, especially in wind energy, and that certainly helps. And then on non-traditional energy sources, as Rick mentioned in the earnings call, we do have some nice order activity in the nuclear sector for refueling operations. So of the major verticals, we still like some of the alternative energy. We like – certainly, aerospace and civil construction around the world continues to be reasonably well. The rest of them, we could spend an hour going through each individual one, but they're all, and you’ve seen some of the reports that would indicate they're down a bit. So on the 737 MAX side, obviously, they have about 400 planes parked right now. I think the exact number is about 387 that are parked. Boeing has got about 400 sitting in their delivery queue. And the issue there is they still haven't come up with electronic fix that I think the FAA is acceptable with and I haven't read all the details on it, but clearly they still haven't matched an electronic solution. So to the extent that they have to retrofit all those engines from the CFM LEAP to something different, which would go back to the original CFM56. That could create an enormous remanufacturing opportunity for re-man centers all over the North America and the world market. So obviously, we participate in that aerospace, but certainly Boeing has to answer those questions on what the plan is going forward, whether it's an electronic fix or a structural fix to the aircraft.

Is your exposure right now to the reduction or the production stop indirect and direct, I mean that the whole supply chain is going to be impacted. So could you talk about your participation broadly in that market?

Yes, our primarily participation is in the jet engine, and we make torque turning devices and torque tension devices for the assembly of the entire Boeing and Pratt & Whitney product lines and even into the Rolls-Royce, but to a lesser extent. So our exposure is purely on the engine side. There are tools that are used in Boeing operations in their assembly lines and in the MRO centers around the world, but the biggest exposure is on the engine. We haven't felt anything in that area. In fact, our aerospace deliveries are still pretty good.

But you would be impacted by the shutdown – if they shutdown the engine assembly, the GE engine assembly?

Yes. If there's a demand for changing from the LEAP back to the CFM56, then certainly that would change some of the demand from our perspective. It's hard to really recommend how that's going to affect us in the long run, because that type of a fix is a massive expense to Boeing if they have to do it. But from our perspective, it's still very healthy and no – I don't believe there's any decremental headwinds that could occur from the 737 MAX. I think largely for our company, we could see some upside if retrofits are required.

Okay. Maybe I don't fully understand, but I don't understand if GE shuts down their engine assembly facility supplying the MAX wouldn't you be impacted? And I'll leave it there.

Well they're converting over to – they’re going to be getting different types of aircraft, whether it's – I've seen some reports that they're converting orders from 737s to 787s. And then if they're converted over to Airbus, that's a different story. We are in a lesser extent supporting those factories. But again, we haven't seen any major impact to us, and we're not predicting anything that would fundamentally hurt our sales volume going forward.

Okay. I’ll leave it there. And in the interest of time, I appreciate the color. Thank you.

Okay. Thanks, Ann.

Thank you. Our next question is coming from Jeff Hammond of KeyBanc Capital Markets. Please go ahead.

Hey. Good morning, everyone.

Hi, Jeff.

Good morning.

I just want to understand a little bit better the cadence of the runoff of the strategic exits. I think you said 10 this quarter, 12 next quarter. I mean does that step up into the second half or are we still looking for $55 million? And then can you just talk about the service comp or remind us the service comp in 2Q and kind of around that what we should expect for the service business into 2Q? Thanks.

Sure. So from a strategic exit perspective, Q2 and Q3 would be the strongest impact, and that's consistent with the growth we saw in service in those quarters last year. So we said $12 million for Q2, it's about $15 million for Q3, and then it starts to decline similar to the trends you saw in last year. So it's about $10 million in Q4. I think that adds up to 55%. So that's kind of the pace you should see. If you remember from our Q2 perspective, that was a – from a core perspective, that was one of the best quarters we had in the history last year. So when you look at service side that it was up in the low-20s last year, so a significant growth quarter in the second quarter, and that was driven by – we had those large projects that really kept us a float last year in terms of outsized growth. That's what really drove that high turnover in Q2 of last year. So if you fast-forward to our guidance for service in Q2 that's why you see such a forecasted low Q2 core growth assumption. So that comp is just – it’s huge. It pulled out the strategic exits, but the large projects were very significant in the quarter last year.

Okay. So the tool piece is kind of continuing at that kind of low single-digit decline rate into 2Q.

Yes.

Okay. And then just a couple of cleanup items just with the changes. Can you give us what do you think the go-forward run rate is for interest expense kind of given that the ECS sale? And then I think you were planning a step down in the corporate expense. How should we think of 2Q corporate expense and kind of full-year?

So I'll start with corporate. And what we said about corporate is this year is primarily the elimination of the ECS stranded costs. So we've got roughly $9 million of cost that we're taking out and that will occur essentially even over the next three quarters. So there's some variable corporate, but I think from a guide perspective, we’re really factoring in about $9 million. And so from an interest expense perspective, it should be about $5 million a quarter is how you should look at that and that's down from the prior year due to the payoff of the term loan.

And then just one more, 2Q tax rate. It looks like…

20%.

Okay. So it just – run rate at 20% for the rest of the year.

Essentially yes.

Okay. Thanks guys.

Thank you. Our next question is coming from Allison Poliniak of Wells Fargo. Please go ahead.

Hi, guys. Good morning.

Good morning.

Just following up on Jeff's question with corporate expense, it does seem like you've added some as well in terms of corporate development. I mean is there a better way for us to think of it? And just – I know some of those costs are coming out, but just – I don't know, quantify how what's going into that number going forward or how we should think about an exit there?

Sure. We haven't really – from a base perspective, I think you should still think about corporate as about $30 million. What you're seeing on the corporate development piece is we do still have hangover ECS acquisition costs. That transaction is behind us as of the end of the quarter. You'll still see some straggling SAE cost associated with that as we progress, and that's in the guide. But from a go-forward steady state, as you're modeling, it's $30 million is what we have out there as the corporate piece.

Got it. Thanks. And then I just wanted to turn back to the new product development comments you had said. Obviously, you're driving a little bit higher sales for you. And you commented that it was helping you to grow above market. Is there any way to help quantify that?

Yes. We have been pushing really hard and we finished last year in high-single digits. And this is the first quarter that I can remember where we have now exceeded the 10% mark. And so when you think about 10% of your revenue that's popping from the new NPD, new products that didn't exist in prior cycle, and they are helping us grow. That's fundamentally a nice thing to have. So you can easily do the math even if it's just a flat 10%, you can see the impact on the quarter is significant and the margins are in line average of where we like it. So it is definitely helping us to stabilize market condition, excites dealers keeps the field sales force, excited about going out there and talking about something new and make their jobs easier. And quite honestly, when we get our promotional activities correct and have to place demo units in the right hands, it can generate some nice orders for us. So it is a very important part even more so in a down market because that's what really helps you out.

Got it. And can I assume that they're all in the Tools segment?

Yes. So I can't give you the exact split, but when we review that monthly on exact composition of the NPD contribution, so we had some torque and tension. And just to be clear, when we completely redesigned one of our wrench lines, we didn't include that. So it was a product we called the RSL wrenching part of Hydratight. When we redesigned it and re-launched it, we did not include that in our NPD, so it's not paint in details that you're talking about here, it's truly good new launches. So torque and tension has some nice launches. We had some things in our machining business that were new. We had some things in lifting that were new. We had some new cylinders that came to the market and we had several brand new pump platforms that launched. So it was very broad. And we're starting to see a performance at all of our major design platform. So we still have some that are lagging others, but clearly the culture of being innovative is starting to really move.

Great. Thank you.

And we are taking time to do that.

Great. Thanks.

Thank you. Our next question is coming from Mig Dobre of Robert W. Baird. Please go ahead.

Good morning, everyone. It's Joe Grabowski on for Mig this morning.

Good morning.

Good morning. I wanted to start with Q2 guidance. Obviously, you didn't have Q2 guidance out there prior, but Q2 guidance EBITDA and EPS was below consensus, and seems to imply a low 13% margin similar to Q1, and then that implies 20% EBITDA margin in the second half. I would have thought we'd see some sequential EBITDA margin improvement for no other reason that the stranded costs and corporate should start to go away. So talk about Q2 guidance and then what drives the ramp from 13% in the first half to 20% in the second half?

Well, couple of things. The ramp isn't that unusual. I think what's driving Q2 is the significant drop in the topline. And so obviously you’re losing some contribution margin. And as we talked about those larger service jobs that we had last year, we're in a region where service profitability is a little bit above – actually is quite a lot higher than what I'll call normal run rate service. So I think for the most part it's the combination of the lower sales volume and it's much lower than last year when you look at strategic exits. And the mix of the volume that’s out versus the volume that we expect in Q2 are all driving lower contribution to a fixed cost base despite the – call it 4 million ECS stranded costs. And so when you look at that from a year and kind of do the math, you will have as we always do a much better margin performance in the back half of the year.

Okay. Thanks for that color. And maybe to just get specific then on corporate expenses, how much will they go down in Q2 versus Q1? It sounds like maybe not the entire $3 million, but how much do they stepped down?

You've got the – call it, $3 million, $4 million from the TSA, but we still have – we haven't as we talked about – I talked about on the margin lock, we haven't been able to take significant actions to actually take down that $30 million, if you will, for a couple of reasons. As I mentioned, you're going to have some corporate development stuff floating around as we wrap up the ECS – fully ramp up the ECS activity. We are providing the subject of the TSA and the TSA income is what's kind of help – causing us to keep our corporate group intact, so that we don't impact our ability to deliver which is contractual at this point. So we didn't and don't have significant true corporate cost, structural cost takeout factored into the 2020 guide. Maybe some opportunities as I said before and we will take those as they come and certainly through the year as ECS is able to come off the TSA. If they're able to move earlier than we’re able to move earlier on cost takeout.

But you get the full TSA in the second quarter?

Yes.

Okay. All right. And then just one quick follow-up in the other segment, Cortland. Operating margin, EBITDA margin took a step down versus the last three quarters of last year, is that just seasonality or anything else, maybe any special items, special expenses in the first quarter?

Well, you've got some expenses associated with the consolidation there that are draining some of that operating profit and net income. But as Rick mentioned, once we wrap up that the business starts really performing quite well especially once we get into Q3 and Q4. So those expenses that are associated in that $5 million cost, a chunk of that or one-time expenses that won't reoccur.

Got it. Okay. Thanks for taking my questions. Happy holidays.

Yes.

[Operator Instructions] Our next question is coming from Justin Bergner of G Research. Please go ahead.

Good morning, Randy. Good morning, Rick.

Good morning.

Good morning.

A few questions here. I guess to start, I think you said in the prepared remarks that the core sales delivered in line with your expectations in the quarter and they were helped I think by one factor. I just wanted to sort of clarify if that was the case and maybe if you could just reiterate what that factor was that helped in the quarter that goes away?

I think core sales were in line with our expectations. I think what we said is, what Randy just talked about. It was helped consistent with our expectations of – for NPD vitality as well as commercial effectiveness and the notion that we would outgrow the market. There was no specific item that's going to go away to hurt us.

Yes. That’s not a one-time project or an order sitting there that would be somewhat unusual. It's just the performance of the general businesses was fairly broad, and then we had good NPD performance. And so when you add it all up, we’re able to outperform what we believe is a fairly difficult market in some parts of the world.

What we did say relative to the tools business as we did have a order flip out of Q1 to Q2. And despite that, the core for the year will remain as we expected. There is a little bit of a flip there, but not impacting our expectations for overall quarter during the year.

Okay. So that was the – was that in the energy side that flipped from Q1 to Q2?

It was power-gen.

Okay. I wasn't sure if there was something you said in regards to the energy.

Power-gen order that changed quarters.

Okay. I guess my other question was, with respect to the EC&S sale, I think you said that EC&S consumed a decent amount of working capital in the first quarter. Do you get that back as part of our working capital adjustment in the sale or is that…

Keep in mind any working capital adjustment is that based on historical targeted working capital as of the close of the transactions. So we have a target out there and we'll settle that here at some point in the coming months. So the point of calling that working capital build out is just reemphasizing that when you look at a standalone pure play tool company as it always has been. The ECS business is far more – was far more working capital intensive and was not the driver of the strong cash flow for this business. If you just look at that working capital use alone and apply that to the cash used in the quarter, it kind of really emphasizes that for you. So it's not a dollar for dollar return because it's based on average working capital on a historical level.

Okay. So some of that working capital usage in the first quarter sort of works against the sales proceeds from the ECS transaction?

No. We normally have working capital build if you will for both businesses in the first quarter. The working capital build is normally significantly more weighted to ECS. That has no impact to – certainly not a negative impact to the proceeds from the business. There is a working capital settlement that, again, we're not anticipating that is significantly good or positive. There’s nothing right now suggesting that it's negative, but that settlement will happen when it happens. So proceeds out of proceeds, we're not expecting some significant adjustments to those proceeds. The only reason we talked about the contribution of ECS to our cash usage, so that as you think about modeling this business going forward and what the first quarter and second quarter which are typically used quarters will look like, it will be significantly better than it has been historically, and the numbers you are seeing here are still on a consolidated basis, which include ECS through the first quarter.

Okay. Thanks. Let me just rephrase my question one more way and then I'll get back in the queue. Working capital that was consumed for EC&S in the first quarter, you will not get that back or materially get that back in any settlement?

No.

Okay. Thanks.

But just to be clear that is not – does not have any impact and should not be reflected as having anything to do with the transaction proceeds. That is normal. And through the close date, we conducted business as we would normally and we set working capital based on continuing business as usual. So we delivered the working capital that would have been expected, that's contemplated by the sales transaction.

Thank you. Our next question is coming from Stanley Elliott of Stifel. Please go ahead.

Hi, good morning. This is Brian Brophy on for Stanley. Just had a question about Cortland that had nice strength on the topline in the quarter. Can you talk about what was driving that? And then guidance for the year implies a pretty sharp deceleration for the remainder of the year. Any color on what's driving that as well? Thanks.

The Cortland that the main driver is we've seen some pickup in our cabling product line in the industrial side of the business, and obviously very, very strong sales on the medical side of the business. So it was a nice mixture of things. We certainly like to get the med side growth, and that has been, as we’ve mentioned in the Investor Day, it's been in the double-digit category for a while. So very, very good business for us. And as to your second question on deceleration, there's no – I don't think – maybe you're reading the charts wrong, but there's no contemplates deceleration there.

Okay. And then given that you guys are now below your leverage target, could you talk about any thoughts, updates on capital deployment? How we should be thinking about that for the remainder of the year and related, what's then the status on the M&A pipeline? Thank you.

So the capital allocation priority won't change our primary things. We have to evaluate all the uses of capital of how we invest in ourselves, what we do with share buybacks. You saw that since the fourth quarter of last year, we've repurchased close to 2 million shares. I think the actual share count would be close to 1.9 million shares of repurchase. So we've been able to really return a lot of value to shareholders in that methodology. Clearly, our debt reduction benefit us in terms of ongoing interest expense and improving that. Every piece of that equation now has well positioned this business to be a very top performing from a balance sheet. So going forward, we are going to be extraordinarily disciplined on our inbound M&A. We have a pipeline that we've developed. There will be things that we talk about in future quarters. But now that we have finished the transactions, we've got the company where we want it, we've got the balance sheet cleaned up, we're in a great position, we want to keep it that way. And as I mentioned in my commentary, ultimately keeping it between 1.5 and 2.5 is the run rate – is the number that we’d like to keep it at. I'd say in the short-term, you're going to see it stay well below one for some time.

Perfect. Thank you. I’ll pass it on.

Thank you. This brings us to the end of the question-and-answer session. I would like to turn the floor back over to management for any additional or closing comments.

Thank you, everybody for joining us today. We appreciate your interest in Enerpac Tool Group, and we wish you all happy holidays.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect or log off at this time, and have a wonderful day.