Enerpac Tool Group Corp (EPAC) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Enerpac Tool Group's First Quarter Earnings Conference call. (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 Investors section. We're 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 1 question, 1 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'll turn the call over to Randy.

Thanks, Barb, and good morning, everybody. We're going to start today on Slide 3. But before Rick reviews the first quarter results, we'd 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 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 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 objectives.

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 tools growth objectives. However, acquisitions will always be subject to strict investment criteria and evaluation of the impact of the growth strategy. The Enerpac Tool Group strategy is clear, and we are not compromising on our objectives to improve this great company.

Overall, we are pleased with the performance of our first quarter as Enerpac Tool Group and the progress towards reducing costs, increasing margins and improving shareholder returns.

Now flipping over to Slide 5. Our 5-year objectives further enhance the quality of Enerpac, and we expect our actions will place us at the top tier of our peer group. Our core growth objectives remain consistent, and we are striving to outperform the market by between 200 and 300 basis points and achieve a 5-year compounded growth rate of 5%. Our investment in product innovation, commercial effectiveness and expanding served industries is the catalyst for achieving this end game.

From a profitability perspective, we have made clear cost actions to achieve our EBITDA run rate of 20% as we exit the fiscal year. As we have described in our Investor Day, we have additional structural and corporate actions to further expand our profitability performance in fiscal 2021. Ultimately, we are very committed to achieving a 25% EBITDA margin.

Our ability to generate strong cash flow is fundamental to our future growth which is why we are improving all aspects of our working capital to drive efficiency and deliver consistent cash conversion above 100%. And finally, we are committed to expanding our return on capital to 20% while maintaining a strong leverage position of between 1.5 and 2.5. The combination of these factors create a very high-value company with lower cyclicality and greater earnings potential.

Over the past 4 years, we have completely repositioned the company as a pure-play tool business and launched Enerpac Tool Group. Going forward, we will continue to increase shareholder returns and never compromise on our pursuit to make the Enerpac Tool Group a top performing company.

I'm going to turn the call over to Rick Dillon, and he will review the details on the quarter, and I'll come back with the market update and guidance.

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 onetime 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 '20. 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. Core sales were flat for the quarter. Both tools and service sales decreased by 1%, respectively. The impact from the strong dollar reduced net sales by an additional 1% and the impact of strategic exits was approximately $10 million. We saw double-digit growth in Cortland medical products led -- during the quarter.

Tool core sales results were varied by region. North America product sales continued the modest deceleration we saw in Q4. Core tool sales were down low single digits, excluding the impact of a large power gen order that slipped out of the quarter but was booked on December 1 and a $1 million decline in heavy-lift product sales attributable to timing and the lumpy nature of the category. The low single-digit decline is consistent with our expectations for the year and what we are hearing in the market. Our distributors are reporting mixed results, with certain regions in North America roughly flat to last year, while others are showing moderate declines, especially in certain challenged verticals. None, however, are expecting significant worsening as the quarters continue ahead.

Product sales in Europe were up low double digits versus the prior year. The overperformance was driven by several heavy-lift products. Again, removing the impact of the lumpy HLT products, core tool sales were flat year-over-year with demand appearing to stabilize from low to mid-single-digit declines we saw in the fourth quarter, while certain countries are seeing stronger demand and others are flat to down low single digits and the rest of the world was relatively flat.

Taking a look at service, our Middle East region continued its strong performance with year-over-year growth in excess of 20% as we continue to capture a series of small unplanned projects in the region. This was offset by the large projects we had in APAC and Europe in the prior year, and as expected, drove the year-over-year decline in service. Lastly, the impact of pricing was negligible for the quarter.

If we turn to Slide 8. As I said earlier, despite the reduction in overall sales, our adjusted EBITDA margin improved by 100 basis points, and we were able to hold EBITDA flat despite these volume headwinds. The strategic product and service exits and the benefit from 2019 restructuring actions resulted in improvements in EBITDA that more than offset the impact of volume declines and a mix that favored service and HLT in the current year versus prior year. We also benefited from strong growth in our medical businesses this quarter. And as we noted, the profit profile for these products are very similar to our tool products.

If we turn now to our balance sheet and liquidity on Slide 9. We used approximately $25 million of cash during the quarter versus $36 million in the first quarter of fiscal 2019, which was in line with our expectations. Significantly lower working capital build during the quarter this year and lower bonus payments drove the improvement year-over-year. It's definitely worth noting that both years included cash used by discontinued ECS operations. And in addition to the transaction-related costs, ECS consumed $17 million and $27 million in primary working capital loan in the first quarters of fiscal 2019 and '20, respectively. Capital expenditures were $5 million, down from the $8 million in the prior year.

We ended the quarter with $207 million of cash on hand. As Randy noted, following the October 31 close of ECS transaction, we paid off our term loan, leaving $286 million of long-term bonds as the remaining debt outstanding. We also bought back approximately 840,000 shares of stock at a cost of approximately $18 million during the quarter, both consistent with our capital allocation priorities as we manage our balance sheet and opportunistically return capital to our shareholders.

Our leverage now sits at 0.8x versus 2.1x in Q1 of 2019. Our balance sheet provides us with a lot of flexibility to continue to execute our growth strategy.

Before I turn the call back over to Randy, I wanted to take another look at our EBITDA margin expansion slide from our Investor Day and provide more color on our progression to date and how we expect to achieve the 20% annualized EBITDA run rate as we exit fiscal 2020.

So if we turn now to Slide 10, our EBITDA margin walk from Investor Day. As we discussed in detail on Investor Day, we believe we have a clear path to achieve our annualized 25% margin target as we look forward to 2024. If we start at the bottom of the page, we have either taken actions or have actions in process today that will allow us to end fiscal '20 with the ability to achieve an annualized run rate of 20%.

So let's walk through how this shapes up during the year and our targets for future savings. We ended fiscal '19 with EBITDA margins of 15%. We included 200 basis points of improvement in our guide for '20. This reflects savings from the elimination of the $9 million of ECS stranded costs and $8 million benefit from restructuring actions we announced and began implementing in 2019. The savings were partially offset by the adjustments to bonus expense. And as we progress through the year, we expect to, #1, complete the restructuring plan announced in 2019 when we identified $12 million to $15 million of annualized savings, we expect to have taken actions by the end of the year to deliver the high end of the projected savings. This will result in an additional $7 million of annualized savings that we will have completely executed by the back half of this year. We will also have eliminated the additional $4 million in ECS stranded costs by the end of the year, and combined, these 2 actions will add an additional 200 basis points of margin based on the midpoint of our 2020 sales guide.

Secondly, we plan to complete the Cortland plant consolidation in the back half of this fiscal year. This will drive $5 million in savings, which includes the onetime charge of $2 million in this year to execute the plan or 100 basis points of year-over-year margin improvement. With these actions complete, we will end the year positioned to deliver 20% annualized EBITDA margins in fiscal '21, again calculated using the midpoint of our current year sales guidance.

So stepping back here, as laid out in our strategic vision at the top of the page, we are targeting another $10 million or approximately 200 basis points from structural cost reductions to rightsize the organization as we exit the transition services agreement associated with the ECS transaction. While there will potentially be some opportunities in fiscal '20, we expect these actions to begin in earnest as we progress through fiscal '21, and the vast majority completed by the end of '21.

We are also targeting an additional 100 basis points of improvement from the execution of an Enerpac plant optimization project that will likely commence in the back half of fiscal '21, and we'll have a longer tail to achieving the annualized 100 basis points improvement to ensure that we don't have a negative impact on operations or on our ability to deliver product.

So collectively, all-in through structural cost reductions and manufacturing footprint optimization, we believe we are well positioned to deliver annualized 600 basis points of EBITDA margin improvement as we end fiscal '23. So that based on our '20 guide revenues, these actions would result in an EBITDA margin of approximately 23% with a path to 25% by fiscal '24,being driven by incremental profit on our targeted 5% compound growth.

With that, Randy, I'll turn the call back over to you.

Thanks, Rick. Let's move over to Slide 11. Market conditions continue to be volatile due to the uncertainty in the trade agreement and the exit of the U.K. for the European Union. In the quarter, PMI indexes 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 remain very conservative and are actively constrained in new product inventory. Of the 13 vertical markets, 3 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%.

Then 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 of between $50 million and $75 million.

The second quarter is traditionally our weakest sequentially and we'll experience tougher service comparisons due to large projects in Q2 of '19. 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 remain consistent at 20%.

In summary, we're 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.

With that, from all 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.

(Operator Instructions) Our first question today is coming from Ann Duignan of JPMorgan.

Randy, my question of you -- my first question will be, could you give us a little bit more color in terms of the 13 verticals, only 3 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. And then, obviously, address the Boeing 737 MAX both direct and indirect, and I'll leave it there.

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 nontraditional 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 other 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 exact number is about 387 that are parked. Boeing has got about 400 sitting in their delivery cube. 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 reman 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 the whole supply chain is going to be impacted. So could you talk about your participation in -- broadly in that market?

Yes, our primary 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 shut down the engine assembly, the GE engine assembly?

Yes. If there is 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 home 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 too. 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 787. And then if they're converted over to Airbus, that's a different story. We are, on 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.

Our next question is coming from Jeff Hammond of KeyBanc Capital Markets.

I just want to understand a little bit better the cadence of the runoff of the strategic exits. I think you said $10 million this quarter, $12 million 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, remind us the service comp in 2Q? And kind of around that, what we should expect for the service business in the 2Q?

Sure. So from a strategic exit perspective, the 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 trend you saw in last year. So it's about $10 million in Q4. I think that I believe adds up to $55 million. So that's kind of the pace you should see. The -- 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 of 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 afloat 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 due to core growth assumption. So that comp is just -- it's huge. And it -- we pulled out the strategic exits, but the large projects were very significant in the quarter of last year.

Okay. So that -- 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 you think the go-forward run rate is for interest expense, kind of given 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 costs that we're taking out, and that will occur essentially even over the next 3 quarters. And so there's some variable corporate. But I think from a guide perspective, we were 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's just a run rate of 20% for the rest of the year?

Essentially, yes.

Our next question is coming from Allison Poliniak of Wells Fargo.

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. And then I just want to turn back to the new product development comments you had said. Obviously, they'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, the products that didn't exist in prior cycles, and they're helping us grow, that's fundamentally a nice thing to have. So it's -- you can easily do the math, even if it's just a flat 10%, you can see the impact on a quarter is significant and the margins are at line average of where we like it. So it is definitely helping us stabilize market condition, excites dealers, keeps the field sales force excited about going out there and talking about something new, it makes their jobs easier. And quite honestly, when we get our promotional activities correct and how 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 where it 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 splits. But when we review that monthly on exact composition of the NPD contribution, so we had some in 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 relaunched it, we did not include that in our NPD. So it's not painted in details that you're talking about here. It's truly good new launches. And so torque and tension had 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 out of all of our major design platforms. And so we still have some that are lagging others, but clearly, the culture of being innovative is starting to really move and is taking time to do that.

Our next question is coming from Mig Dobre of Robert W. Baird.

It's Joe Grabowski on for Mig this 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. It seems to imply a low 13% margin similar to Q1 and then that implies a 20% EBITDA margin in the second half. I would have thought we'd see some sequential EBITDA margin improvement, if 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?

The -- well, a couple of things. The ramp isn't that unusual. I think the -- what's driving Q2 is a significant drop in the top line, and so obviously, you're losing some contribution margin. And as we talked about, that -- those larger service jobs that we had last year were in a region where service profitability is a little bit above -- actually, it's 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 of ECS stranded costs. And so when you look at that from a year and you kind of do the math, we will have, as we always do, a much better margin performance in the back half of the year.

Okay. 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 step 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 walk, 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 that 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 '20 guide. There may be some opportunities, as I said before, and we'll 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, then we're able to move earlier on cost takeout.

Rick, you get the full TSA in the second quarter?

Yes.

Okay. All right. And then just 1 quick follow-up in the other segment, Cortland. Operating margin, EBITDA margin took a step down versus the last 3 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 are onetime expenses that won't reoccur.

(Operator Instructions) Our next question is coming from Justin Bergner of G.research.

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 1 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 we -- core sales were in line with our expectations. I think what we said is, what Randy has 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.

There's not a onetime 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 is we did have an order flip out of Q1 to Q2. And despite that, the core will -- for the year will remain as we expected. There is a little bit of a flip there, but not impacting our expectation for overall core 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 -- in energy.

No. It's the 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 a working capital adjustment in the sale? Or is that...

Keep in mind, the -- any working capital adjustment is set based on historical targeted working capital as of the close of the transaction. 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 stand-alone 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 they -- 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 EC&S transaction?

No, no, 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 use quarters will look like, it will be significantly better than it has been historically, and the numbers you're seeing here are still on a consolidated basis, which include ECS through the first quarter.

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

No. But just to be clear, that 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.

Our next question is coming from Stanley Elliott of Stifel.

This is Brian Brophy on for Stanley. Just had a question about Cortland that had nice strength on the top line 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?

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 contemplated 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?

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 the 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 1 for some time.

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 your log off at this time, and have a wonderful day.