Enerpac Tool Group Corp (EPAC) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Actuant Corporation's first-quarter earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded Thursday, December 18, 2014.

It is now my pleasure to turn the conference over to Karen Bauer, Communications and Investor Relations Leader. Please go ahead, Ms. Bauer.

Thank you. Good morning and welcome to Actuant's first-quarter fiscal 2015 earnings conference call. On the call with me today are Mark Goldstein, Actuant's Chief Executive Officer, and Andy Lampereur, Chief Financial Officer. Our earnings release and the slide presentation for today's call are available in the Investors section of our website.

Before we start, a word of caution. During this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Investors are cautioned that forward-looking statements are inherently uncertain and that there are a number of factors that could cause actual results to differ materially from these statements. These factors are outlined in our SEC filings.

Consistent with prior quarters, we will utilize the one question, one follow-up, rule today in order to keep the call to an hour. Thank you in advance for following this practice. And with that, I will turn the call over to Mark.

Thanks, Karen; and thank you for joining us on our fiscal 2015 first-quarter earnings call. As you saw this morning, we reported first-quarter results that were modestly below our guidance and consensus estimates.

The stronger US dollar and unexpected litigation charge were the primary drivers versus our original guidance. Compared to the prior year, EPS was down due to those same items, as well as an $0.08 per share headwind from a higher effective income tax rate. Andy will provide more detail on these items in his prepared remarks this morning.

During the fiscal quarter we repurchased 3.3 million shares of stock for $104 million. This, coupled with normal seasonality, tax payments on last year's RV divestiture, and a build in working capital, resulted in an increase in our net debt leverage during the quarter.

The Energy segment core sales growth in the quarter was strong at 6%, with 30-plus-% core growth in Viking, which had its best quarter under Actuant ownership. With the exception of Cortland, Energy segment results were in line with expectations and not significantly impacted by the dramatic decline in oil prices. However, the oil price drop has now started to become more visible in pricing and order patterns across Energy.

Sales in the other two segments continue to reflect sluggish and inconsistent demand. In Industrial, integrated solution sales continued below expectations, but new orders picked up and backlog grew. In Engineered Solutions, we had a tough prior-year comp in European truck as well as slowing demand in ag OEM.

As communicated in this morning's release, we lowered our guidance for the year, taking into account the 35%-plus decline in oil and gas prices over the last 90 days as well as continued inconsistent demand in other markets. We will spend time on this topic later on the call, especially on the Energy outlook.

With that overview, I will turn the call over to Andy to go over the quarterly details.

Thank you, Mark; and good morning, everyone. Sales for the quarter were approximately $328 million and diluted earnings per share was $0.38 a share. The stronger US dollar against virtually all other currencies had a meaningful impact on our financial results.

Versus guidance, currency rate changes caused a $6 million sales shortfall, a 2% EPS headwind, and an $8 million increase in net debt. The euro and pound weakened against the US dollar by about 5% during the quarter, while currencies for Brazil, Norway, and Australia -- all heavy oil and gas markets -- each weakened about 10%.

A slightly higher effective tax rate compared to our guidance was a $0.01 a share EPS headwind as well, along with a $0.02 a share litigation provision that we booked in the quarter. Excluding these items, EPS would have been within the guidance range and sales at the low end.

Compared to last year's $0.44 first quarter, it's important to remember that we had an 8% effective tax rate last year versus 24% this quarter, which in itself was an $0.08 a share headwind. That's in addition to the currency and litigation headwinds.

Excluding these items, first-quarter earnings per share grew year-over-year, essentially the result of stock buybacks over the past year.

Turning now to slide 5, I'll provide a few comments on sales. Our consolidated first-quarter sales were down 3% year-over-year, with core sales down 1% and currency meaning a 2% headwind.

Current-year sales from the Hayes Industries' acquisitions essentially offset the divested RV product lines revenues in the first quarter of last year in the year-over-year comparison. Engineered Solutions had a tough comparable due to last fall's emissions-related European truck pre-buy and finished down 7% core, while Industrial segment core sales were down 1% and Energy was up 6% on a core basis. I'll provide more color on sales by segment shortly.

Our consolidated operating profit margins were down 120 basis points year-over-year to 11.7%, 60 basis points or half of this decline was attributable to the litigation charge and about 25 basis points due to currency. The remainder -- the remaining 35% basis points -- 35 basis points or so of margin erosion was a net impact of all other items including reduced production volumes, mix, and lower spending.

I'll now turn to segment-level results, starting first with Industrial on slide 7. We saw sequential improvement in year-over-year core sales in the Industrial segment, from minus 7% in the fourth quarter to minus 1% in the first quarter. The Industrial tools portion of the business was up 1% core, but integrated solutions declined 17%.

In general, customers are extremely cautious on pulling the trigger on projects across many of our businesses, not just in the Industrial segment. That being said, bookings were strong in the quarter in integrated solutions, including the $10 million project that Mark will expand on.

Operating profit margins in Industrial were 26.1% in the first quarter, a 120 basis point reduction from the prior year, almost entirely due to the mix from the Hayes Industries acquisition, which currently operates at lower profitability levels than the base Enerpac business. Hayes is off to a very good start. While it's not included in the core sales calculation, its top line grew again over 10% in the quarter and its profitability is in line with our expectations.

Moving on to the Energy segment on slide 8, Energy had a solid quarter with 6% core sales growth and 290 basis points of year-over-year margin expansion. I'm happy to report that much of this was due to a great quarter from Viking, which posted 30%-plus core sales growth and EBITDA margins north of 25%. This was Viking's best sales and earnings quarter since being acquired 15 months ago, and it's the type of growth and profitability we knew it was capable of generating when we acquired it.

Hydratight also grew in the quarter, but overall segment results included a core sales decline at Cortland. Cortland saw its seismic market sales decline in the quarter on account of the lower oil prices, while customers in other product lines hesitated on starting new oil and gas projects.

Geographically for the segment in total, Asia and the Americas were strong while the North Sea and the Middle East softened during the quarter. We'll dive deeper into the impact of lower oil and gas prices later on this call.

Rounding out our segment discussions I'll finish up with Engineered Solutions, and I'm on slide 9. We knew that we'd have a down quarter in this segment versus the prior year's 15% core sales growth. The European truck pre-buy last year was a big headwind, as were weaker demand in emerging markets such as China and Brazil and softening demand in agriculture.

The 7% decline in core sales growth, the divestiture of the RV business last quarter, and currency headwinds cost Engineered Solutions sales to decline a total of 14% from a year ago. Operating profit margins declined over 400 basis points year-over-year, the result of lower volume and related absorption of fixed costs. These margins are not where we want them to be, and our segment leadership team continues to work on improving them, including additional facility consolidation, management changes, and other actions.

To wrap up my part of today's prepared comments, I will cover cash flow and capitalization now. As you saw in the press release, we continued repurchases of stock during the quarter. In total we bought back 3.3 million shares, including approximately 1.5 million shares since our year-end earnings call on October 2.

Taking into account the additional 600,000 shares that we've acquired so far in December, there are approximately 5 million shares remaining under the current 7 million share buyback authorization.

The combination of the $104 million of capital we spent on buybacks in the quarter, plus the $8 million net impact of currency changes on net debt and the approximately $31 million of negative free cash flow in the quarter increased our net debt by $146 million in the quarter. Net debt-to-EBITDA leverage increased to 1.8 times at quarter end.

Our first-quarter cash flow was impacted by a $17 million build in working capital and $10 million of income taxes on last June's RV divestiture gain, as well as a handful of other items. Despite the weak cash flow quarter, our liquidity and availability are both in great shape to handle future capital deployment and acquisitions, organic growth opportunities, and buybacks.

I'll now turn the call back to Mark.

Thanks Andy. Before covering to the rapidly changing energy environment we are facing, I wanted to highlight a number of positive things going on at Actuant. One of these items Andy referred to earlier and is a significant win for the Enerpac integrated solutions business. The project is very unique and typical of the creativity that our IS technology can enable.

An elevated offshore roadway is being constructed around one corner of Reunion Island, which is an island off the eastern shore of Africa where rockslides are common and potentially hazardous to drivers on the existing coastal motorway. The IS team has begun working on this $10 million order, and we will start to see revenues in the fourth quarter of this fiscal year.

The second area I want to highlight is that Hydratight booked another order for its patented Morgrip subsea connectors in the quarter from Petrobras, the large Brazilian oil company. These mechanical connectors are used in emergency subsea repairs, often when aging infrastructure fails. Oil companies such as Petrobras are making sizable investments in such contingency products regardless of the decline in oil prices, in order to reduce their risk.

Another important win took place at Gits, which booked a couple of orders for highly engineered valves worth in excess of $50 million over the truck platform life from a leading European OEM. This is another example of the fruits of years of investment in technical solutions selling. Shipments don't start until 2016 and 2017.

Our investments in people and new technology continue to pay off, as evidenced by these new wins and a top new product award for our ag seeder patented system that we highlighted at our October investor conference.

Now unfortunately, these successes have been overshadowed recently by the significant market changes and headwinds we've encountered since starting the current fiscal year. To summarize these, we've seen a 35% decline in oil prices since we provided our current-year outlook; and, frankly, this remains a very uncertain picture.

Simultaneously, we've seen a meaningful strengthening of the US dollar, which impacts not only the translation of our international results into US dollars but also input costs to those foreign units buying components from US dollar-denominated suppliers. We've seen demand in Europe, Brazil, and China weaken pretty much across the board. And finally, both European truck and ag OEMs have reduced build schedules for their products, impacting our forecast as we move deeper into fiscal 2015.

Collectively these factors and a lack of positive GDP momentum and traction have caused us to recalibrate our outlook for the fiscal year. Within our portfolio, we don't have any short-cycle or consumer-facing businesses that may benefit in the near term from the dramatic reduction in oil prices.

Before we review our revised guidance for the year, we wanted to address investors' questions on our energy exposure and provide a perspective on how the rapid reduction in oil prices will impact us going forward. Here on slide 13, we have isolated our exposure to oil and gas markets, which extends beyond but does not include the entire Energy segment.

Approximately 34% of our total sales are related to energy markets, with a portion of that not tied to oil and gas, as we illustrate on this slide. In total, we estimate that about 28% of our total revenues are linked to oil and gas, with exposure in both the Energy and Industrial segments.

If we dive deeper into this approximate $400 million slice of our business, you can see that we've essentially no exposure to midstream oil and gas. Our upstream exposure, where most of the project deferrals and cancellations have occurred, primarily impacts Viking and portions of Cortland. These two businesses are more impacted by oil price changes than Hydratight.

Viking is largely focused on mooring drill rigs, and we have been talking about reduced demands and deferrals in the North Sea and in Norway specifically. However, Viking has won large new products in Australia and Southeast Asia, which more than offset the North Sea weakness in the first quarter.

Although we just reported that Viking had its best quarter, based on dialogue with customers we expect it to soften as the year progresses. However, even with this deceleration, we still expect to see full-year core growth in Viking.

Two-thirds of Cortland's sales are tied to oil and gas. Its seismic tow cable product lines are used in exploration and have already been impacted by the oil price reductions in the first quarter.

While its umbilical and workover cables are frequently used in maintenance applications, they are larger dollar in nature and therefore more tied to capital spending patterns. As such, we feel demand will decline as capital spending is pared back.

Our downstream oil and gas exposure primarily relates to MRO sales and service at Hydratight and Cortland. We believe this is likely to be the least impacted, since it's tied in with safety, production, and uptime -- all of which are mission-critical. There is a potential for customers to reduce maintenance scope and to extend intervals between turnarounds, but thus far this has been minimal.

While we haven't owned our Energy businesses through numerous cycles, we do know that our customer demand was pretty consistent despite significant oil price movements over the past decade. Additionally, our Energy segment held up relatively well in the Great Recession.

We are bullish on Energy in oil and gas for the long term, and that has not changed. We will manage the current situation aggressively, but cannot predict with certainty at this time how long this will last or how much it will impact Actuant, as the situation is dynamic.

That's a great segue into guidance, which I'm now going to discuss, starting on slide 15. As noted in the release, we lowered our fiscal 2015 sales guidance to a range of $1.33 billion to $1.37 billion, and earnings per share to $1.85 to $2.00 a share. The biggest challenges from our prior guidance are sales outlook and completed share buybacks.

From a sales standpoint, we are lowering the core sales growth expectations for all segments, but most notably in Energy. We now expect Energy core growth to be roughly flat, moderating from the 6% we delivered in the first quarter to negative single digits by the end of the fiscal year.

For Industrial we still expect growth, but we've slightly narrowed our core growth estimate to 3% to 4%. And for Engineered Solutions we've adjusted our expectations to negative 2% to 4%, predominantly for the agriculture and European and China truck markets, which are experiencing moderating order rates beyond what we originally anticipated.

On a consolidated basis our core growth range for the year is now negative 1% to positive 2%.

As we saw the first quarter, worldwide currency rates weakened across the board against the US dollar, with the biggest movements in currencies other than the euro and pound. As a frame of reference, the change in currency rates versus last year impacts sales by about $52 million; and the change in rates caused a $31 million headwind versus our prior guidance.

From an earnings standpoint, we expect normal decremental margins on a larger volume. We expect to offset a portion of this decline with cost-reduction activities, and we are implementing contingency plans established for this sort of demand change in each one of the businesses.

Partially offsetting impact of lower volume is an approximate $0.05 benefit to EPS from share repurchases completed since issuing our previous guidance.

To round out the full-year guidance discussion, we expect our free cash flow in 2015 to be approximately $150 million and the 15th consecutive year of free cash flow conversion over 100%. Our expectation for the second quarter is for sales to be in the $310 million to $320 million range, with EPS of $0.25 to $0.30, compared to $0.30 in the prior year. As I reviewed earlier, currency definitely impacts the comparison to the prior year and represents an approximate $0.02 year-over-year headwind.

Finally, our second quarter has always been our weakest of the year due to normal seasonality. Just to reiterate, all guidance excludes the impact of any future acquisitions or share repurchases -- in this case, just to be clear, any that take place after today's earnings announcement.

That wraps up our prepared remarks. Let's open up the call lines for Q&A, please, operator.

(Operator Instructions) Rob Wertheimer, Vertical Research Partners.

Hi, good morning and thanks for the extra disclosure on oil and gas. Your disclosure of oil was great, and that was very helpful, so thank you.

One question just so I make sure I understand it right. On the downstream side, you are lumping in, like, the more stable production. It doesn't just mean refinery and petrochem; it means production, etc.?

Yes it does, that's correct.

Okay, perfect. Then just wanted to ask, I mean there's been some rumblings of even production curtailments in the North Sea and maybe in other offshore areas. Are you hearing any of that from your customers? If it happened, do you anticipate it would take two and three years?

I don't know what people are planning or whatever. Are you hearing any weakness on that side of the business, let's say?

Yes, Rob, what we are seeing and what we talked a little bit about last quarter was in the North Sea specifically, with Statoil up there; they have warm-stacked a couple of rigs and they plan to go back into service sometime over the next quarter or so. So we have seen that trend there.

But that's where we've seen it specifically. We haven't seen it in Australia or Indonesia or any of the other markets where we are actually offsetting some of the decremental revenue from the North Sea and making it up down in Australia and Indonesia.

Just to clarify, Rob, that would be -- those rigs are drill rigs as opposed to production rigs. So we have not heard -- I mean there's a lot of things that are under consideration by our customers, but we haven't gotten any feedback that there is any change as far as production rigs coming down in any meaningful way right now.

Yes, nothing definitive.

Perfect. Then your guidance is based on what you are hearing from customers now, or what you are guessing they might tell you in -- I know this is a tough question -- but what you are guessing they might tell you in three months? Or what you're hearing?

Or how far down the curve of guessing about it could get to do you try and incorporate? Thank you. I'll stop there.

Yes, there's really number of things we look at. We go through a bottoms-up forecast from the businesses based on what they see. We look at the macro environment.

We have history certainly with -- from a specific standpoint. In Energy we have history through the (technical difficulty). So we take a number of these elements as well as customer feedback into the guidance recommendations.

Thanks again.

Matt McConnell, RBC Capital Markets.

Thank you good morning. I'm hoping you can help with a little more of the historical context around the newer parts of your Energy business. We know what Hydratight did last cycle; but how would Cortland and Viking impact that?

Do you have what they did peak-to-trough last cycle, or how they held margins, or anything else that can help us understand the historical context?

I guess it depends what you consider the last cycle to be. During the Great Recession we do know Cortland, because we owned Cortland; and certainly that piece came off considerably more than the base Hydratight business. We saw about 20% declines in that business, because it's more aligned with capital spend.

Seismic markets as an example were impacted more, where some of the other markets impacted less. Margins did click down because of the absorption factor on it.

Viking we did not own at that time, so we really can't comment.

okay. Okay, I'll just have to estimate, I guess. But I guess switching gears to Industrial maybe, and I know there are some comp issues with integrated solutions and that creates some noise. But now it's on about 10 quarters of no organic revenue growth.

So I know the environment is tough. Maybe based on PMI or industrial production you'd expect some growth. But any reason why that's decoupled over the past few years, I guess?

Let me answer that in a couple different ways. Just to talk about Industrial in general, I need to separate the integrated solutions part of the business from the core industrial tool side of the business. In the last quarter we had a negative 17% in the integrated solutions business and plus 1% in the industrial tool side of the business.

We are seeing that sort of low growth in all markets across the board. We started seeing a decoupling from PMI ISM data probably about 18 months ago or so, maybe even a little bit further than that.

There's a couple theories. One of the theories around that is we've significantly reduced our cycle time on orders. If customers want the shipments immediately, there's about 400 SKUs in Industrial that we ship within 24 hours of the order; and that's really been done over the past year or so to get that service level where it needs to be.

As a result distributors don't have to carry the inventory. So part of the process in the past was as the ISM PMI data came out, inventories were stocked in distributors; and we've really taken a lot of the inventory out of the system. So I think that has added to it.

The other piece as I look forward, the incoming order rates we saw moderate improvements in both the IT and the IS order rates over the past quarter, which makes us feel better. If you take a look at the North American market in particular and you look at the customer base, the National Accounts like Grainger, MSC, are growing very strong: mid-single to double-digit year-over-year increases. The larger independents are growing positive.

And where they are is shortfall year-over-year are in those distributors that focus on one of the vertical end markets like mining or like oil and gas where we are seeing some headwinds. So that in a nutshell, Matt, is what we see going on. We've seen this decouple for the past 18-plus months.

Yes, okay. Thank you; that's very helpful.

Allison Poliniak, Wells Fargo.

Hi, guys, good morning. Just want to go back to Viking, make sure I understand the business a little better. In North Sea it sounds like you have some visibility that there could be some improvement in that market this year.

But as you look to Asia-Pacific where you are seeing strength, what is the concern? What's your visibility there in terms of things getting pulled back or delayed? Do you guys have any thoughts on that?

We aren't saying pullbacks, I would say, within Asia. That's for sure. The growth that we are seeing in the last three quarters has been coming out of Australia and Asia Pacific.

It's actually been the North Sea that has been weak, and I would expect the North Sea to continue to be weak. Norway in particular. The UK side of it appears to be hanging in there better.

We've had several projects going on in the last three to six months in Australia. One of those is winding down the end of this month, into next month. So the growth rate will moderate a little bit down there, but we still expect it to grow as we move forward.

We had a super quarter. This quarter we are locking down some contracts longer-term to continue the flow of revenue in this thing. But -- it will grow for the year, but clearly it's going to come off. I think we've seen the best quarter of the year and it will come off.

North Sea will come off more than Australia and Asia Pac.

Okay.

Allison, just to reiterate there, we are not projecting the North Sea to bounce back. We have had a number of rigs hot-stacked. They come and go.

But that's where we see, to Andy's point, more softening.

Okay. Okay, that's fair. Then just even going back to the Industrial comment, bookings strong on the integrated solutions. I mean, is that what gives you the confidence that's where the back half of Industrial could get a little better, based on the first half, since you're there?

Well, certainly the first quarter was below my expectations from a revenue standpoint, Allison. So that's one of the reasons that we look forward and took a look at what we needed to do for the remaining three quarters of the year.

I think our quote on the IS side of the business, our quote funnel is strong. But that being said, IS was down about 30% in the second half of last year, so the comps are going to be a little bit easier coming in.

We just -- we are starting to see some orders. We are not claiming victory yet, but it's a step in the right direction from the order flow that we saw in the prior quarters, prior periods. But it's still low single-digit, mid single-digit that area.

Okay, great. Thank you.

Jeff Hammond, Keybanc Capital Markets.

Hey, good morning, guys. Just back to Engineered Solutions, you've got a 6-point swing in the growth rate. It seems like a quarter ago we understood ag was getting worse, and Europe truck was maybe struggling post pre-buy. So I just want to understand a little bit better what changed so materially over the last three months that you are swinging your forecast that much.

Let me take a swing at it, and then you follow in behind me, Andy. From an ES standpoint, going into this year from a truck standpoint we had originally felt pretty good about truck. And actually in the first quarter truck performed stronger than we anticipated against very high comps from last year with the pre-buy over in Europe.

What we found as the quarter progressed is that the bookings continued to get reduced as the year went on, and especially in China and Brazil and Europe, those three markets. So those are the trends that we saw in the first quarter that have led us to bring down the full-year guidance from a revenue standpoint in truck.

On the ag side of the business, if you take a look and look at -- we serve OEMs through our Elliott business with the drive lines; and Weasler is the aftermarket through the -- excuse me. Flex Shafts at Elliott to the OEMs; drive lines through the aftermarket. The aftermarket was really compensating for the reduction that we're seeing on the OEM side of the business.

And we haven't seen any reduction or improvement in the order flow on the OEM side, and the aftermarket has softened as well. So because of those trends we've brought that forecast down as well.

Within ag, just to frame out ag for everyone again, this is about a $125-ish-million segment for us. Last year we grew at high single digits. Our expectation for this year from the last guidance was 3% to 4% growth on that.

The base Weasler business certainly did that in the first quarter, both on the aftermarket standpoint and the OEM standpoint. But our order intake bookings were down in North America, so we'd expect that growth rate to slow as we move forward.

And the other piece definitely is outside of North America. Europe has slowed down considerably on the ag side. In Brazil, which was going to be one of the growth areas for the ag seeder, where we had some customers lined up, that market is in shambles right now from an economic standpoint and everything is pushed to the right.

And we anniversaried the ag seeder as well, which has impacted us. So we have a number of dynamics in there, Jeff, that are driving those forecasts.

Okay. Then just on 2Q guidance, I think you are guiding flat earnings to down earnings. Just as I look at the pieces it seems like core growth is flat; you have a lower tax rate; you have a materially lower share count.

So is there something happening with profitability just because of absorption? or are there other some other costs or restructuring that's in there that I'm not seeing? Because it just seems like pretty conservative assumptions given where tax and share count are going.

A couple things here, Jeff. I'll comment both sequentially and then on a year-over-year basis. Certainly sequentially there's no question that our profitability goes down first quarter to second quarter, and we are definitely going to see that again this year.

When you look at it on a year-over-year basis, currency is definitely coming into play in this. There is headwind where some of our supply chain when we're bringing product out of Asia, those currencies tend to be locked in with the US dollar. They have not moved; but the euro has fallen down, so this 5% reduction is creating purchase price variances coming through our numbers relative to the prior year.

The other item in here clearly is absorption in it. As our volumes come down and we are seeing OEMs in some of our end markets -- auto would be a good example of it, where they have cut back their production schedules for Q2. Truck I would say the same thing, European truck, they've cut it back because of inventory levels and whatnot. That's impacting it in the quarter.

When you look at the other piece of this, being the Energy, it's a high-margin business. Clearly it's moving within Energy, though.

You will see less benefit from Viking in Q2 than you did in Q1 because the volumes come off in Q2 on a seasonal basis and because we wound up one of the rental jobs in Asia. Again these rental jobs are very high incremental margins.

All of that gets mashed up into our expectation on it. So you have sequentially clearly a reduction in margins; year-over-year, yes, there will be a reduction in margins based on what we are forecasting right now in margins Q2 from last year to Q2 this year.

okay. Thanks, guys.

Mig Dobre, Robert Baird.

Good morning, guys. Sticking with the guidance here, the thing that I'm trying to understand, if I look at the second quarter and the full year you are basically guiding for 35% of your earnings to occur in the first half and 65% to occur in the back half. And that's a pretty healthy ramp.

Historically you been closer to, call it, like a 45/55; and even last year you've done 40/60. So I'm trying to understand how we get this earnings ramp, especially since your commentary seems to suggest that things are getting tougher rather than easier going forward.

I guess I haven't run the numbers looking at it that way, Mig, when I'm looking at what's going on here. Clearly we will.

We are definitely back-end loaded from a profitability standpoint. We always have been in this thing.

From a mix standpoint we are expecting mix to improve as the year goes along. As Industrial grows on a core basis as opposed to being a drag on a core basis, that will help out.

From a savings standpoint on some of the restructuring actions that we've taken last year and this year -- for example, we are still half-way through the move of our automotive production from our Oldenzaal plant in Holland down to Turkey. That's going to be completed roughly mid-year in early spring.

So we have duplicate overheads in both places. That will be coming out, as an example.

Clearly as a result of the downward revision in our outlook here in sales and whatnot we are taking actions now that will benefit the second half of the year. We can't undo the cost in the first quarter; that's in the books, right? So we're taking actions now and will see Q3 and Q4 reflect more of those savings as we go forward.

The other item clearly that hit, that we had in the first quarter of the year, that comes into play as well. A couple of million dollars, it has an impact when you look first (multiple speakers)

I appreciate that. But is there a way you can quantify some of these savings that we are talking about here? I mean are we talking $4 million, $3 million, more or less?

I mean, we are -- our guidance incorporates all that, so I don't want to incrementalize what's going on. Clearly there are going to be cost savings coming out of the business on this thing; but I really don't want to get into providing our estimates first-half, second-half on spend and that sort of stuff.

I think, Mig, the way to look at it is you've got industrial mix picking up in the second half, which is higher profitability; restructuring benefits, so we get the second-half benefit; contingency planning that the businesses are focused on right now and some of the other cost reductions which will have a second-half impact. And you're not going to -- and you had that one-time charge in the first half.

I think those are the components of what our margin improvement is in the second half.

That's great. I guess my follow-up, going back to Industrial specifically, you have brought down the core growth assumption just very slightly. But obviously Energy is, call it, 12.5% oil and gas of that segment. And you were commenting earlier that demand trends in the tool business remain fairly sluggish.

What leads to this acceleration as the year progresses, if you would?

In Industrial in total?

Yes.

I think we answered that question earlier, that we are going from minus 1% core to, for the year, 3% to 4% core; second half minus 30% last year in IS. We expect to be up in IS in the back half of this year.

We are seeing improvement in the trend of IT as we move through. So that's essentially what we are seeing.

I think the other thing from an energy exposure side within Enerpac, we are not expecting a significant impact. It's $50 million of exposure within Enerpac, give or take. It's not going to have a significant impact on the consolidated total here.

It's downstream. It's tied in with maintenance.

Yes. And a big part of the narrowing of the range for the full year for Industrial was that the first quarter was lower than we expected, and so we are quarter behind where we thought we'd be relative to that.

That's helpful. Thank you, guys.

Charley Brady, BMO Capital Markets.

Thanks. Good morning, guys. Can we -- I just want to jump over to Viking again and just on one of the prior questions about how it's performed in the past cycle. I understand you guys didn't own it in the past cycle.

But I mean, clearly, as part of the due diligence when you're buying it and you've got now the historical financials and results of the company, there must be some sense as we look back to the last oil disaster, 2008, 2009, some sense as how that business performed, even taking into account the fact that it's a bit of a different business today. Since you guys have bought it you've broadened it out a little bit.

But do you have any sense you can help us with to get a magnitude of how this business performed in the last oil shock?

One thing to remember as you think about this is that in the last cycle, the last Great Recession, the business was exclusively North Sea. So it was UK and Norway. There was no Asian business right now which is -- or Australia business, which is really offsetting what we see right now. And that's why we feel pretty comfortable with the way we will manage through this.

I don't have off the top of my head what the impact was with Viking during the last recession.

Certainly it was down in the North Sea; I don't have a specific percentage for you, Charley, on that. We think we factored in a reduction in the North Sea on a go-forward basis.

But we have very good momentum on Asia. That momentum will moderate as we go forward, but we had very good growth there.

I think the only other thing I will add is, as I said before, the way we assemble the forecast that leads to guidance is really bottoms up by customer from the businesses. So the guys that are in the middle of this and working with the customers on a daily basis are putting this together. So we feel comfortable with what they've brought in.

No, that's helpful. And fair point on the fact that it had 100% North Sea exposure last time and clearly doesn't have it this; so the downside probably not nearly as bad as it was.

Did you tell us how much Cortland was down in the quarter?

We can dig it out for you. Lump for us, it's 10%-ish something, 10%, 12%; and I'm guessing.

Low teens. It's low teens.

Okay. Then on the one project that you guys have coming off on the Viking business, how much -- it's obviously going to impact some of the growth. You talked about that winding, coming down a little bit as that project comes off.

When does that project come off? And can you give us a sense of the magnitude of what that might do?

Yes, it's coming off in the second quarter here. I think it is $0.5 million, $0.75 million a month type thing.

Okay.

That's incorporated in the guidance.

Got you, okay. One more question. Can you give us the share count at what it stands today, the fully diluted share count incorporating the buybacks?

The numbers that we're using in our guidance I believe are about 74 million to 75 million. I'm sorry, $64 million to $65 million would reflect what's happened through today: 64 million to 65 million shares.

Okay.

Probably the midpoint there.

That's great. Thanks Andy.

Scott Graham, Jefferies.

Good morning. I'm hoping to just talk about the framework for 2015, maybe just more of a 40,000-foot. The analyst conference you guys presented a scenario that the $2.05 to $2.15 prior guidance could be supplemented by share buybacks of 6 million, which would be additive to EPS by $0.18.

What is the share buyback thinking now versus that 6 million?

I would say that -- put it in context of that, that was a scenario that -- if we would buy back 200 million of stock during the year and if we would do acquisitions, this is what it could look like on a go-forward basis. That was not necessarily our prediction of what was going to happen in the year.

So in terms of what our expectation is for the year, our expectation is we will continue to buy back opportunistically. Obviously you get an idea from the last two quarters here we've deployed a fair amount of money in buybacks because we think it's a good buy.

And based on what our outlook is for cash flow and acquisition pipeline and timing of deals and where we want to be from leverage standpoint, I don't think it has changed at all. Obviously we revisit it quarter to quarter, but there's really no change in our view.

No. Just to remind you, for the first quarter we bought back 3.3 million for the first quarter and deployed about $104 million. So we still have a significant amount of shares available on the authorization that we received from the Board in October.

Right. Well, let me just try the math this way. If we ended up on an average basis 69 million in the fourth quarter of last year, and we are going to be in the 64 million, 65 million range, it essentially assumes that there's a somewhere in the 5 million share repurchase range. So let's call that $0.15 a share.

So between then and now -- I understand currency went the other way, and I understand energy for everybody. What I guess I would like to know more about is, that's a pretty big delta in operating income versus just two months ago. So what are we doing on a go-forward basis to maybe -- and keeping in mind of course that analyst conference occurred when one month of the quarter was already done.

What are we doing on a go-forward basis to maybe get ahead of that as opposed to being behind it, now that we are saying we're going to cut some costs. Which is the right thing to do, great; but if we also consider the fact that -- in fact this is one of my questions to you Mark, that there was also some of those top-draw contingency cost reductions that would protect the guidance and now versus where we are now.

I guess, just on a go-forward basis what do we do to sniff this out? Because there's a pretty big delta in operating income. How do we sniff that out a little faster and get ahead of it as opposed to being behind it?

Just a couple things to remember, Scott. First of all, we have had a precipitous fall in oil and gas over the past 90 days. So this is -- and it's all dynamic; it's all real-time stuff. And so it's not as easy as having all the facts in front of you and then putting together a contingency plan.

The contingency plans were put together based on some parameters. And for the Energy team in particular it was $100-plus oil. So what was developed then, it's a different scenario now. So that reality is a little bit different.

The c-plans have been implemented in each one of the businesses that are impacted by this. We've got additional consolidations in facilities that -- we had a couple this quarter, this past quarter. We're optimizing the organizations not only from a prioritization standpoint but sharing resources across segments where it makes sense.

We're sharing facilities. We're driving supply chain down, given that we think there's some opportunities there on a materials standpoint and freight.

And we are redeploying some of our corporate staff around functions like lead office on very critical projects within the business to make sure that we drive operational excellence. So I know it doesn't give you the line item specific data that you're looking for, but that's in a nutshell where -- what's changed between October and now and what we're doing about it.

Andy, you want to add more color on it?

Absolutely. When you look at our original guidance to where we are at right now, we lowered it by roughly $90 million on the top line and roughly $20 million of operating profit on that. So that in and of itself would normally be a low 20s EPS impact from that.

We talked about the $0.05 benefit from the stock buybacks that we did do that are incremental to what we had in the original guidance. So that brings down the decremental impact of this volume down to about a $0.15 to $0.20 decline.

We've broadened out the range a little bit obviously in our guidance here, but I am not sure I'm beyond that -- I mean, $20 million on a $90 million decline and a third of that decline is currency, to reiterate on this thing, it doesn't seem crazy given the decrementals in our business.

And the mix.

Fair enough. In the past you guys have been kind enough to treat us to pretty deep dive into your M&A pipeline. I was talking about numbers and segments and even a little bit of a hint toward timing from time to time. I was wondering if you guys could do that for us now, where we stand on M&A pipe.

Sure. I would say that we've got a robust funnel of M&A opportunities out there. And similar to last quarter, the majority of them are what I'd call tuck-in acquisitions, which are in the $50 million to $100 million purchase range.

The opportunities that we have out there span across all of our segments and are all focused on those macro drivers that are part of our Actuant strategy: infrastructure, energy, food and farm productivity, and natural resources and productivity. Again we've got opportunities for these tuck-ins across all businesses.

I would say that things are progressing with the funnel. These are really hard to predict, Scott, as you know; and I'm encouraged with the funnel and the progress, and we'll let you know as soon as something happens.

Okay. Thanks a lot.

Ann Duignan, JPMorgan.

Good morning. This is Thomas Wadewitz on for Ann. I think you've already addressed most of our questions on oil and gas today. Thank you for that.

Just one question. Have you seen demand across your agriculture business impacted positively by the recent rally in soft commodity prices?

No, we have not seen that. I think that's relatively short time. We typically wouldn't see those kinds of positive or negative effects in our businesses.

Okay. Thank you very much. Happy holiday.

Same to you. Okay. Well, thanks everyone for joining the call today. In closing, I just wanted to take a minute to summarize a few key points, figuring that we would deep dive into a couple areas today.

First on strategy, we continue to be bullish on the long-term growth characteristics of our businesses and the macros that we are following. Second, the global nature of our business gives us diversity during uncertain times like this and gives us a platform to serve international markets and customers.

Third, we continue to invest in growth, both organically and through acquisitions. And as we just talked about, our capital deployment priorities have not changed. We've got a robust funnel of tuck-in acquisitions and continue to opportunistically buy back shares.

Cash flow remains our hallmark. We are forecasting, even with the reduction, 2015 to be our 15th consecutive year of free cash flow conversion in excess of 100% of net income.

And finally, the organization is very strong and I have extreme confidence in my team to execute the forecast in the face of some challenging macroeconomic headwinds. So from all of us at Actuant, we hope you have a happy and healthy holiday season and enjoy a relaxing time with your families.

Finally, just a quick note that our second-quarter call will take place on March 18. I will be around all day to answer any follow-up questions you have. So have a great day and wonderful holiday.

Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.