Enerpac Tool Group Q4 2026 Earnings Call Transcript

Enerpac Tool Group (NYSE:EPAC) reported fourth-quarter financial results on Thursday. The transcript from the company’s fourth-quarter earnings call has been provided below.

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Summary

Enerpac Tool Group reported record annual revenue of $652 million for fiscal 2026, with a 4% organic growth and a significant 30% increase in free cash flow.

The company completed the acquisition of SFE Group, which is expected to be accretive to adjusted EPS in fiscal 2027, and outlined plans for the Propel growth strategy focusing on commercial excellence, innovation, and operational excellence.

Guidance for fiscal 2027 includes revenue expectations of $825 to $845 million and adjusted EBITDA of $195 to $205 million, with a focus on leveraging the SFE acquisition and expanding in key markets like the Americas and data centers.

Full Transcript

Paul Sternlieb (President and CEO)

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 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 and, 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 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 Program Profitable Growth Strategy, which we call Propel, and highlight our successful innovation program. Darren.

Darren Kozik (EVP & Chief Financial Officer)

Thanks, Paul. Turning to slide four, we finished the year with strong momentum. In product, growth was led by the Americas, supported by demand from data center buildout, 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 buildout, 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. And in APAC, we saw strong product momentum in India, Korea, and Australia, along with heavy lifting technology wins including E‑Movers and gantries.

While our 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 6, for the full year fiscal 2026, our product business drove growth across its 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 2 points to reported growth.

Turning to slide 7, 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 8, 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. Since fiscal 2022, we have nearly tripled free cash flow while keeping capital expenditures at roughly 2% of revenue in most years. And notably, we ended fiscal 2026 with net debt to adjusted EBITDA leverage of only 0.1 times, which positioned us well for the subsequent completion of the SFE Group acquisition.

Speaking of our financial flexibility, on October 16th we successfully renewed and expanded our credit facility with strong support from our banking group. All participating lenders increased their commitments, reflecting continued confidence in our business and financial profile. As a result, we have increased the size of our five-year credit facility from $600 million to $850 million. The new structure consists of a $300 million term loan and $550 million revolving credit facility, providing us with enhanced financial flexibility to support our strategic priorities and growth opportunities.

The facility also includes an accordion option of up to $425 million, providing additional capacity for future M&A. Moreover, despite the significant increase in facility size, we were able to maintain the favorable pricing and key terms of our prior agreement, which we view as a strong outcome in the current financing environment. Turning to slide 11, as we highlighted when we announced the agreement to acquire SFE Group, the company provides a strong strategic fit and creates significant opportunities for value creation for Enerpac, in addition to expanding our addressable market by approximately $1 billion. The approximately $472 million purchase price consisted of roughly $452 million in cash and about $20 million of equity awards granted in lieu of transaction bonuses.

We funded the cash portion with cash on hand, our expanded term loan, and borrowings under our new revolver. The purchase price represents 10.6 times SFE’s trailing adjusted EBITDA, or 9.5 times including the synergies we expect to realize within three years, and we expect the acquisition to be accretive to adjusted EPS in fiscal 2027. We continue to target $4 to $6 million of synergies by year three. Thanks to our strong cash generation of fiscal 2026, we achieved a net leverage at closing of approximately 2.3 times, down from our original estimate of 2.8 times.

With SFE Group’s strong free cash flow profile, we expect to bring that down to approximately two times by the end of the first year, well within our target range of 1.5 to 2.5x. That gives us the flexibility to continue our disciplined capital allocation strategy, including internal investments, bolt-on acquisitions, and opportunistic share repurchases. Integration is already underway with our governance and cross-functional execution teams in place.

We look forward to sharing more at our Investor Day next week. With that, our initial guidance for fiscal 2027 is shown on slide 12. I say initial given that we just closed the SFE Group acquisition yesterday. We are confident in our day-one readiness, long-term synergy potential, and the pre-close planning we have completed to leverage our combined human resources, IT, finance, and legal infrastructure. Now that the deal has closed, we can begin working on the commercial side with customers and developing detailed plans to capture revenue synergies.

As you evaluate guidance, keep in mind that fiscal 2027 will include approximately 10 months of SFE Group’s performance. Adjusted EBITDA and adjusted EPS guidance for fiscal 2027 exclude M&A transaction charges and integration-related items. Adjusted EPS also excludes the amortization of acquisition-related intangibles. Starting with the top line, we expect fiscal 2027 revenue of $825 million to $845 million, with organic growth of 4% to 6%. We expect adjusted EBITDA of $195 to $205 million, which includes incremental investments in our new strategy and support for SFE. For adjusted EPS, we are guiding to a range of $2.00 to $2.15. Our other modeling assumptions, including depreciation and amortization, interest expense, capex, adjusted tax rate, and share count are shown on the slide.

Our guidance assumes no substantial change to the current tariff or regulatory environment and economic trends similar to those as we exited the fourth quarter of fiscal 2026. With that, let me turn it back to Paul.

Paul Sternlieb (President and CEO)

Thanks, Darren. As previously announced, we will be hosting our Investor Day in New York next week. Among the many topics we plan to discuss, we will introduce our next generation growth strategy, Propel. As shown on slide 13, Propel is built on three pillars. First, we will grow in attractive end markets with commercial excellence. We plan to deploy next generation Enerpac Commercial Excellence, known as ECX, our commercial engine to accelerate growth across all products and regions, driving share gains through differentiated channels, digital reach, and application-led selling.

We also plan to accelerate the growth of SFE Group by leveraging Enerpac’s global distribution and key account capabilities. Second, we will differentiate through product-first, application-led innovation. As I will discuss in a minute, we have steadily increased our R&D investment and with it accelerated the pipeline of mission-critical customer solutions. And third, we will expand through operational excellence initiatives including our PEP operating system, inventory management, and service expansion into higher margin applications.

We look forward to sharing the full story along with our multi-year financial objectives on November 4th. Of course, a critical part of our growth strategy is our commitment to innovation. As you can see on slide 14, we have significantly increased our investment in R&D, growing it at an 11% compound annual rate over the past three years. More importantly, we are seeing the benefits in the pace of new product introductions. In fiscal 2026 we launched 11 products, up from five the prior year.

Heading into fiscal 2027, we have a lot to be excited about at Enerpac. Our product business continued to deliver broad-based strength across the Americas. Our service business is showing encouraging trends with sequential improvements every single quarter. In fiscal 2026, our strong cash flow and balance sheet provide the flexibility to pursue our growth strategy, and the addition of SFE Group, with its premium brand platform and market-leading products, further strengthens our position as a premier industrial solutions company.

With that, we’d be happy to take questions.

OPERATOR

We will now begin the question and answer session. If you would like to ask a question, please press star-one to raise your hand. To withdraw your question, press star-one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Your first question comes from the line of Will Gilday with CJS Securities. Your line is open. Please go ahead.

Will Gilday (Analyst at CJS Securities)

Hey, good morning. Thanks for taking our questions.

Paul Sternlieb (President and CEO)

Morning, Will. Hey.

Will Gilday (Analyst at CJS Securities)

So, congrats on the strong quarter and closing the deal. Can you just expand some more on the assumptions embedded in your guidance?

Paul Sternlieb (President and CEO)

Yeah, sure, happy to. Well, thanks for the question. So, look, first, we are really excited about where we’re headed. I think there’s a lot to be really pleased about, particularly having finally closed the acquisition of SFE. You know, that’s a business with very premium products and margins. In fact, I was with the team at a major trade show, Fabtech, in Las Vegas last week. It showed really well. They had a number of new products on display, very strong customer receptivity on those.

That team has demonstrated the ability to drive very strong growth, both organically and inorganically. And frankly, they have exposure, higher growth end markets and attractive geographies, with over 70% of their revenue in the Americas. So that will be, we think, a nice tailwind for us as well. Of course, very complementary position that expands our addressable market by about a billion dollars. And it comes with a great strong management team who will stay on with Enerpac and is incentivized and motivated for the long term.

So we’re really, really excited and pleased that we were able to close on that. In terms of guidance, I’ll turn that over to Darren. He can talk a little bit about our thinking behind that.

Darren Kozik (EVP & Chief Financial Officer)

Thanks, Paul. You know, Will, as we look at 2027, I would say a couple things. First, just as a reminder, we’re only going to have 10 months of SFE, okay? So as you kind of work up your estimates and models, just remind yourself of that. But then as we look at the year, we see organic sales of roughly 4% to 6%, okay. And kind of behind that, you know, we see continued strength in the Americas. You know, that was very strong in Q4. We see that progressing into next year.

In addition to that, our HLT business has been on a really strong growth run. So we expect to see that positive momentum. And then service is stabilizing. You know, that business did turn around in Q4. You know, we’re still looking for strong, profitable work there, so we want to make sure we get the right work in service. I’d say the wildcard is still, as we talked about even this time last year, is Europe, okay. You know, there really is no impetus for a significant change there. So as we think about our business, you know, roughly 40% in Europe, we still have our eyes there on that part of the portfolio as a little bit slower, although our product growth rates were very strong in Q4, okay.

So I’d say that’s kind of the volume front. As we go down the P&L, we will have some leverage from that volume, but there are two places we need to invest back in. Number one is SFE, okay. You know, that team is very strong. They have great products, great operations, but their finance and IT infrastructure and some other places we just need to invest back because they’re not at public company standards or Enerpac standards. So those will be investments we make.

And second is Propel. You know, Paul started to allude to that. But next week we have a lot of great things to show you, kind of around grow, differentiate, and expand, and where we can invest back to get stronger growth in the future. So, you know, that’s the shape, the investments, and when we think about it at the midpoint, you know, that’ll turn about a 24% EBITDA margin, which is very strong, 2.07 EPS, which is up double digits, and that includes SFE accretive in year one, okay. So we’re very happy about that as well. So that’s the guide that’s out there. You know, the business is in a really good position.

Will Gilday (Analyst at CJS Securities)

That’s great color. Thank you. And then just looking at the quarter, you know, really, really solid organic growth, 24% organic sales growth in the Americas, it’s very impressive. I mean, can you talk about the drivers of that? How much of that was price versus volume? And can you also kind of expand on the drivers behind lower margins in the quarter?

Paul Sternlieb (President and CEO)

Yeah, sure, Will. So I think, look, yeah, we were extremely pleased with the growth overall in the quarter, particularly in the Americas, very robust certainly. Clearly the industrial sector in the U.S. is very robust, improving, and I would say performing better than really any other significant country or region in which we operate. That’s obviously a plus for Enerpac, where nearly half of our revenue comes from the Americas region. As we talked about, with the addition of SFE, over 70% of their revenue is generated in the Americas.

So on a pro forma basis we’ll be, you know, in the mid-50s, I think, on a revenue basis skewed to the Americas. So I think it’s really driven by the strength of the U.S. industrial sector. Clearly we see a lot of growth tailwinds, particularly in end markets like infrastructure, data center buildout, power generation, and the defense sector as well. I think we also see very nice continued tailwinds from reshoring activities here in the U.S. market, and we think that those are not only robust but sustainable over the mid and potentially long term. So we’re quite bullish about that, I think.

Outside the Americas, as Darren talked about, you know, obviously slower growth, but we did see very solid order flow in EMEA, particularly with strength in infrastructure and large defense orders. And we think that will be beneficial here in fiscal 27 as well. So overall, yeah, I think again, we were quite pleased with the performance in the quarter and particularly with the growth rates that we saw here in the Americas region.

Darren Kozik (EVP & Chief Financial Officer)

Yeah, and Will, to kind of talk about the fourth-quarter margin, just as a reminder, you know, we were comparing to our highest margin quarter of last year at 26.5%. So we did have a tough comp there. But as you unpack some of that change year over year, you know, probably in the first position here was there’s some mix dynamics there. You know, we talked a lot about HLT growth in the Americas. And, you know, as a reminder, HLT margin tends to be a little bit lower than the portfolio average because it’s a capital good, you know, that’ll run in the mid-40s.

So that puts a little bit of pressure overall. Second, with that strong quarter from an organic growth rate as well as free cash flow generation, you know, we did have to increase for some incentive comp, okay. Which we’re happy to reward our people for that strong performance, but that put a little bit of pressure in the quarter. But then third, we invested in Propel, okay. In the second half of the year, we really started to invest behind that strategy because we see a strong market, particularly in the U.S., so we want to get ahead and get those investments in to drive growth in 2027.

So those were the large drivers. You know, we are excited about Propel. We’re excited to invest behind that because we think that’ll be a catalyst for growth, and we thought that was a wise move.

Paul Sternlieb (President and CEO)

Yeah, and I’ll just add color on that, which is, you know, we’ll talk a lot more next week at Investor Day about Propel. But to Darren’s point, the reality is, I mean, we’ve been executing on that internally now for many months. Obviously, we have a public unveiling, effectively, next week, but the team’s been hard at work executing on that growth strategy. And frankly, as Darren said, we’ve been investing behind that for a while now.

Will Gilday (Analyst at CJS Securities)

Great. Thank you for the color. And then just one more for me. Leverage is going to be a half turn lower after the close of this deal than previously expected, so back in your target range. You know, how are you thinking about cash generation and the new credit facility?

Darren Kozik (EVP & Chief Financial Officer)

Sure, Will. So, you know, we were pleased to close the credit facility. We had great support from our banks. You know, as we sit here today, you know, probably around 2.3 times levered. And I would say, just as a reminder, free cash flow generation for us is really strong in the second half of the year. So a lot of that leverage will come down in Q3 and Q4, just given the first half of the year for us has a lot of tax payments, bonus payments, things of that nature.

So that’ll be the kind of profile of leverage throughout the year. You know, as we look at that, you know, given where we sit today and with the credit facility, you know, obviously debt paydown is top of mind. We haven’t had this amount of leverage in a while. So that will be a focus of ours. But that’s not to say we won’t look at opportunistic share repurchase or even bolt-on M&A. You know, we think we’ve got a platform now and a profile for a company that’s in a really good spot that we can add on other industrial tools and solutions players.

So, you know, I think we tend to look at it, Will, as everything’s on the table. But we will focus to get that leverage down, and that’s our commitment.

Will Gilday (Analyst at CJS Securities)

All right, we’re looking forward to your Investor Day. Thank you.

Paul Sternlieb (President and CEO)

Thank you.

Darren Kozik (EVP & Chief Financial Officer)

Thanks, Will.

OPERATOR

Your next question comes from the line of Ross Barenblack with William Blair. Your line is open. Please go ahead.

Ross Barenblack (Analyst at William Blair)

Hey, good morning, gentlemen. I mean, really good quarter there on the top line. Looks like, you know, highest in company history since you guys got here. Anything one-time to call out? And it just feels like you’re maybe abundance of caution going into the next year, or if there was anything with the data centers as a big HLT sale or something of that nature that would give you pause for a potential deceleration in 27.

Darren Kozik (EVP & Chief Financial Officer)

Yeah, Ross, thanks for the question. Really nothing in terms of any meaningful one-offs to note in the quarter. It was just overall a very strong, robust performance by the team. Yeah, and I think we’re pleased with the progress we’ve been making there. You know, I think it was broad-based. I mean, we talked about a number of end markets where we’re seeing really nice tailwinds and kind of favorable dynamics there, and we expect that to continue here into fiscal 27.

You know, I think on the organic growth, I mean, obviously finishing the full year at, you know, around 4% organic growth, we feel like the guide to 4% to 6% here for fiscal 27 makes sense, and we’ll continue to evaluate as we progress throughout the year. But, you know, given the market dynamics and the execution of the team, we feel that’s appropriate. So yeah, I think overall that’s where we sit today.

Ross Barenblack (Analyst at William Blair)

Okay, that’s helpful. On the data center and power side, can you just remind us of kind of what the sales cycle looks like? Is it a similar dynamic with other large projects where it’s kind of a one-time purchase, or do you see more of a recurring cycle there? Doesn’t this equipment go to different job sites?

Paul Sternlieb (President and CEO)

Right. Yeah, no, thanks for the question, Ross. It is pretty interesting, I’d say specifically on data centers. So, you know, our exposure is less so on the data centers themselves or the hyperscalers; it’s sort of one step back. So we are generally selling to folks that are manufacturing equipment that goes into a data center, like gensets or other power equipment, etc. And then we’re providing equipment and support for either their own manufacturing facilities as they’re making that equipment and need to move it around in their plants, or ultimately to transport it or to install it into a data center.

Our equipment doesn’t typically sit permanently in the data center. What I would say is we are seeing a number of repeat or recurring orders in that space. Most of the work that we see tends to revolve around our smaller HLT gantries, which are really a very nice substitute for more permanent overhead crane solutions. So as you see other industrial manufacturers building out new capacity, whether it’s expansion or even new manufacturing facilities, you know, they don’t necessarily want to make these large one-time investments in overhead cranes, which are fixed in a facility and they can’t easily move, which also are very expensive and also have very significant lead time.

So our smaller gantries are really an exceptional substitute that allow them to get that with very short lead times. And it’s mobile equipment, so it plays very well there. E‑Movers, another one of our HLT products, also is supporting those customers, particularly in those applications. And we have, as I said, seen a number of repeat orders. I would say the cycle time or the lead time for those is generally shorter than what we typically see in our HLT business. Probably most important for these customers is availability. I would say price is probably, you know, a much less critical element for them, frankly. So, you know, we’ve been making investments behind inventory and operational improvements to be able to support, you know, very quick lead times.

Ross Barenblack (Analyst at William Blair)

Okay, that’s helpful. Do you get the sense then that you’re kind of expanding that TAM customer by customer? When you think of, like, just competitive landscape, I mean, are you going out there kind of big-game hunting to make sure that your brand’s well enough—well, you know, people know about it and, you know, they know that you have the ability to deliver?

Paul Sternlieb (President and CEO)

Yeah, it’s a great question. And, Ross, we will talk more specifically about this on our investor day next week. Phil Jefferson, our chief commercial officer, will speak exactly to that. But suffice it to say we have been, and we are continuing to, make additional investments in more resources behind, you know, commercial sellers specifically focused on the data center market, including a focus on enterprise selling as well. So we already have some very strong established customer relationships, but we have more active hunting work underway with more resources and feet on the street dedicated to that activity.

Ross Barenblack (Analyst at William Blair)

That’s great to hear. I will jump back in queue. Thank you.

Paul Sternlieb (President and CEO)

All right, thank you. Thanks, Ross.

OPERATOR

Your next question comes from the line of Steve Silver with Argus Research. Your line is open. Please go ahead.

Steve Silver (Analyst at Argus Research)

Good morning, and thanks for taking my questions, and my congratulations on the closing of the acquisition as well.

Paul Sternlieb (President and CEO)

Thank you.

Steve Silver (Analyst at Argus Research)

So you guys mentioned major contract wins in the data center space as well as approved vendor lists. I was wondering if you could provide a little more color on that and really what the implications might be for the business moving forward.

Paul Sternlieb (President and CEO)

Yeah, look, I think those wins that we talked about, they really reflect the commercial traction that we’re building, particularly in the Americas, and also I’d say the disciplined sales process that we have built—we call ECX, Enerpac commercial excellence. I think we’re making, you know, particular gains in infrastructure, as we talked about—data center build-out, power gen, defense industries. I do think we are taking share. We see good evidence of that.

And as I said, we’re continuing to invest and accelerate investments, particularly commercially as well as operationally and from an inventory-selective perspective behind that. And some of these approved vendor lists also I think position us well into the future because, again, we become, you know, the easy button, frankly, for these customers and the one-stop shop. And if they build increasing confidence behind our capability to deliver for them on short notice with very high-quality product that meets their needs and frankly is a great substitute for what otherwise would be expensive and long lead-time investments for them, it’s really a no-brainer for those sort of customers.

Steve Silver (Analyst at Argus Research)

Great. And so a key component of the Propel strategy you’re talking about is product innovation. And I know you guys have been talking about this for quite some time in terms of new products, yet you’ve done this pretty much with a modest R&D expense on an absolute basis. You mentioned the 10% CAGR in R&D growth, but still a pretty low number on an absolute basis. I’m just curious as to whether that will likely be accelerated either on an absolute basis or as a percentage of sales moving forward.

Paul Sternlieb (President and CEO)

Yeah, we’ve been extremely pleased, Steve, with the progress that our innovation team has made over the last several years. As you may recall, we previously talked about—effectively it was a reboot strategy from four or five years ago. We’ve come a long way in terms of building out the process, the capability, the team behind that—obviously the roadmap, now executing in terms of launches and commercialization. So I think we’ve made, you know, really exceptional progress.

Kudos to our team on that, and launching 11 products here in fiscal 26 and, frankly, you know, a similar target, if not better, here in fiscal 27. We will talk a lot more specifically about innovation at our investor day next week. Martin, who heads up our innovation function and our HLT business globally, will spend quite a bit of time going into really significant detail behind innovation, how we run it, what the future looks like. We have been and we will continue to increase our level of investment in R&D here. We think that we are a clear technology leader in our space, and we want to continue to be front and center in the industry in that respect.

The only other comment I’d make in terms of, you know, absolute levels of investment—it’s hard to compare, but I think at the end of the day, just bear in mind the bulk, if not really the vast majority, of our innovation spend is on our product business. So when you look as a percent of revenue, you really have to think about percent—the denominator effectively being our IT&S product business overall. So I think, you know, we’ll continue to invest behind product innovation, but frankly also, you know, supporting areas like our field service and our applications expertise as well, which I think is a key differentiator and maybe the unsung hero of our business in many respects.

Steve Silver (Analyst at Argus Research)

Great. Thanks for the color, and I’ll get back in queue.

Paul Sternlieb (President and CEO)

Thank you.

OPERATOR

Your next question comes from the line of Ross Barenblack with William Blair. Your line is open. Please go ahead.

Ross Barenblack (Analyst at William Blair)

Thanks for taking the follow-up, sir. Just a couple on the margins. Can you maybe help us pinpoint what this integration and growth investment cost is for 27? We have the SFE targets—it’s something like around 20 million. I don’t know if that’s all in FY27, and it seems like there’s maybe some other moving parts there, too. You guys didn’t say anything about material inflation. I know others are having that issue. I just wanted to verify that that’s not an issue for you guys as well.

Darren Kozik (EVP & Chief Financial Officer)

Yeah, Ross, let me take a couple pieces there. I would say, you know, first, pure integration cost—we think that is in the ballpark of 10 to 14 million. I would say that’s to put the businesses together, to get the ERPs to work, you know, those types of dynamics. Outside of that, there is some core investment we need to make in SFE to stand that up. That will be recurring costs in the business. So really there’s investments of two types there: one, just to get it up and running—you could put that as 10 to 14 million; and two, you know, some core investment in things—call it SEC reporting or legal resources—that we’ll need on a recurring basis. So there’s kind of a combination of both there from an integration perspective.

You know, second, on the material inflation—you know, we read the news, too. We see some impacts of it, but I would say it’s not as exorbitant as some may be led to believe. Obviously, we have our eyes on the wall there, and obviously we have a sourcing team that is driving all the cost that we can. But as we enter 27, it feels like an environment similar to 26 that we’re prepared for.

Paul Sternlieb (President and CEO)

Yeah, and I think, as always, Ross, you know, from an inflation standpoint, our goal is to at least offset that through a combination of, you know, pricing where appropriate and productivity actions here in the business. We continue to firmly believe we can do that, if not over-recover a little bit, to maintain margin profile. As you know, from a pricing standpoint, we typically take one to two price increases a year. That’s never peanut butter—we evaluate that by geography, by product line, even at SKU level.

But we’ll, you know, continue to evaluate that here in fiscal 27.

Ross Barenblack (Analyst at William Blair)

Okay. I mean, it’s hard to tell what the core incrementals should be as our starting point for 27. Can you just give us a sense of what the organic should be before we start layering in some of these costs?

Paul Sternlieb (President and CEO)

Yeah. I think on the incrementals, what I would say is we’re going to share more specifics around that—not to sound like a broken record, but we will specifically address incrementals, and actually decrementals should those occur, next week at our investor day. So stay tuned. But we’ll talk specifically next week around sort of the fixed versus variable cost structure of the business and why that gives us confidence in our ability to deliver on the numbers that we’ll share to the incrementals and decrementals.

Darren Kozik (EVP & Chief Financial Officer)

Yeah, and Ross, I would just add that we’ve been on a journey here. Free cash flow’s tripled almost over the last couple years here. We’ve done the acquisition, you know, we feel the time is right in a good market to invest back in the business and get growth above market. And that’s what we’re here to do.

Ross Barenblack (Analyst at William Blair)

I never had a doubt on the free cash flow, you guys. You’re on a tight ship over there. And then just one more here, just on the… I believe that we had SFE accretion around 25 cents for year one. So 10 months of that, about 20 cents is kind of the starting point. We think about the organic EPS, just trying to back up moving parts.

Darren Kozik (EVP & Chief Financial Officer)

That’s in the range. Ross, I think you got to kind of look at that business in a couple of components. One, kind of take that down to 10 months; two, look at the current interest rate environment; and then three, the incremental investments we need to make back in that business. So that might get you to something that’s a little bit less than that in the grand scheme of things.

Ross Barenblack (Analyst at William Blair)

Okay, fantastic, guys. Well, thank you for the time.

Darren Kozik (EVP & Chief Financial Officer)

Okay, thank you. Thank you.

OPERATOR

If you would like to ask a question, please press Star one to raise your hand. To withdraw your question, please press Star one again. Please stand by while we compile the Q&A roster. If there are any further questions, please press Star one to raise your hand. There are no further questions at this time. I will now turn the call back to Paul Sternlieb, CEO, for closing remarks.

Paul Sternlieb (President and CEO)

Okay, well, we hope that you’ll join us for Investor Day being held next week on Wednesday, November 4th at the New York Stock Exchange. In addition to Darren and myself, we’ll be joined by other members of Enerpac Tool Group’s leadership team, providing a comprehensive overview of our strategic vision and an in-depth review of our products, capital allocation, strategy and financial objectives. Attendees will also be able to see our products close up through live demonstrations and meet the management team at a luncheon following the presentations.

If you are unable to attend in person, the presentations will be webcast and accessible on the investor relations section of our website. In addition, we will be participating in the Baird Global Industrial Conference in Chicago the following week on Tuesday, November 10th. We hope to see you there. And I’d be remiss if I didn’t end with congratulations to the Milwaukee Brewers for winning the World Series. Well deserved. With that, thanks again for joining us, and have a great day.

OPERATOR

This concludes today’s call. Thank you for attending. You may now disconnect.

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