Enerpac Tool Group Corp. 2026 Q4 Earnings Call

Good morning, and thank you for joining us for Enerpac Tool Group's earnings call for the fourth quarter and full year fiscal 2026. Joining me on the call today are President and Chief Executive Officer, Paul Sternlieb, and our Chief Financial Officer, Darren Kozik. On today's call, we will reference non-GAAP measures. You can find a reconciliation of GAAP to non-GAAP measures in the press release issued yesterday, and in the appendix of today's presentation. Yesterday, we also issued a separate press release announcing the completion of our acquisition of SFE Group. Our comments will also include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include matters noted in our latest SEC filings. The slides referenced on today's call are available in the investor relations section of our website, which you can download and follow along.

A recording of today's call will also be made available on our website. I will now turn over to Paul.

Thanks, Christian, and good morning, everyone. As you saw in our earnings release, we ended fiscal 2026 on an extremely strong note. Revenue in the fourth quarter exceeded our expectations, with 10% organic growth in our Industrial Tools & Services or IT&S segment. That gain was driven by exceptional performance in the Americas. Moreover, we enjoyed strong sales gains in both IT&S's product and service businesses in the quarter. And while near-term uncertainty remains on the service side, given the fluid situation in the Middle East, we are encouraged by its progress in the fourth quarter as the actions we have taken to transition to a higher margin service business while improving its cost structure are clearly beginning to show results. In fact, the organic growth in the service business has improved sequentially every quarter in fiscal 2026 and turned sharply positive in Q4.

Fourth quarter momentum drove record annual revenue of $652 million, our highest since the relaunch of Enerpac Tool Group in 2019, with full-year organic growth of 4%. While full-year margins remain impacted by several factors, which Darren Kozik will address, we delivered robust cash generation in fiscal 2026, with free cash flow up 30%, which positions us for better than anticipated balance sheet leverage following the acquisition of SFE. As announced yesterday, we are very pleased to have completed the acquisition of SFE Group with the closing effective October 28th. We will share a lot more about SFE, the synergies we are targeting, and the status of our integration progress at our upcoming Investor Day in New York next week. This morning, Darren Kozik will walk through our fiscal 2026 performance, provide details on our balance sheet and the SFE transaction, and introduce our fiscal 2027 guidance.

Then I will come back to give a preview of our next generation profitable growth strategy, which we call PROPEL, and highlight our successful innovation program.

Darren? Thanks, Paul Sternlieb. Turning to slide 4, we finished the year with strong momentum.

In product, growth was led by the Americas, supported by demand from data center build-out, power generation, and defense, and by the continued traction from the launch and commercialization of our newer products. In service, the actions we have taken are clearly beginning to show results, and the business grew nicely in the quarter, reversing the decline we saw over the first nine months of the year. Cortland extended its run of double-digit growth as it continued to win new customers and projects. As shown on slide 5, the Americas led our growth in the fourth quarter, with strong gains across standard products, Heavy Lifting Technology, and service.

In addition to benefiting from a strengthening U.S. industrial sector and reshoring activity, we continue to make inroads into growing end markets, including infrastructure, data center build-out, power generation, and defense. From a commercial standpoint, customer reception to our newer products continues to gain traction. We secured major contract wins, and we qualified for additional approved vendor lists. Notably, to continue to position us well for serving the U.S. defense sector, in the fourth quarter, we received CMMC certification, which is the U.S. defense's cybersecurity compliance program. In EMEA, our standard product business grew in the fourth quarter. Our HLT business remained solid, but declined against a difficult comparison, given a series of large deals in the prior year. The underlying trends are positive for this business.

Finally, despite continued challenging conditions in the Middle East, service revenue in EMEA grew for the first time in fiscal 2026, helped by LNG maintenance and shutdown work. In APAC, we saw strong product momentum in India, Korea, and Australia, along with Heavy Lifting Technology wins, including E-movers and gantries, while the service business was impacted by macro and geopolitical events. Please keep in mind that given the relatively small size of the business in APAC, quarterly results will fluctuate. Notably, all three regions saw strong double-digit order rate growth in the quarter. Turning to slide six. For the full year fiscal 2026, our product business drove growth across IT&S, reflecting accelerating investments in Enerpac Commercial Excellence, or ECX, and innovation.

That more than offset the decline in service revenue, which was affected in part by our inability to access certain geographies in the Middle East due to the conflict, as well as the softer North Sea market in the first half of the year. Combined with another standout year at Cortland, Enerpac delivered total organic growth of 4% for the year, with currency adding roughly two points to reported growth. Turning to slide seven. For the full year, the Americas drove our IT&S growth up 10%, led by Heavy Lifting Technology as the U.S. benefited from a strengthening industrial sector and reshoring activity. In EMEA, full year organic revenue declined 3%. Standard products and Heavy Lifting Technology both grew.

That growth was offset by service, which was pressured in the first half of the year by our U.K. business and the continued customer consolidation in the North Sea, which we have previously discussed. However, we are pleased to report that the major win secured in the second quarter continues to ramp well. In addition, the conflict in the Middle East continues to create uncertainty in our business. Overall, slower economic growth across Europe weighed on results. That said, we have seen solid order flow in the EMEA region, with strength in the infrastructure market and large orders from the defense industry that will be beneficial in fiscal 2027. In Asia-Pacific, organic revenue declined 1%, as growth in Heavy Lifting Technology was offset by lower service revenue. Looking ahead, we are encouraged by strong order rates and new product momentum in India, Korea, and Australia.

Stepping back, it's important to note that nearly half our business, prior to the addition of SFE Group, was generated from the Americas region, which we believe provides significant benefits over the next several years, particularly given the strength of the U.S. economy and industrial sector. Moreover, the skew to the Americas will be further bolstered by SFE Group, where roughly 74% of its revenue is generated in the Americas region. Turning to slide eight, gross margin declined year-over-year, impacted by mix and higher bonus expense in the cost of goods sold. The increase in adjusted SG&A as a percent of sales was driven by investments in our new strategy and higher bonus expenses. We are proud of the fact that all permanent Enerpac employees are covered under our bonus plan, which rewarded the team for strong performance in fiscal 2026.

As a result, our fourth quarter adjusted EBITDA margin was 22.6%, compared with 26.5% in the prior year quarter, which was the highest margin quarter of fiscal 2025. Turning to slide 9, for the full year, gross margins were negatively impacted by mix, given the higher growth rate of our Heavy Lifting Technology business and dilution from our service business. Overall, EBITDA margins were also impacted by our increased investments, including higher R&D and incentive compensation, as well as investments in continued operational enhancements. As we move into fiscal 2027, we will drive opportunities to improve asset utilization and further optimize our manufacturing footprint. Turning to slide 10, our asset-light model continues to generate strong cash. Fiscal 2026 free cash flow of $120 million expanded 30% year-over-year, driven by strong collections activity, inventory management, and reduced cash taxes.