Enerpac Tool Group Corp.
Q2 2021 Earnings Call Transcript

Published: 24 Mar 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Enerpac Tool Group's Second Quarter Earnings Conference Call. . As a reminder, this conference is being recorded March 24, 2021. It is now my pleasure to turn the conference over to Bobbi Belstner, Director of Investor Relations and Strategy. Please go ahead, Ms. Belstner.

[Bobbi Belstner:]

Thank you, Operator. Good morning, and thank you for joining us for Enerpac Tool Group's Second Quarter Fiscal '21 Earnings Conference Call. On the call today to present the company's results are Randy Baker, President and Chief Executive Officer; Rick Dillon, Chief Financial Officer; and Jeff Schmaling, Chief Operating Officer. Also with us are Barb Bolens, Chief Strategy Officer; Fab Rasetti, General Counsel; and Bryan Johnson, Chief Accounting Officer.

[Randy Baker:]

Thanks, Bobbi, and good morning, everybody. We're going to start today on Slide 3. And before we review the details on the quarter, I'd like to provide an overview of Enerpac's progress and our recovery from the global pandemic. As always, safety is our #1 concern for our employees worldwide, and as of today, we still have approximately 40% working from home offices. In the quarter, we were affected by regional spikes in the infection, resulting in full border closures in the Middle East. We responded by returning to the broad lockdown processes we've been using throughout the pandemic. Unfortunately, this did have an impact on our sales and slowed our recovery progress. Despite these factors, we were able to improve the performance in the quarter to near parity with our first quarter results. This is not our typical cycle within a fiscal year as the second quarter is normally a low point for both sales and profit. Secondly, our cost efforts continue to support very positive decremental margins, which are in line with our expectations of 35% to 45%. As I discussed in prior quarters, we have protected our ability to execute the long-term strategy, including new product development, sales coverage and our capital allocation priorities. Our focus on the balance sheet has enabled us to pay down an additional $45 million in debt in the quarter, which further enhances the long-term performance of Enerpac.

[Jeff Schmaling:]

Thanks, Randy. I'll add some detail on Q2 from a regional perspective as well as touch on some of our key verticals and distribution. And then I'll finish up on Enerpac operations and a few comments about the Cortland business. As a general comment, I think you'll see that this past quarter continues to confirm the significant differences in how our global markets are recovering as well as how the various countries and regions we serve are responding to the continued challenges of this pandemic. Starting on Slide 6. In total, we're pleased to see continued sequential year-over-year improvement in both product and service sales in the second quarter. Despite still being down year-over-year, we're encouraged by the feedback from our distributors about their businesses and the strong quoting activity that we're seeing in our primary markets. We'll start with the Americas. And as I said, dealer sentiment has turned noticeably more positive, and there's a general consensus that most will be getting back to pre-COVID activity levels in the coming months. We saw an increase in overall in-stocking orders in both January and February and another decline in our drop ship rates, which further confirms that our dealers' confidence is improving. We're also seeing some positive indicators from our OEMs and national account business, and we did see a sequential increase in our backlog for these accounts in the quarter, which is starting to look more like our normal pre-COVID levels. The severe weather that caught Texas by surprise in February also contributed to some missed product and service revenues around the Gulf. Some of these issues, however, coupled with the strengthening -- or the continuing strength in oil prices may offer some opportunities to recover some of this as we move into the third quarter. Looking at our vertical markets, general construction and power gen, specifically wind, continue to improve in the U.S. as well as growing demand in mining in Western Canada and our oil sands customers. Strong copper and iron ore pricing and demand continues to give our mining distributors opportunities in Chile, Peru and Brazil. However, we are continuing to struggle a bit with COVID restrictions in Mexico. Our ability to visit customer sites and dealers is slowly improving, and we're anxious to continue to ramp up once the vaccination efforts and reopenings continue to get more traction.

[Ricky Dillon:]

Thanks, Jeff. Good morning, everyone. I'll start with a quick recap here on Slide 8. Fiscal 2021 second quarter sales increased slightly when compared to the first quarter and were down 11% from the prior year. Core tools product sales were down 10%, and that's an improvement from down 14% in the first quarter. Service was down 12% compared to down 24% in the first quarter. And Cortland sales were down 21% or $2 million versus down 35% in the first quarter. We had an approximately $3 million impact from our acquisition of HTL. The adjusted EBITDA margin for the quarter was 10%, and that's down from 12% reported in the first quarter and in the prior year. The adjusted tax rate for the quarter was 16%, which is up slightly from the prior year. We expect our full year adjusted effective tax rate to be in the range of 20% to 25%. Let's turn to Slide 9. Jeff already covered what we're seeing by region, and I'll just make a few additional comments here. We had a favorable $3 million impact from foreign currency, with the continued weakening of the dollar during the quarter. If current FX rates hold, we would expect to see continued tailwinds from currency in the back half of the year as well. As Jeff discussed, our service sales were impacted by border closing in our MENAC region. Those closings had an impact for the region of about $5 million, and that includes $3 million from the delay of service project revenue in the quarter. It is important to note here that but for the impact, we would have reported service revenues on parity with our 2020 results. This is a good indicator of recovery as the second quarter revenues in both fiscal '21 and fiscal '20 exclude the large projects that were included in '19. As a reminder, Q2 is historically our lowest quarter, and Q3 is usually our strongest quarter. Q3 2020 was also the trough in terms of COVID impact on our results, with core sales down 38% year-over-year. As we look at the pace of recovery going forward, we would expect to see accelerated sequential quarterly and year-over-year growth in the back half of the year as we anniversary our worst 2 COVID-impacted quarters. So moving on to adjusted EBITDA in the waterfall on Slide 10. As we have noted, our decremental margin, excluding the impact of currency, was 29% and continues to reflect the improved leverage that our lower cost structure provides as sequential volumes increase. We anticipate incremental margins in the back half will in turn be at the high end of our stated range of 35% to 45%. As we have seen through the pandemic, lower product sales volume continues to weigh heavily on our adjusted EBITDA margins. The impact of service sales was offset by a favorable mix, with service margins up about 400 basis points year-over-year as we continue to focus on -- globally on higher volume -- higher value-added and more profitable service work. Manufacturing variances this quarter totaled approximately $1 million, and that's down from the $6 million reported in Q1. It is comprised of 3 elements

[Randy Baker:]

Thanks, Rick. Let's turn over to Slide 12. As we think about the balance of the year and our progress towards normal sales volumes and profitability, we've come to the conclusion that both economics and the sequential improvement will position Enerpac at near parity with our 2019 core sales levels as we exit the fiscal year. Secondly, we fully expect incremental margins to be in the range of 35% to 45% on core sales. And lastly, we will continue to focus on cost control and executing our margin expansion strategy. All the current economic outlooks are pointing towards full recovery as we exit the fiscal year and support our forward projections. This is further supported by our booked orders, which have increased sequentially and are up 15% in the first few weeks of March. As always, we are cautious concerning the potential resurgence of the virus. However, the advent of a wide distribution of vaccines is creating our sense of optimism. Moving over to Slide 13. This brings us to our projections for the remainder of fiscal 2021. We are projecting sales to be in the range of $280 million to $290 million, with accelerating sequential improvement. We are projecting the growth rates in the back half of the year as follows

[Operator:]

. Our first question comes from Mig Dobre with Baird.

[Joseph Grabowski:]

Yes. It's Joe Grabowski on for Mig this morning. Thanks so much for the guidance. Very helpful and a lot of color around it, too. It's difficult looking at year-over-year right now because we're about to go against the toughest of the COVID shutdown. So I was looking at your guidance second half '21 versus first half '21. And at the midpoint, it implies a 19% improvement second half versus first half. The chart on Slide 4 show that there is seasonality in the sales to improve in a normal year from second half to first half maybe 5% or 6%. But when you think about your business as your end markets geography second half versus first half, what are kind of the key drivers for that 19% sequential second half improvement?

[Randy Baker:]

Let me cover the broad side. And then, Jeff, why don't you jump in on some specifics. But if you think about the percentage that I discussed of the back half growth rates of tool sales in the broad vertical markets we serve, are key to our profitability because that's where the high gross profit comes from, and then certainly, the full recovery of our service business, which includes the service rental. So we're looking at all our major vertical markets. As Jeff mentioned, we're seeing great activity in civil construction, which includes bridge activity, bridge maintenance. We're seeing good activity in alternative energy markets. And we also see a very strong commodity market. And if you go backwards in time and think about when were the last times we saw commodity prices at this level, not specifically the oil and gas markets, which are certainly trending very well in the right direction. But if you also think about the base metals and agricultural products, it's all pointing in the right direction. So that's probably one of the macro drivers that I look at, are the fundamentals supporting those growth rates, and we feel they are. And so that's the drivers there. And then, Jeff, do you want to jump in and give some more specific?

[Jeff Schmaling:]

Yes. Yes, kind of leapfrogging onto your commodity story. Normally, as we enter Q3, we're starting to see ramp up in construction, especially infrastructure-type work. So that's a normal sequential thing for us. But we're seeing increased activity after, frankly, kind of a quiet period we've been through during -- due to the pandemic. But -- and a lot of our OEMs that service a variety of verticals are seeing increased activity, as I spoke to in my comments as well. So infrastructure, especially in ESSA. I highlighted the bridge project, but there's an awful lot of those in our quote log as well. We're starting to see some improvement in that type of spending here in the U.S., although not nearly enough quite yet. We're looking forward to some of that. But yes, overall, just an uptick in kind of all the prime verticals that we serve.

[Joseph Grabowski:]

Great. Okay. That's really helpful color. And I guess my follow-up question, I'll kind of stick with the same math. If I look at EBITDA second half versus first half, rough math, it implies about a 17% EBITDA margin in the second half versus an 11% EBITDA in the first half. So pretty healthy incremental sequentially. Maybe just talk about some of the like cost headwinds and the cost tailwinds that are maybe helping or hurting second half to first half to drive that EBITDA margin improvement?

[Ricky Dillon:]

Sure. I think the -- as we've been saying, I think the biggest tailwind will be improving product volume. And so that's going to be the biggest driver to that improvement first half to second half. You'll see about the -- you'll see incremental bonus expense at some level. And you'll see a little bit of incremental savings. We hope to get the benefit of continued improved utilization, less underabsorption like you saw in Q2. So I think the biggest -- Q1 to Q2, I think, the biggest tailwind will be product volume. We do have a mix play that will be favorable as the product volume kicks up, and that's going to be our biggest driver of improvement.

[Operator:]

Our next question comes from Jeff Hammond with KeyBanc Capital Markets.

[Jeffrey Hammond:]

So just on, I guess, another cut at price cost. I think you talked about airfreight and manufacturing variances in the first half. How are you thinking about manufacturing variance in the second half? And then also, are you doing something to kind of shift away from this airfreight issue over time?

[Ricky Dillon:]

Well, a couple of things. I think airfreight is a bigger factor now because of the rise in demand. And it's not just our business, it's kind of global and our -- managing our inventory levels. So as I said on the call, you saw more in Q2. As we carefully balance inventory levels, you'll see a little bit more airfreight than normal. I think over time, you see -- as we've talked about, the goal is to minimize airfreight, and we've focused a lot on ourselves and us planning to do that. This is an unusual period because we're kind of threading the needle here on how much inventory you met back in without just opening the flood gates until we see kind of a sustainable level of normal demand that Randy talked about, which we think we'll get to by the end of the quarter. I think from a utilization and a cost perspective -- or absorption, we still believe back half will have neutral to favorable absorption. As we look at our operating facility, certainly favorable front half to back half. And then the cost associated with that, as we talked about, where we took the targeted pricing such that any incremental commodity/rate, all of those inflationary costs would be covered by pricing. So that should be a net neutral from an EBITDA perspective.

[Jeffrey Hammond:]

Okay. And then just at a high level, I mean, I think you seem to have line of sight to kind of get back to demand levels kind of pre-COVID. And predating that, you were -- there were a lot of moving pieces with kind of restructuring, resizing the company for its simplification. Just maybe as you step back and look at the -- your structural cost base, how are you feeling about -- as you get back to this more normal rate kind of starting to get back on track to these long-term margin targets?

[Ricky Dillon:]

Sure. As we consistently talked about, structurally, we've taken the $33 million worth of cost out. We feel good about that. There will always be opportunities to continue to drive efficiency, and we continue to look at that. We really think, from a margin perspective, this is really about volume. And I define it in 2 steps. First, getting back to kind of that normal flow, which would take us back to -- when we set the margin target, take us back to that $600 million in top line. And then -- and we view that as market recovery. And then leveraging our growth on top of that, which is driven by NPD, which is driven by focus on value-added and service work and rental, we believe those 2 as kind of the final steps to getting to that 25%. If the recovery continues, the sooner we get to this $600 million mark, you've got margins in excess of 20%. Based on the work we've done, it should be in that 21% to 22%, if not better. And then the further sequential improvement volume is what drives us to the 25%. So we're still committed to our objectives. We think we've done all of the things we need to do. And a little bit of broken record, we see it in the quarter. We see it in the EBITDA margin improvements first half, back half. We believe getting back to that normal run rate gets us to the 20%-plus EBITDA margin and sets us up to drive the 25%.

[Operator:]

Our next question comes from Brendan Popson with CJS Securities.

[Brendan Popson:]

I just want to ask, with your commentary on the back half of the year, obviously, Q3 is typically strongest. But it sounds like you expect, given a recovery, sequential growth in the Q4. I just want to confirm that's the case. And then following up on that, you also had a comment that you expect to be at pre-COVID levels at the exit of the year. So I guess, outside of any further hiccups, is that -- looking out beyond FY '21, is that a good way to think about your revenue potential as we exit the year?

[Randy Baker:]

Yes, that's exactly what we were inferring, is that, first of all, the sequential improvement will accelerate. And we're very happy with the inbound orders that we've seen to date in March. And one of the interesting elements that we're watching is that if you recall last year, the big drop off didn't occur until the last week or so of March. And so the fact that we were already 15% up versus prior year in March is really supporting our projections that it's going to accelerate, and we're going to have somewhat of an off-cycle or a typical year where the third quarter is our peak, followed by the fourth. We believe that, that will be -- that cycle will not occur this year, that it'll be sequentially better each month and each quarter. And so if you think about the pressure wave that I gave you in the slides earlier on in our prepared remarks, that gives you the range of a normal operating year. And what we do is we look at the best months that have been achieved and the worst months that we've achieved over a particular history of the company, and you can see we're back in that range and the slope of that line has been accelerating. So we look at the economic reports. We look at our inbound booked orders. We're looking at how well our factories are performing and then we look at our major vertical markets that Jeff walked us through. And all of those factors bring us to the conclusion that the exit point of the year, we're back in business. And as Rick said, now that we've worked on our balance sheet very, very hard, we positioned this company very well to start accelerating our strategies, which is around certainly other things beyond just the organic growth story.

[Ricky Dillon:]

Quickly here, when you look at the pressure wave on Slide 4 in terms of how you should be thinking about Q3 versus Q4, Q3, obviously, normally, has that peak. You can see it on the pressure wave. This will be sequential improvement. If we look at that dotted line, it speaks clearly to order rates getting back to kind of normal by the time you get to the end of Q4. So by normal, we mean back into the pressure wave. And that's our expectation. So your question of the continued sequential improvement, as Randy described, you can also see it on this slide.

[Operator:]

Our next question comes from Ann Duignan with JPMorgan.

[Ann Duignan:]

I'd like to just go back to price cost, if we could. Can you talk about the pricing that you said you've issued this quarter? Is that just on products going through distribution? Is it on all products? Is it on all products and services? And how much did you increase pricing by? I'm trying to get a sense of how much pricing will contribute to the guidance you gave for decrementals, incrementals.

[Ricky Dillon:]

So I view this as similar to what we did back when we were looking at tariffs. These were targeted pricing for targeted products that are specifically impacted by the costs we're seeing. So it wasn't across the board. As we talk with the tariffs, it's anywhere from, call it, 1% to as high as 4%. But again, it's specific to the costs impacting those products. So when you think about read-through of pricing, on a net basis, what I said earlier was this will -- pricing will offset costs. And we'll continue to look here in the back half to read -- what pricing looks like going forward to generate that normal read-through of roughly 1% that we would take on an annual basis. But these actions are cost-specific and net neutral for the back half of the year.

[Ann Duignan:]

And I appreciate that. I guess my follow-up is along the same lines. On the cost side then, I'm assuming, though, that you had purchased a lot of your steel and a lot of your aluminum earlier before prices got to where they are today. So you may be price cost-neutral for the next quarter or 2 quarters based on your forecast. But for how long will the current pricing cover you in terms of neutral into next year without further price increases?

[Ricky Dillon:]

Well, what's a little bit different this year than maybe historically is while we do have some of the steel or machine parts, I should say, purchased, we're not sitting nearly anywhere near the inventory levels that we've historically had. So the numbers I gave are kind of back half-focused, with the price really being taken to offset those costs. So at some point, should prices go down or when prices go down, there will be a benefit. But right now, we're really factoring in how we're going to manage this, the cost associated with bringing inventories back up both to meet demand. And then on a go-forward basis, we've been talking about sales and ops planning. So our purchases will be much closer to demand than you've historically seen, and you should see the lower inventory levels accordingly.

[Ann Duignan:]

Okay. That's helpful. I appreciate that. And then just a quick follow-up on cash flow. Would you expect cash flow to be negative in Q3? Just given comments on adding inventory, et cetera, just unseasonably, but the first half was unseasonable also.

[Ricky Dillon:]

Right. We didn't provide the guide on cash. And I think you hit it because we really have to monitor inventory and have to monitor demand and the timing of the demand through the Q3, Q4. As we talked about earlier, you definitely see an accelerating demand as we approach the end of Q4. so this is about working capital, which will be the biggest driver. Obviously, you got to get lots of favorability from the EBITDA, but the working capital is going to be carefully managed. So it's hard to say what those -- that will look like on a quarter-by-quarter basis.

[Operator:]

Our next question comes from Deane Dray with RBC.

[Deane Dray:]

Can we circle back on the impact of the extreme weather in Texas? You said that there were some missed business opportunities, interruptions. Can you quantify that? How much was recouped in the quarter? How much do you think in the coming quarter that will contribute in terms of a catch-up? And are there any new construction opportunities that will come out of it? We're hearing lots of investment in hardening of the grid and the wind turbines. Any new opportunities that are going to come out of that for you guys?

[Ricky Dillon:]

Sure. I'll start with impact on the quarter. The -- from a quarter perspective, it -- I would say, roughly, call it, $1 million top line, somewhere in there. So -- and it's definitely a flip between Q2, Q3, Q4, likely Q3. So not a huge impact, but an impact nonetheless. The margin flow-through on those products on that work is pretty good. So that's what we see in terms of impact timing. It is a flip between Q2, Q3. We did start to see that work come back online as we kind of navigated through the quarter. So that's how we think about the impact from the weather in Texas. Jeff, do you want to talk about opportunities?

[Jeff Schmaling:]

Yes. Again, just mainly what was impacted was some labor, some jobs that we were scheduled to go out on. We didn't. Primarily, the biggest from a margin impact, it was the lack of rentals. We normally rent quite a bit of tooling out of our Deer Park facility, which obviously didn't go out. We had a little bit of logistics impact. We couldn't get trucks in and out where we needed to, to ship some products. But I guess the impact on product was relatively minor. In terms of going forward, yes, I think a lot of it's going to come back, perhaps plus some in Q3 here. We're already seeing our rentals start to pick up, our request for a little longer-term rental on equipment pick up. And to your question specifically, we are seeing some opportunities for some repair and some strengthening of the grid down there. So probably primarily a Q3 impact on the plus side.

[Deane Dray:]

All right. That's good to hear. And I apologize if you said this and I missed it. The uptick in orders for March at 15% is pretty impressive. And any way you would break that out in terms of geographies, business verticals? Just additional color there. I think since that is we're at this pivot point now, anything that we can gauge that would be helpful.

[Randy Baker:]

Let me just start off. It's very broad, and it's what we needed to see. A lot of good regional improvement. And Jeff, do you want to jump in there?

[Jeff Schmaling:]

Yes. I mean, that's the highlight of that one. It's across a lot of verticals. It's across a lot of regions, and it includes orders from distribution. So the fact that we can't pinpoint one big contributor overall is a good news for me that it is a little more widespread positive uptick.

[Deane Dray:]

And that also includes geographies?

[Jeff Schmaling:]

Yes, absolutely.

[Operator:]

Our next question comes from Michael McGinn with Wells Fargo.

[Michael McGinn:]

I just want to start off by saying as a native Central New Yorker, it's not every day you hear about incremental manufacturing investment into Cortland, New York. So appreciate that. My first question relates to the long-term growth algorithm you guys have stated with leverage now in a reasonable place. Historically, your focus on M&A has been addressing different geographies within tooling like the Larzep brand. Going forward, do you still think there's room for regional geographic expansion? Or is this a different model where maybe you're looking to get closer to the factory floor with tooling and automation? Or anything that stands out for you guys right now?

[Randy Baker:]

Let me just try to recap some of the things we've talked about in the past and then bring it back to your question about geographies. The main thing that we've focused on has been the vertical and then the associated tools that go with those vertical markets. So things that have been highly interesting to us in our last acquisition, which is essentially just a year ago, that was based in the torque and tension markets, which we thought was a great fit to expand our tool platforms. And we've already seen the benefits of that acquisition of expanding our torque wrench product lines. We still -- we now have a full 3-tiered product line. And I believe that, that has been a very good acquisition. So that's a good example of how we view it, both from a vertical market we intend to participate more in and then the types of tools that go into that vertical market. And so things for us right now, obviously, torque tension, handle tensioning devices are still very interesting. Cutting and bending devices are also very interesting. And then the peripheral tools that are in general industrial markets like aerospace are also quite interesting. And then to directly answer your question relative to the geography, as we've said in the past, we believe a brand in the Asia Pacific market, at some point, would be very valuable. And that's really the last major geographic move we need to make, would be an Asia Pacific-manufactured brand.

[Michael McGinn:]

Great. Appreciate it. And then moving on to the margins. I know a lot has been discussed already, but if I back into the numbers, I'm coming up with something like the -- you're probably going to have to breach that 20% operating margin threshold within ITS by the fourth quarter. I just want to make sure I have that correct. Is that on par with similar prior peaks? And maybe can you help us frame what the margin differential from your new product development efforts have been under the 80/20 simplification versus SKUs that you kind of have been rolling off the platform in terms of legacy products that are maybe lower margin that you've offered previously.

[Ricky Dillon:]

I think from a margin perspective relative to the Q3, Q4 progression, I think we're saying, when we end the Q4, we'll have an order rate that supports a 20 -- at least 20% margin run rate going forward. So that's how we're describing our progression through the back half of the year. Jeff, do you want to talk about NPD and margins there?

[Jeff Schmaling:]

Yes. I mean, certainly, as we develop new products, our target is always to be at least at line average and hopefully, a little bit above if they're really new and innovative products. So I don't see any interruption in that as we continue to launch new products. So certainly, the intent is for all those to be incremental.

[Ricky Dillon:]

And with any NPD, they don't always start at target, but we've had success in getting them there fairly quickly.

[Michael McGinn:]

Okay. And then if I could sneak one more in on a little more specific end market. Rail has come up a couple of times as an incremental opportunity. I just want to see, is this something where you're in the railcar manufacturing facilities on the track? Are you working in conjunction with like a Nordco Wabtec application? Or can you just kind of frame what your rail business is and what it looks like and who you compete within that market?

[Jeff Schmaling:]

Yes. Sure. Most of our activity is really on the rail side and the maintenance side of that system. We've got several specifically designed products to help maintain and install new rail and things like that. The competitors in that space, kind of our normal hydraulic competitors, we have several partners that are primary suppliers to the big rail operators. So it is through distribution, but it's relatively targeted specific distributors that sell to those end users. So that's a space that we are bringing out some new products and some updates to our current product line. But given the age of that infrastructure, we do think there's opportunity there. And already this year, we've seen a fairly nice uptick in orders into that space.

[Operator:]

. Our next question comes from Justin Bergner with G Research.

[Justin Bergner:]

Just to start, I wanted to sort of step back and look at that 20% EBITDA margin guidance. If you end the current fiscal year with something on the order of $525 million of revenue and $70 million to $75 million of adjusted EBITDA, what are the benefits beyond the normal incrementals that allow you to get to that 20% margin at $600 million of revenue, which basically would translate to an incremental $45 million to $50 million of EBITDA on an incremental $70 million of revenue? I'm just having sort of some difficulty thinking of the drivers beyond the sort of normal incremental range that allows you to get there?

[Ricky Dillon:]

Sure. When we say getting to that normal and that $575 million to, call it, $600 million in revenue, we look at that if you go -- coming out of '19, we were guiding, call it, somewhere between -- I think midpoint was right around $595 million of that original guide. We've now taken all of the cost, $33 million of the cost -- of cost out that exiting at that $600 million level, which combined with the leverage on the cost out, that gets you to that 35% to 45% incremental, definitely high end. And it also results in the EBITDA margin at a normal run rate. At 600-plus revenues, that EBITDA margin to be above 20%. And so in terms of what happens, it's really product. Product growth and product volume, that's what's really missing right now. And when I say product, it also includes -- Jeff talked about this earlier, improved rental service activity as part of our value-add really. And then you get the approved -- sorry, improved manufacturing utilization from the volume. And we do have continued facility rationalization benefits that are yet to come as well. So all those combined, consistent with our original margin lock, we think you hit that roughly $600 million mark. You've done -- we've done all the self-help things up to that point to get us to 20%, plus $600 million above 20%. And that above 20% to 25% is really driven off of market NPD, value-added work and continuing to drive efficiencies within our manufacturing facilities.

[Justin Bergner:]

Okay. My second question relates to the infrastructure demand in Europe. I think this is something that you emphasized new today or at least emphasized a lot more today. So what are the drivers there? Obviously, Europe's a lot of different countries and subregions. Does this have legs? How much of your European revenue base is tied up with infrastructure-related demand at present? Just any sort of background you can provide would be helpful.

[Jeff Schmaling:]

Yes. There's been a book of quotes that we have had for numerous projects. I emphasize the bridge project, especially. We've got numerous bridge projects, numerous -- just kind of transportation-related quotes that we've had open quotes on for months and it's been really encouraging that we are seeing many of those start to come to award stage. So I think as I talk to my team in Europe, they're pretty bullish on the fact that the spending that has been planned for -- since pre-COVID is starting to get released. So I hesitate to give you a percentage of our revenue over there that's tied up in that. But between those projects and the sales going through our general distribution, it's a meaningful amount of our business. So I think there's some pent-up demand there, but there's also been some new projects as well that we're starting to get some information on. So good news, frankly, all around.

[Operator:]

That's all the questions today. I'll now turn it back to management for closing remarks.

[Randy Baker:]

Okay. Thank you very much, everybody, for joining us today, and we'll look forward to follow-ups.

[Operator:]

Thank you. This concludes today's conference. All parties can now disconnect. Have a great day.