Enerpac Tool Group - Q1 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to the Enerpac Tool Group's First Quarter Fiscal 2024 Earnings Conference Call. . As a reminder, this conference is being recorded December 20, 2023. It's now my pleasure to turn the conference over to Travis Williams, Director of Investor Relations. Mr. Williams, please go ahead.

Travis Williams (Director of Investor Relations)

Thank you, operator. Good morning, and thank you for joining us for Enerpac Tool Group's First Quarter Fiscal 2024 Earnings Call. . On the call today to present the company's results are Paul Sternlieb, President and Chief Executive Officer, and Tony Colucci, Chief Financial Officer. Our slides and a recording of today's call will be available on the Enerpac website in the Investors section. 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 risk 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.

Paul Sternlieb (President and CEO)

Thanks, Travis, and good morning, all. Following on the heels of Enerpac's strong financial performance in fiscal 2023, we started fiscal 2024 with another solid quarter. While we remain cautious as to how the full year will unfold, given the economic and geopolitical uncertainty, we are affirming our full-year fiscal 2024 guidance. Our results clearly reflect the continued benefits of our Ascend Transformation program, our four pillar growth strategy, and the changes across the organization that are making Enerpac more efficient, more productive, and easier to do business with. As you can see on slide three, first quarter organic revenue, what we previously referred to as core revenue, was up 5.5% from the year ago period to $142 million. Moreover, we captured significant improvement in operating and SG&A efficiency.

With that, Adjusted EBITDA expanded 31% to $35 million in the first quarter of fiscal 2024, enabling us to achieve an Adjusted EBITDA margin of 24.6%. I'll let Tony review our first quarter performance and fill in the details about the positive year-over-year gains. Then I will speak about geographic trends, provide some details about a few exciting areas of our growth strategy, and introduce our estimates of revenue breakdown by end market. Tony?

Tony Colucci (CFO)

Thanks, and good morning. We are now on slide four. As Paul said, Enerpac enjoyed solid top-line growth and outstanding EBIT expansion in the first quarter of fiscal 2024. Reported revenue growth of 2% year-over-year reflected the sale of the Cortland Industrial business in the fourth quarter of fiscal 2023. On an organic basis, which excludes divestitures and the impact of foreign exchange, revenue expanded five and a half percent. For the industrial tools and service segment, organic revenue growth was 5.8%, comprised of a 4.5% increase in product revenue and a 10.1% expansion in services. The segment enjoyed a positive contribution from price as well as volume and mix. Overall, Enerpac revenue growth was slightly offset by a 2.3% decline in Cortland Biomedical.

The expected decline was primarily a timing issue related to some specific customer programs. On slide five, from a profitability standpoint, gross margins expanded 360 basis points to 52.3% in the first quarter of fiscal 2024. This was driven by the continued success of our Lean initiatives, focus on operational excellence and price benefits. Among our initiatives, we improved freight expense by optimizing routes and renegotiating rates. Gross margins also benefited from the divestiture of the Cortland Industrial business. Similarly, we continued to benefit from initiatives that improved our SG&A efficiency. SG&A expense declined 21% year-over-year, primarily due to lower Ascend charges. Adjusted SG&A expense, which excludes Ascend and other one-time charges from both periods, declined 5%.

This benefit was achieved by streamlining our organizational structure and offshoring certain finance and IT functions, along with further optimization of all back-office functions. On an adjusted basis, SG&A was 29% of sales, down from 31.2% of sales in the year ago period. As we have said, our financial framework goal is to bring our SG&A spend in line with best-in-class industrials, and we continue to move in that direction. Turning to slide six, with both top-line growth and margin expansion, adjusted EBITDA increased 31% year-over-year. Adjusted EBITDA margins expanded 550 basis points from 19.1% in the first quarter of fiscal 2023 to 24.6% in the most recent period. On a GAAP basis, diluted earnings per share from continuing operations totaled $0.33 in the quarter.

Adjusted EPS increased 34% year-over-year to $0.39, compared with $0.29 in the prior year. This increase was primarily the result of EBIT expansion, along with a lower share count and despite a higher but more normalized adjusted effective tax rate of 21.9% in the first quarter of 2024, compared with a 15.6% rate in the year ago period. We continue to expect our adjusted effective tax rate for the full year to be in the 20%-25% range. In the first quarter of fiscal 2024, operating cash was a use of $7 million, resulting from higher Ascend-related cash payments and the timing of the cash bonus payment. In fiscal 2023, the bonus was paid out in the second quarter.

On slide seven, as we have discussed, Enerpac's strong liquidity and balance sheet support our capital allocation priorities, including internal investments to drive organic growth, strategic acquisitions, and opportunistic share repurchases. At the end of the first quarter, net debt was $97 million, resulting in a net debt leverage ratio of 0.9x Adjusted EBITDA. Total liquidity was approximately $500 million. Additionally, we have the option in the credit facility to request an M&A accordion up to $300 million. As previously mentioned, with a full-time corporate development leader in place, we are actively exploring acquisition targets while adhering to our disciplined financial and strategic criteria. During the quarter, we returned $26 million to shareholders through the repurchase of approximately 1 million shares. At quarter's end, we had about 3 million shares remaining against the 10 million share board repurchase authorization.

With that, let me turn the call back to Paul.

Paul Sternlieb (President and CEO)

Thanks, Tony. As we discussed on our year-end fiscal 2023 call, we streamlined our organization into three geographic regions: Americas, EMEA, which includes Europe, Middle East, Africa, and Asia Pacific. The realignment has enabled some early cost synergies. We anticipate additional cost savings as well as revenue synergies going forward. In the Americas, we continue to see a neutral to cautious sentiment among our channel partners, who are generally expecting low single-digit growth in calendar 2024. The mid-single-digit organic growth experienced in the first quarter was broad-based across our verticals, with strength in construction, wind, and rail. Overall, we believe channel inventory is appropriate, with perhaps a few exceptions. In our newly combined geographic region, EMEA, we had solid top-line growth in products and services, yielding organic growth in the high single digits.

While, as previously discussed, we exited certain low-margin service business in the Middle East, we more than offset that with new projects. Looking forward, overall dealer sentiment is neutral to cautious. The Asia Pacific region saw low single-digit organic growth in the quarter, but strong order growth, which should translate to solid revenue growth in subsequent periods. We're encouraged by the pace of investment activity and inquiries associated with infrastructure spend in Japan, power plant investment in China, and wind opportunities, especially in India. Switching gears, as you know, Enerpac's highly diversified end market participation adds stability and provides growth opportunities. We know that investors are interested in greater insight into our end market mix. To that end, we've developed our best estimate of Enerpac's revenue by vertical market, which we show on slide nine.

As you can see, oil and gas, which is primarily downstream, along with the general industrial sector, are our two largest end markets. As it relates to our targeted verticals, rail is included in the infrastructure category, which total about 9% of sales in fiscal 2023. Wind is included in the power generation sector, a 10% category. The other category includes the company's exposure to shipbuilding, automotive, aerospace, off-highway vehicle repair, military, paper and wood, marine, and rescue. Finally, I'd like to provide some color on two of our growth pillars, innovation and expansion in Asia Pacific. On the innovation front, as we've mentioned, over the past two years, we have reconfigured our new product development program with a disciplined process and roadmap focused on customer needs and aligned with our four key vertical markets.

For example, we recently launched two new battery-powered portable pumps, rounding out Enerpac's best-in-class cordless pump portfolio. These pumps have competitive advantages in terms of speed, runtime, and oil capacity. They're capable of serving applications across a wide array of end markets, with clear advantages within the MRO, rail, and wind sectors. And we believe these battery pumps can take share from competitors in applications where small electric or air pumps are currently being used. Moreover, these products are equipped with Enerpac Connect, allowing customers to receive detailed product information, perform firmware updates, and track service records. In Asia Pacific, as I mentioned, we're excited about infrastructure, power plant, and wind projects in the region.

One of the images on the slide shows the critical role of Enerpac equipment in use at the Narita International Airport in Japan, where a 450-ton overpass road bridge was removed ahead of a planned runway extension. Lack of space prevented the use of a crane for the bridge removal. Instead, our customer used Enerpac JS-500 jack-up units mounted on self-propelled modular transporters to remove the entire bridge overnight, thus minimizing traffic disruption on the expressway. We're also advancing the rollout of our second brand, Larzep, a mid-tier offering targeting a relatively untapped market segment, which we believe could be roughly on par with the size of the premium segment on a dollar basis. To date, we've signed up several new distributors and are pleased with early order activity. We've also added new commercial leaders in Southeast Asia to help accelerate growth.

We're leveraging our Enerpac Academy in Singapore to train new distributors and customers in the region, drive demand, and build brand loyalty. As we know from our experience in other regions, providing training on our equipment is a critical component of customer engagement and penetration. As you can see from our performance, this quarter and over the past two years, Enerpac is capturing consistent benefits from our Ascend transformation initiatives, our growth strategy, and the programs we've implemented to enhance operating efficiencies. We are confident that there is more to come as we work to achieve our long-term financial framework. Before we open the call to questions, I'd like to extend my sincere thanks to our global workforce for their deep commitment to our customers and for advancing the initiatives that are making Enerpac a premier industrial tools and service business. Now, we'd be happy to take any questions.

Operator (participant)

Thank you. We'll now be conducting a question-and-answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. One moment, please, while we pull for questions. Our first question today is coming from Tom Hayes from CL King. Your line is now live.

Thomas Hayes (SVP and Senior Analyst of Industrials)

Hey, good morning, guys. Thanks, for taking my call, and congratulations on the start to the year.

Paul Sternlieb (President and CEO)

Thanks, Tom. Good morning.

Tony Colucci (CFO)

Hi, Tom.

Thomas Hayes (SVP and Senior Analyst of Industrials)

Morning. Hey, Paul, I was wondering if you could give us a little bit more color or detail on the market conditions in the Americas. It sounds like, you know, you were up mid-single digits for the quarter. It sounded like maybe you outperformed the market a little bit. I think you mentioned that the expectations from some of your customers were low single-digit growth for the year. I was just wondering, any other color you can give us as, you know, market conditions as it's, you know, your largest region there?

Paul Sternlieb (President and CEO)

Mm-hmm. Sure. Yeah. I think as I mentioned in my prepared remarks, you know, what we hear from channel partners is probably more of a neutral to cautious sentiment, and that's really not new. We've been talking about that for several quarters, and we referenced that they are, you know, for their business overall, generally expecting kind of low single-digit growth in calendar 2024. We did outperform that. I think the strength of our business globally and certainly in Americas is that it's very broad-based. You know, we are quite diversified in terms of end markets, and I think, you know, we're still quite bullish about what's to come yet from the infrastructure bill. Still early days here in the U.S.

Wouldn't say we've seen any significantly meaningful impact, but you know, our expectations are that that will become a nice tailwind for us, you know, in the coming quarters and years. So I think we remain, you know, optimistic, despite some of the cautious sentiment that we hear from our channel partners.

Thomas Hayes (SVP and Senior Analyst of Industrials)

Okay, fabulous. And then, Tony, maybe on, on the strong gross margin performance, certainly outpaced what I was expecting. You know, any granularity that you could provide as far as, you know, you called out several drivers of, of that and just, you know, any color there? And then maybe just touch on the sustainability of that margin rate. Is that something that, we should, we should start thinking about for the balance of the year as far as, you know, margin trends? You know, certainly, probably not that much of a quarter-over-quarter, improvement. Just any thoughts you can give us on, you know, gross margin rates as they trend through the year?

Tony Colucci (CFO)

Sure. Yeah. I mean, first of all, we're very happy with the performance on gross margin, you know, 360 basis points improvement there. You know, I would say that pertains to several factors. You know, we certainly have the operational efficiencies that we're seeing to come through via Ascend and other initiatives. I'd also say that, you know, we've stronger mix of more profitable products that we saw here in Q1. And, you know, gross profit will fluctuate throughout the year, you know, with different regional growth rates and mix. But we'll also continue to see benefits through our initiatives, while we still have some investments coming through here in automation and other capacity needs as well.

I mean, it will fluctuate up and down here throughout the year, is what I would say.

Thomas Hayes (SVP and Senior Analyst of Industrials)

Okay. Maybe two more, if I could. One, as I'm still kind of getting a little bit up to speed on the story, you know, is there anything that we need to kind of think about as far as seasonality, as we go through the year? Has anything changed versus previous years?

Tony Colucci (CFO)

No. No changes. You know, still, you know, kind of first half versus second half dynamic that, that we, that we'll continue to see.

Thomas Hayes (SVP and Senior Analyst of Industrials)

... Okay, maybe just last one for me. I appreciate it. As far as wind projects, I think you called out that area seems to be okay, but we've seen some news stories lately pertaining specifically to offshore wind projects. I was just wondering if you could maybe talk about your exposure to offshore wind. It sounds like maybe some of those projects, you know, may be slowing or moving to kind of a pause. You know, is that an issue? Or just any color you can provide on that'd be great.

Paul Sternlieb (President and CEO)

Yeah, sure. So as I mentioned, you know, we've broken out and provided a bit more color in terms of our exposure that we estimate by end market. We show power gen as a roughly 10% category for us, so wind is part of that. So today, wind is still a relatively small part of overall Enerpac revenue, but it is, you know, obviously a meaningful and growing market in our view, that still has very significant potential. And we're still bullish on the sector. We still see plenty of demand for installations. If it's not offshore, it's onshore. We have, you know, good, I would say, connectivity to both. So we're not overly reliant on one or the other, onshore versus offshore. And in fact, onshore makes up the bulk of the U.S. wind power market today.

You know, based on what we see from industry research and experts, the expectation is offshore wind will ramp up again. In fact, you know, there was a recent article published citing some statistics from the Bureau of Labor Statistics, that employment of wind turbine service technicians is gonna increase 45% over the next decade, and that will be the fastest growing occupation in the U.S. So I think just another data point, you know, that gives us increasing confidence over the, you know, over the short, medium, and long term about the, the growth in that sector, just given the dynamics around the, the need for the shift, you know, to clean energy. And I, I think we're incredibly well-positioned to play a meaningful part in that.

Thomas Hayes (SVP and Senior Analyst of Industrials)

Great. Appreciate the color. I'll jump back in the queue.

Operator (participant)

Thank you. Next question is coming from Larry De Maria from William Blair. Your line is now live.

Larry De Maria (Group Head, Global Industrial Infrastructure Equity Research)

Thanks. Good morning.

Paul Sternlieb (President and CEO)

Morning, Larry.

Tony Colucci (CFO)

Hi, Larry.

Larry De Maria (Group Head, Global Industrial Infrastructure Equity Research)

Hey, hello. Hey, just to maybe follow up on that, in the wind, can you maybe talk about the geographical opportunities? I think you mostly were referencing, you know, domestic opportunities, but are there... What does it look like outside of, you know, the U.S.?

Paul Sternlieb (President and CEO)

Yeah. No, thanks for the question, Larry. I think a few points I would make there. So first off, you know, we have broad exposure across the whole, what I would call, life cycle on wind. So we have, you know, established good relationships with OEM wind turbine manufacturers and some of their key suppliers, as well as folks that are doing installation and commissioning, as well as O&M, or operations and maintenance work, and ultimately, you know, even decommissioning of older turbines. So I think we have broad exposure. We're not overly reliant on any single part of that market.

I would say similarly from a geographic standpoint, yet earlier in my comments were about the U.S., but, you know, we have, you know, significant pipeline of activity that we're looking at, you know, in other markets, including in Europe and parts of Asia. So, I think we have, you know, really good broad-based exposure geographically, and we see, you know, increasing interest and investment activity, in different parts of the world for wind. Again, just given the shift to clean energy.

Larry De Maria (Group Head, Global Industrial Infrastructure Equity Research)

Okay, thanks. Makes sense. Second question, you talked about your growth outlook where... Well, you talked about, you know, the orders and, and sort of how to think about, and I guess Europe is most cautious, and there's some optimism brewing in APAC. Can you maybe drill down and give some order of magnitude in terms of, you know, regional growth for the year?

Paul Sternlieb (President and CEO)

Yeah, I mean, we haven't broken it out by region. I mean, you can see what the actuals are. I would say, I mean, the sentiment is, you know, probably similar across Americas and Europe, you know, sort of neutral to cautious, I think we said, in terms of the channel. So, you know, I think, you know, ultimately, we've affirmed our full-year guidance. At this point, we don't have any reason to believe differently, you know, one quarter in. I mean, we're pleased that, you know, this quarter we delivered 5.5% organic growth, you know, above our 2%-4% expectation for the year, but we still have three quarters to go.

You know, we'll see where the dynamics take us in 2024, but I think we're just being mindful of some of that, you know, neutral or cautious sentiment that we hear from the channel.

Larry De Maria (Group Head, Global Industrial Infrastructure Equity Research)

Okay. Makes sense. Last question. You're, you know, obviously good start to the year with, what? 24.6% Adjusted EBITDA margins. We're tracking in on that, on, you know, Ascend targets. So can you just, you know, update how we think about Ascend in 2024 and beyond? And, you know, update—when might we get an update, I guess?

Paul Sternlieb (President and CEO)

Yeah. So again, you know, we're really pleased with the performance that we have here in EBITDA margins in Q1 of the 24.6%. And, you know, it's... We're tracking well in line with what we guided to for the full year. You know, perhaps a bit ahead of schedule from that perspective. Again, you know, we'll have some fluctuations here through the rest of the year in both gross margins and EBITDA percentages with, you know, various timings that we have with, you know, benefits coming through and investments that we're making here as well. But, you know, I would say at least on track with, we're expected to be, if not a bit ahead. So, really happy to see that.

You know, from an Ascend perspective, there are still more initiatives that are coming through. As we mentioned last year, as we ended fiscal 2023, you know, we achieved our Ascend benefits a year ahead of schedule, so we're

... really excited about that. You know, still getting not only the tailwinds from that here in FY 2024, but, you know, new initiatives that that we're executing against. And, you know, as we said in our last call, we're going to, you know, we're not breaking out the Ascend benefits from just natural benefits, as, you know, the business has migrated into just a comprehensive view at this point. So but, you know, still improvements to come, is what I'll say. And, and, you know, we're on track with what we guided.

Yeah, and I, my only comment I would add to what Tony said is, yeah, we're continuing to execute Ascend, but I think he's right. You know, it, it evolves much more into our continuous improvement program and framework. We're pleased with the progress we made, but we still got a very active funnel of initiatives that we're, you know, at various stages of maturity, so we feel good about that. And I would say, likewise, you know, our guidance on... or our financial framework around targeting an Adjusted EBITDA margin of 25% by fiscal 2025, that remains at this point. We've not revised that, but certainly, given, you know, what we were able to deliver in Q4 last year, and this Q1, gives us increasing confidence about our ability to meet or beat that framework for fiscal 2025.

Larry De Maria (Group Head, Global Industrial Infrastructure Equity Research)

Okay, sounds good. Thank you very much, and good luck this year.

Tony Colucci (CFO)

Thanks, De Maria.

Paul Sternlieb (President and CEO)

Thank you.

Operator (participant)

Thank you. Next question is coming from Steve Silver, from Argus Research. Your line is now live.

Steve Silver (Senior Equity Research Analyst)

Good morning, and thanks for taking my questions. So the earnings presentation cites oil and gas and petrochemical as the largest areas of end market exposure for the company. I was just wondering if you could, if you could expand a little bit more on this, as you mentioned that the business operates primarily downstream compared to up and mid. Just curious also in terms of that market's exposure to new builds versus maintenance markets. Just trying to get a sense as to how we should think about the growth in that end market, broadly.

Paul Sternlieb (President and CEO)

Mm-hmm. Yeah. Good morning, Steve. Thanks for the question. Yeah, I think, certainly, you know, it is our largest market. You know, that has come down, I would say, considerably from the highs of Actuant days, our predecessor company. You know, our expectation is that will likely come down further, not on an absolute dollar basis, but as a percentage over the coming years, as we drive accelerated growth in our more focused verticals, like infrastructure, rail, industrial, oil and wind. But in the oil and gas sector today, the majority of what we do is largely in the downstream area of that and a little bit of midstream. It's also largely tied to maintenance. So I would say the exposure to new build-out and CapEx is relatively minimal there.

It's not, not zero, obviously, but most of what we do is tied to maintenance on existing assets. So certainly, oil and gas is a cyclical sector, but by and large, I would say that we, our exposure is the less cyclical part of that overall sector. And, you know, so we'll continue to see some fluctuations of, you know, obviously, given the market dynamics, but, you know, we think we're well positioned, with what we do in that space.

Steve Silver (Senior Equity Research Analyst)

That's helpful. Thanks. And one more, if I may. Regarding the recently announced Track Tools rail acquisition, can you speak to your views on the growth opportunity there and maybe perhaps what synergies you see with the core business?

Paul Sternlieb (President and CEO)

Yeah, absolutely. You know, we're really excited to complete that acquisition. And although it was small, you know, not, not material for us, it is very strategic. Certainly, it's the first of our acquisitions that are linked towards what we're doing, you know, in our focused verticals, in this, in this case, rail. And the exciting part for us about Track Tools is, first, and most importantly, you know, it's very differentiated technology for the marketplace that really creates, you know, some significant benefits and functionality for end users in that space, which obviously was our, our key interest in the acquisition.

I think secondly, although it's a very relatively small brand and business today, and essentially only focused in the U.S., what we're excited about is our ability, you know, to scale that globally, you know, given our presence really in all major markets and our existing customer relationships in the rail sector, in many of those markets, and we're actively working on that as we speak. So, you know, we're excited about the commercial growth potential and frankly, over time, some of the cost synergies, you know, as we can, you know, drive out, you know, some of the, you know, the overall cost of the product and improve the production efficiencies, you know, over time. So, it was a really exciting acquisition. Early days, but we're pleased with the progress we're making.

Steve Silver (Senior Equity Research Analyst)

Great. Thank you so much, and my congratulations on the quarter as well.

Paul Sternlieb (President and CEO)

Thank you very much, Steve.

Travis Williams (Director of Investor Relations)

Thanks, Steve.

Operator (participant)

Thank you. Next question today is coming from Gary Prestopino from Barrington Research. Your line is now live.

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

Hi, good morning, everyone. Just a quick question-

Paul Sternlieb (President and CEO)

Good morning

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

... on your building and acquisition pipeline. Would it be safe to say that a lot of these acquisitions are small, private companies that are very product-specific to your markets? Or are they really across the board in terms of the kind of things you're looking at?

Tony Colucci (CFO)

Yeah. Hi, Gary. So from a size perspective, you know, I would say it's a bit across the board in terms of what our funnel has. You know, I'll go back and just say from what the types of companies that we're looking for are. You know, we're really trying to stay close to our knitting here, is what I would say. And we're looking for product tuck-ins. We're looking for targets that would help us expand in our key vertical markets that we've been discussing. And then, you know, targets that help us expand our technology or innovation here as well. So, I mean, that's what we're focused on in terms of our targets, and that's what we have in our funnel.

Paul Sternlieb (President and CEO)

Yeah, and I would add to that, Gary, you know, our current funnel, I would say both quality and quantity, has significantly improved as we brought on a full-time corporate development leader about half a year ago now, who's, you know, fully dedicated to that. I'd say the second thing is, you know, we have what I would classify as both, both small or medium and larger sized kind of deals in that funnel. So, you know, many of them, yes, could be characterized as, you know, more privately held kinds of businesses. But, you know, we've got all different kinds in there, and we continue to, you know, have good, meaningful conversations. As we know, you know, these things tend to be episodic and depend on asset availability.

We've got a pretty disciplined process from early stage, you know, target identification through to outreach and cultivation, ultimately, you know, transacting and integrating deals.

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

Okay. And then just lastly, on the Ascend program, it was a prior question, where I think you hit, you know, at least this quarter, close to your Adjusted EBITDA margin target. Going forward, as you move from Ascend to maybe just, you know, continual cost control, productivity improvement, whatever, what are you targeting areas that would help to drive the margin even further? I mean, assume that a lot of the low-hanging fruit on Ascend has been taken care of, so what do you bank on to grow the margins going forward? Is it, you know, products, higher margin products? Or are you still able--you're gonna go through a program where you're gonna really tightly control SG&A expenses? Any vision you can give us on that would be helpful.

Paul Sternlieb (President and CEO)

Yeah, sure. I think there are a few things. You know, from a cost of goods perspective, we still believe we have ample opportunities to drive more manufacturing, productivity, and efficiency. Somewhat through investment, as Tony referenced earlier, in automation, other capital investments, and we're actively exploring those. I would say secondarily, we still believe we have opportunities in sourcing. You know, we still have a relatively complex supply chain, and there are definitely opportunities to drive more best-cost country sourcing, more vendor consolidation, more value engineering work. We continue to evaluate our footprints and look for opportunities there.

And then on the SG&A side, as Tony referenced in his remarks, I mean, we're pleased with the progress we've made, and yet I would say we're still high relative to what we see as best-in-class industrials and think there's more opportunities over time to drive greater efficiencies there, as we've been doing. So, you know. And then, of course, there will be some pricing and ultimately mix benefits, especially driven, I would say, particularly by our focus on our core verticals and the work that we do in innovation. I would say, you know, generally speaking, most of our innovation, we would expect to be margin accretive, especially if it is, you know, truly differentiated product in the marketplace, which is really what's in our funnel. So, you know, all that should be favorable over time.

Of course, some of that we may choose to reinvest, to drive accelerated organic growth. You know, so not all of that will drop to the bottom line, but on, on balance, we still see opportunities for margin expansion.

Tony Colucci (CFO)

Yeah, agreed. I would just add that, you know, we have a lot of opportunities and initiatives in our pipeline here across the board. Did a lot of work in, you know, the last two years, but there's still more opportunities that are there, that we are driving. And, you know, we're we really are taking this to the next level here, as well, in terms of the ideation that we have and, you know, just really moving to a continuous improvement type of mindset.

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

Thank you very much.

Paul Sternlieb (President and CEO)

Okay.

Tony Colucci (CFO)

Thanks, Gary.

Paul Sternlieb (President and CEO)

Well, thank you very much.

Operator (participant)

Thank you. That does conclude our question and answer session. Do you have any further closing comments?

Paul Sternlieb (President and CEO)

I would just like to say thanks again for joining us this morning. As always, Travis will be available to take any follow-up questions. Best wishes to everyone for a wonderful holiday season and a Happy New Year.

Operator (participant)

Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.