Enerpac Tool Group Corp (EPAC) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Actuant Corporation's second-quarter earnings conference call. (Operator Instructions). As a reminder this conference is being recorded, Wednesday, March 18, 2015. 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 and good morning. Welcome to Actuant's second-quarter fiscal 2015 earnings conference call. On the call with me today are Mark Goldstein, Actuant's CEO, and Andy Lampereur, CFO. Our earnings release and the slide presentation for today's call are available on the Investors section of our website.

Before we start a word of caution. During the 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 calls, 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 second-quarter earnings call. We reported earnings per share within our guidance range on sales that were slightly below guidance. As Andy will explain, the continued strengthening of the US dollar impacted both comparisons. Our EPS excludes the accounting impairment charge we recorded in the quarter on our upstream energy exposure.

We reported 2% core sales growth in both our Industrial and Energy segments in the second quarter, and an 8% decline in Engineered Solutions resulting in a consolidated core decline of 2%. While pleased with the sales growth in Industrial and Energy, Engineered Solutions sales and our consolidated profit margins were disappointing. The lower tax rate and stock buybacks in the quarter helped mitigate the margin impact.

We are facing cyclical headwinds in each of our four key verticals but remain confident in their secular long-term growth potential. Andy will talk through the details of the asset impairment charge, but let me reiterate that, despite this non-cash write-down, we believe the worldwide demand for energy will be strong over the long run and our niche leadership positions in that market are for very attractive long-term growth prospects.

In the short-term, given current market conditions, we are aggressively managing costs which I will discuss later on the call. With that overview I will turn the call over to Andy to go over the quarterly details.

Thank you, Mark, and good morning, everyone. before getting into a discussion on operating results I'm going to review the impairment charge. In accounting terms we had a triggering event this quarter given energy market conditions that required us to rerun our annual impairment tests. This resulted in a $6 million write-down of trade names and a $78 million write-down of goodwill for a total gross non-cash charge of $84 million.

We were only able to book a $2 million tax benefit against the charge as the goodwill is not deductible for tax purposes. The net $82 million impairment charge amounts to a non-cash $1.33 EPS loss, as you can see on this schedule.

Moving on to operating results on slide 5, sales were approximately $301 million for the quarter and diluted earnings per share, excluding the impairment charge, was $0.28 a share. The continued strengthening of the US dollar throughout the quarter had a meaningful impact on our financial results.

Versus guidance, foreign-currency rate changes caused an $8 million sales shortfall and a $0.02 to share EPS headwind as well as a $10 million increase in our net debt. However, stock buybacks and a lower tax rate provided a combined $0.03 a share EPS benefit compared to the guidance.

With or without these items our actual EPS of $0.28 was within our guidance range with sales falling just under the low end of the guidance after considering currency. Compared to last year's $0.30 a share first-quarter EPS currency was a $20 million sales and a $0.04 EPS headwind in the quarter. Earnings per share benefits of $0.04 from the buybacks and $0.05 from the lower tax rate more than offset this and highlight the year-over-year profit margin.

Turning now to slide 6, I'll provide a few comments on sales. Our consolidated second-quarter sales were down 8% year over year with core sales down 2% and currency a 6% headwind. Both the Industrial and Energy segments posted 2% core sales growth, but Engineered Solutions declined 8%. Geographically the Americas were down year over year due to weaker Energy and Engineered Solutions demand.

Europe sales were down a couple of percent core with our North Sea energy exposure causing the most headwinds. And Asia-Pacific was up double-digits due to fantastic growth in our Energy Capital there. Emerging markets continue to be a bright spot with core sales growth in India, China and Brazil despite more modest GDP growth expectations for those countries than in the past. I will provide more color on sales by segment shortly.

On slide 7 consolidated second-quarter operating profit margins were 9.3%, a reduction of 260 basis points year over year. We had built into our second-quarter guidance a 200 basis point decline for under absorbed manufacturing overhead, unfavorable acquisition mix, foreign-currency pressure and material costs, downsizing and nonrecurring prior year benefits as well as a couple other items all of which were realized in our actual results.

However, we also had about $1 million of extra freight expense related to the West Coast port issues, higher warranty and bad debt charges in the quarter and some sales misses in certain of our high-margin product lines that we missed in the forecast. I will provide more color in my segment level discussions, but want to caution you not to extrapolate full-year margins based on the second quarter as it is our seasonally weakest of the year.

I will turn now to segment level result starting first on slide 8 with the Industrial segment. We saw our third consecutive improvement in year-over-year core sales in the Industrial segment in the second quarter. The industrial tools portion of the business was up 4% core compared to a 1% increase in the first quarter. However, our Integrated Solutions sales continued to lag with a 14% sales decline in the second quarter.

IS customers seem to be extremely cautious on pulling the trigger on projects after they have been quoted and re-quoted, possibly due to economic concerns. A bright spot in the quarter was the sales at Hayes Industries, last May's acquisition. Its encapsulated concrete tensioning products are being well received in the marketplace generating double-digit growth, but they are not yet included in our core totals.

From a margin standpoint Industrial did not have a good quarter with a 390 basis point decline year over year. The reduction results from expedited freight due to the West Coast issues, 140 basis points of unfavorable mix due to the Hayes acquisition, an insurance gain last year and out of period warranty costs this year. While not a great margin quarter for Industrial I am not concerned and I view it as a bit of an anomaly.

Let's move on to the Energy segment which you will find on slide 9. The Energy segment's 2% core sales growth for the quarter was pretty much dead on our outlook. Mark is going to provide more color later on the call, so I will keep my comments brief.

Summarizing our second-quarter Energy core sales, Viking was up double-digits, Hydratight was up low-single-digits and Cortland was down double-digits. Geographically the segment has benefited from robust activity in projects in Southeast Asia and Australia which has muted strong headwinds in the North Sea.

Energy segment operating profit margins were down 30 basis points year over year and reflected the combination of downsizing cost, high cross hire rent expense, Cortland under absorption, lower Viking retention expense and a handful of other items.

While we had an excellent first half in Energy this year with 10% year-over-year profit growth, we are aggressively reducing costs in anticipation of lower volume quarters as the impact of the oil malaise is fully realized.

Now I'll turn to Engineered Solutions, which you will find on slide 10. The segment had a rough quarter with an overall 19% year-over-year sales decline. This reflected a combination of last year's RV business divestiture, 5% foreign currency headwinds and an 8% core sales decline.

The segment posted lower core volume in virtually all end markets. One of the few areas of growth was Weasler's drive lines at 1% core growth, but that was noticeably weaker than the 7% core growth in the first quarter and is expected to turn negative in the back half.

Heavy duty truck volume was down in Europe due to last year's pre-buy comp and more significantly in China as OEM production is down quite a bit from a year ago. On the auto front, lower convertible car sales in Europe resulted from weak consumer demand in the few new or refreshed convertible top models.

From a profitability standpoint the Engineered Solutions had a very poor quarter with margins considerably below the prior year and our expectations. Given year-over-year core sales declines and seasonally low OEM production levels, our production volumes or build rates were very low and under absorbed overhead and other manufacturing inefficiencies were significant.

Volumes for the high-margin Ag seeder product line were down 50% from a year ago when we were rolling it out for the first time and filling our customer supply chain. And this had a negative impact this year given its high incremental margin. Expedited freight due to the West Coast issues and unfavorable purchase price variances at European units that are sourcing components from China also hurt margins by over 100 basis points year over year.

There are a lot of contributing factors, but the bottom line is margins in the segment were at an unacceptable level. In order to deliver improvement here going forward we need to finalize the in process projects in the second half including the convertible top production moved to Turkey and the product line move out of maximatecc's Lancaster plant. We also need to improve manufacturing efficiencies on the products that we moved last year to new places.

Finally, we will be adjusting employment levels, the size of segment cost structure appropriately for the ongoing revenue expectations. With two of the three business leaders in this segment new in the last six months, we are confident they will drive profit improvement going forward.

To wrap up my part of today's prepared remarks, I will cover cash flow capitalization and buybacks. We continued to buy back Company stock during the quarter. In total we bought back 2.9 million shares for approximately $76 million. This pretty much accounted for all of the increase in debt in the quarter which now stands at 2.2 times net debt to EBITDA.

Our second-quarter free cash flow was $14 million and was ahead of last year. We typically generate the majority of our annual free cash flow in the second half of the year and we expect fiscal 2015 to be no exception.

We've got good liquidity and capacity under our credit facility which will enable us to continue to opportunistically buy back shares and complete strategic tuck-in acquisitions. Since we started buybacks 3.5 years ago we have repurchased approximately 19 million shares or nearly 25% of our outstanding stock. Over the last year alone we bought back 15% of our outstanding stock.

That magnitude was made possible with the proceeds from last year's divestitures of both the Electrical segment and the RV business. But now that we've moved back into our targeted 1.5 to 2.5 net debt to EBITDA leverage zone, the pace of buybacks will moderate somewhat as we want to allocate future free cash flow first to tuck-in acquisitions and then to buybacks.

However, we see a lot of value in the stock at its current price and we'll continue opportunistic buybacks over the next few years, bolstered by the new $7 million -- 7 million share authorization. So that is it for my prepared remarks today. I will turn the call back over to Mark.

Thanks, Andy. As Andy mentioned, I'm going to dive deeper into oil and gas and provide a more detailed update to what we shared during our December earnings call.

As you heard today, second-quarter Energy core sales growth of 2% was right on forecast and our outlook for the next two quarters is still in the circle with our prior estimates. We saw mid-20% core sales decline in Cortland in the second quarter followed by a mid-teens -- following a mid-teens core sales decline in the first quarter. We expect Cortland's core to be down about 10% to 20% for the remainder of the fiscal year and into next year.

Hydratight was up 2% core in the second quarter, but we expect that it will start to post core sales declines starting next quarter and will continue for the balance of this fiscal year and into next year in the negative 5% to negative 10% range.

Finally, Viking posted robust growth in the second quarter due to significant Australian and Southeast Asia project work. Some of these jobs however are winding down and comps start getting more challenging as we anniversary their start dates. Accordingly, we anticipate Viking to have sales declines starting in the fiscal third quarter which will increase to about 20% for the balance of the calendar 2015.

What all of this means is that we feel that our flat to negative 2% core sales outlook for Energy segment for the full year is realistic. However, we need to emphasize that our exit rate in the fourth quarter of fiscal 2015 will be significantly lower than today which sets up for a more challenging fiscal 2016 outlook for the segment.

While Energy segment profits are up year to date that won't continue given the upcoming sales declines and pricing relief requests from oil and gas customers. And as a result the Energy segment has been working on cost reduction activities, as you can see here on slide 14.

During the quarter Viking's standalone headquarter office in Aberdeen was closed and combined with its UK field office and layers of management were removed throughout the segment. Additional headcount reductions are underway. On a year-to-date basis Energy segment headcount has been reduced by 5% which will be further reduced to 10% by the end of May.

Total targeted annual savings from these cost reductions are about $15 million with a net $7 million benefit for this year already baked into our guidance. You should not incrementalize these savings in your models as they will be more than offset by the impact of lower volume going forward. Said another way, these actions are an attempt to offset a portion of the margin and volume pressures that will be forthcoming in fiscal 2016 and we are trying to get ahead of the curve.

Our cost reduction activities are not limited to the Energy segment alone as we have been squeezing discretionary spending and making structural changes throughout Actuant to offset the currency and end market weaknesses.

In addition to benefits that will be realized upon completion of the in process facility consolidations, we are expecting to trim our payroll by an additional $5 million in the current quarter to balance cost structure with today's revenue. This is also included in our updated guidance.

While markets such as oil and gas are challenged it is a good opportunity to make lemonade out of lemons. Customers are looking for cost reductions and ways to simplify their business and that creates sales growth and market share opportunities. We are focused on capitalizing on this and have had some success in the second quarter that will benefit us in the future.

Similarly, in addition to organic growth initiatives, we remain committed to growth via tuck-in acquisitions for all three of our segments. One of the visions I laid out for the organization when I took over as CEO was a tighter strategic focus on acquisitions and we are following that mantra. Our activities today favor accretive focused tuck-in acquisitions versus larger deals or new platforms.

M&A market activity remains buoyant and we looked at several interesting opportunities in the first half of fiscal 2015. Some of them are still alive while others did not make sense strategically or did not meet our financial return criteria. Our capital deployment priorities are tuck-in acquisitions first and stock buybacks second, so be assured there has been a lot of internal effort focused on acquisitions.

Now let's turn to slide 16 and start to review updated guidance. As you have heard repeatedly today, foreign-currency is having a big effect on the top and bottom lines in the P&L, in cash flow and on the balance sheet. Using the euro as an illustration, our December guidance for the year was based on a euro to dollar exchange rate of 1.25. It ended up averaging 1.17 for the second quarter and now is in the vicinity of 1.05.

Today's updated guidance assumes a euro between parity and 1.05 which has a $55 million to $65 million impact on our current year sales and a $0.15 to $0.18 reduction to EPS versus the guidance we provided on our last earnings call.

Also impacting our outlook for the year are changed core growth sales assumptions which you can see on slide 17. From a sales standpoint we are lowering the core sales growth expectations for all the segments with total core now expected to be down 3% to 4% from the prior negative 1% to positive 2% range. I covered Energy in detail a few minutes ago with the takeaway being full-year or sales of flat to down 2%.

Industrial core sales has turned positive, but has little momentum in the base industrial tool demand and continued caution on larger integrated solutions projects. The Americas demand is uneven while Europe is hanging in there better-than-expected and Asia-Pacific has slowed due to the impact that oil and gas and mining have had on their underlying economies. We are currently projecting full-year core sales to be flat to down 1% in Industrial.

And finally in Engineered Solutions, we have lowered our expectations across virtually every major end market and now expect core sales down 5% to 7% versus prior down 2% to 4%. Specific call outs include weaker truck demand, sluggish auto demand from European customers, weakness globally in off-highway equipment and declining Ag demand, most notably outside the US and on our display and seeder products that go into big-ticket Ag equipment such as tractors, combines and seeders.

Pulling all of this together on slide 18, including the benefits from completed stock buybacks and a lower estimated effective tax rate, we are guiding to full-year earnings per share of $1.65 to $1.75 per share on sales of $1.245 billion to $1.265 billion. We expect our third-quarter sales to be in the $315 million to $325 million range with EPS of $0.52 to $0.57 per share.

These third-quarter estimates reflect substantial year-over-year foreign-currency headwinds including approximately $40 million at the sales line and $0.10 per share of EPS. Full-year free cash flow conversion should be around 105% to 115% of net income resulting in approximately $110 million to $120 million of free cash flow. Finally, as a reminder, all guidance excludes the impact of any future acquisitions or share repurchases.

Just one more slide before we open it up for questions. We are currently facing a perfect storm of a surging dollar, oil and gas price reductions and concurrent end market and geographical weaknesses. There is no question that our four macro growth lane ways are currently challenged.

However, there is also no denying that over the long-term global population growth, changing diets and the emerging middle class will all drive the need for products, technologies and solutions that serve these particular end markets.

Actuant is well-positioned with leading shares in niche markets, an asset light business model and customer focused culture to capitalize on these trends when they inevitably return to their up cycle, and they will return. Most importantly, we are a consistent cash flow generator in thick and thin and we will continue to use that cash to drive long-term shareholder value.

So that wraps up our prepared remarks and let's open up the phone lines for Q&A, operator, if we could.

(Operator Instructions). Jeff Hammond, KeyBanc Capital Markets.

Hi, guys, this is James Picariello filling in for Jeff. So can you just start off, speak to the Enerpac business, particularly what you are seeing in the downstream refinery maintenance space and what your expectations there -- what your expectations are for the second half? Is the guidance reduction mostly a function of Enerpac slowing or is it more integrated solutions just not refilling the backlog as you had hoped? Thanks.

Sure, James. When I look at Enerpac on a global scale, if you look at integrated solutions, it was down about 14% for the quarter. We have got a great funnel of opportunities out there. And as we mentioned in the prepared remarks, we continue to see push offs, delays, but the funnel is good and it is converting at a lower rate than we anticipated.

On the Enerpac industrial tool business, and if I focus on North America right now, we actually saw good growth in the quarter in North America, it was up about 7%. The backlog is not what we expected coming out of this and the momentum isn't where we wanted it to be going into the second half. And as a result that certainly has impacted us.

Europe continues to putter along, if you will, it is fairly flat. Asia Pac -- we have had some strength there, but mining and oil are really impacting the Enerpac business in the Australian market, which is a fairly strong area for us.

So because of a number of those elements we have taken the forecast down in the second half. The one area we are focused on in the IS portion of the business is more of that standard product that we have talked about, so gantries and sync lifts and some of the more standard product versus the larger ticket items that you have seen us win on larger projects in the past. So that has been our focus there.

Got it, that is helpful. And if I am allowed, just one follow-up. Can you quantify what the one-time items were in the Energy segment tied to Cortland severance and, etc., just to get an idea as to what the underlying operations were?

About $1 million in the quarter.

Okay, thanks. I will get back in queue.

Ann Duignan, JPMorgan.

Good morning, this is [Tom Simonitch] on behalf of Ann. You described continued strength in Australia and southeast Asia in Energy. When do expect to complete these projects?

The strength that we have seen in Southeast Asia is primarily driven by some of the Viking wins that we have had over the past 12 to 18 months. They vary in length; some of those are longer contracts, some of those are 12-month contracts. And so, they stagger off. But we do see a fall off as we get into the third and fourth quarters. So we -- and that is one of the reasons why we have guided down the expectation in revenue.

Okay, thank you. And also you say that product mix was a headwind to margins in Industrial, can you add some color there?

Yes, the Hayes acquisition primarily has been the drag there. That is at a lower margin than our core Enerpac business.

All right, thank you very much.

Allison Poliniak, Wells Fargo.

Mark, can you talk about growth in innovation a little bit, expand on that? Just how do you view that in this kind of environment where you are obviously needing to strip out cost? Does the filter get a bit tougher for some of these projects?

Yes, that's an interesting question and we have spent a lot of time on that, Allison. And what we have done is to, from a growth and innovation standpoint, we have really narrowed the focus of our activities. And what we have narrowed it down to is top three/next three by segment and we have really begun focusing most of our resources and capital around those top growth initiatives.

And so, in this period of time where we have got to do some cost take-out within the business we are still focusing on growth and innovation, but it is more narrowly focused on these top three/next three, and we are rallying our people around those areas.

Great, thanks. And then, Andy, just want to just go back to your comment on EBIT margin. I think you said this was sort of the -- this quarter would be sort of the bottom for the year. How should we think about them in the back half? Obviously core volume declines are accelerating, you are obviously taking cost out, obviously a lift but potentially down year over year.

Yes, the margins, when I look at back half of the year they will be down year-over-year just given the volume shortfall and the impact of -- or the year-over-year volume reduction as well as the impact of purchase price variance on currency, particularly in the third quarter.

I think by the time we get to the fourth quarter that is going to be evening out. We had some restructuring costs fourth quarter of last year, we will get restructuring savings this year. So I am hoping that our fourth quarter of this year will be up year over year from a margin standpoint.

Great, thanks so much.

Allison, one of the other things we have done on the ring fencing of initiatives is around the high-growth markets where we have really seen some good growth over the past four to six quarters as well, mid-single to high-single-digit growth.

Perfect, thanks so much.

Matt McConnell, RBC Capital Markets.

So on the free cash flow guidance, you are still looking for above 100% conversion. But that 105% to 115%, I think that is a little below what you have done in the past couple years. And you might expect with lower revenue you would have inventory coming out maybe. But anything else we should be thinking about with respect to that free cash flow forecast?

I think when you look on average over the last 5, 10 years we have probably averaged about 110% to 115%, so I feel okay about it. Working capital will have to come down but that is incorporated in there.

Okay, great. And then you ran through a bunch of the initiatives in Engineered Solutions. And I wonder could you put a cost savings number around that or -- and how much of that cost savings would hit in fiscal 2015 versus 2016? And just margin expectations maybe for the second half of the year as you see a seasonal volume lift.

Yes, I think the actions that we talked about are projects that we talked about last year already. I mean we took a hit in the fourth quarter of last year to do kind of Phase 2 of the automotive move out of the Netherlands down into Turkey. And the other one was a much more minor -- it is probably 15 employees or so coming out of our Lancaster plant. When that is done essentially manufacturing will be totally out of that plant.

The issue here, we have savings with this stuff, but you have got costs -- I shouldn't say costs, but you have got margin going the other way because of the impact of lower volumes. So it is really -- it is all net out, it is included in our forecast already. But the savings (technical difficulty) that we talked about are a couple million dollars on an annual basis, you are just going to see that starting in the fourth quarter of this year.

Okay, that is helpful. Thanks.

Rob Wertheimer, Vertical Research Partners.

So obviously the oil market has been soft, so maybe the impairment is no surprise. But I wonder if you can talk about -- did the triggering mean you flipped from an undiscounted cash flow to a stricter test? And does the implied new valuation assume much lower margins that are in the quarter or the fiscal year? I am just trying to understand how that worked mechanically.

Yes, essentially we did have the triggering event like we said. We use the same calculation you do at any time if you are tripping the cash flows on it or whatnot. Our forecast going forward was also baked into the DCF calculations that we've got in that model that do have to jive obviously.

So, in the near-term some significant headwind especially with Cortland right now and then I would say Hydratight coming on late this year into the negative range and Viking hitting it this quarter in the third quarter.

Okay, so mix but some of it is forward-looking rather than what you are seeing right now in the current environment? Okay, perfect.

Oh, yes (multiple speakers). You have to I mean I honestly (multiple speakers) we, based on our -- we beat numbers, right? The first half our profits were actually above our plan.

It is just going -- [sneaking] forward.

And the second question is -- and again, I'm not sure how much you want to get into the detail. But how much price downs -- obviously there are some very, very big headline numbers that people are asking for and then I guess that turns into a negotiation.

How much of that is baked into this year versus you think it is something you struggle through and then you will struggle through again next year? I don't know if you have incorporated that into the forecast in a material way.

Yes, the -- what you are referring to, Rob, is the ask that we're getting mainly on the Energy from some of the larger folks. And those requests are -- first of all, we typically get requests in the markets that we are in for price reductions on an ongoing basis.

This is obviously a little bit more intensified. We are getting letters from 10% to 25% request. We are using those as an opportunity to negotiate and see what the additional revenue streams, who can pick up in the process. And we have got those discount [thoughts] that our businesses have already baked into our guidance for this year.

Okay, great, thank you.

Scott Graham, Jefferies.

I wanted to jump around the businesses a little bit because you guys have really not gotten a lot of help from markets which I would have thought would have been helping you by now. When do you guys -- and it is essentially these five. Industrial tools, maybe when does the turn up more decisively? European truck, IS; China truck, auto -- when is the inflection for sales in those businesses, best guess for you?

Let me just run through this and then, Andy, you can --.

We will get our crystal ball out.

You can follow up. But let me give you just some thoughts. On the industrial tool side we had anticipated that we would see a lift obviously and that isn't -- the backlog isn't where we thought it would be. And we continue to have softer production numbers coming out of a lot of the markets that we are in. And so, we are thinking that is going to be fairly tepid over the next couple of quarters.

Yes, just to point out here, we are up -- I mean --.

Yes.

-- growing again the change that we really had is we anticipated more momentum coming out of this quarter that would lead to a little bit better growth in Q3 and a little bit better in Q4 and we are just starting at a slower pace. And it is extremely frustrating to forecast this thing because you have a good month and then you have got a bad month.

It is inconsistent.

There doesn't appear to be momentum in this market in particular with tools.

On the truck side, on European truck we had that big Euro 6 build last year. We had a tail on that that came into the first couple of quarters. And so, we are in the middle of anniversarying that right now.

All indications from the data that we see coming out of Europe and that is where most of our -- the majority of our truck business is in Europe. And most of the market data coming out right now talks about a low-single-digit increase in build as the year progresses. So that's what we are thinking on the European truck side of things. And that is on the calendar year as well, Scott.

On the IS side of the business, that is a more difficult one to predict. We are really focusing on the standard activities around gantries, sync lifts, some of the more standard product versus some of the larger projects, even though we continue to bid on them, we have got a funnel that is as big as we have had. We have got a number of programs that we are working on. We still have built into the second half of the year about a 10% to 15% lift in IS and --.

Yes, but that 10% to 15% is coming off the comps. So I mean --.

Yes.

-- sequentially it is not a -- it is not suddenly boom things are going but --.

(Multiple speakers) year over year.

Yes we were down quite a bit.

On the China side, Scott, I just got back. I was in India and China a couple of weeks ago, I just got back from China. I think we have -- and I am very happy with the team there, we have seen some growth I think even in a tepid environment. And again, they came out with lower government growth numbers while I was there.

But I do believe that we will begin to see some growth, but I think it is more share. The truck part of the business continues to be very sluggish though in China, that continues and that is down about 10% through the remainder of the fiscal year. And I think that was -- oh, on the auto side --.

The last one was just on auto, yes.

Yes, the auto one is just a function of platforms, Scott, there just aren't new platforms coming out. We have had a couple of wins, we talked about the Camaro earlier this year and -- but there have been very few that are coming out.

And so we feel in all these areas that we are maintaining our share. It is just that there is less new stuff coming out [and many] existing platforms are being extended from what we used to see as five years to seven years.

Yes, understood.

I would just comment on auto in particular -- I'd comment on auto in particular because this is a question we get all the time when we are meeting with investors and they are asking about margins and Engineered Solutions. Automotive revenues this year for us will be about $50 million, back in 2012 they were $120 million.

So I mean the business is down by $70 million over the last three years. Certainly at a $50 million pace this business is break even. We were making very good margins two or three years ago, but with the volume differential it is not there. So auto certainly will be a great thing when it comes back, but it is weak right now.

All right, thank you for that. And the last one to be, if you could, Andy, what was the quarter end share count?

The actual share or what we had relative -- if you look in the face of the income statement I think we had [60] -- I think we had 61,759, which was the average without the common stock equivalents, the average with the common stock equivalents would have been [62.5] or so or [63]. I expect that to come down by about 1 million. The actual count was about 1 million less than that, this is obviously a quarter average on here, so, it could have been less than that by about 1 million shares.

Okay, so essentially on the face of your Q, that was the number I was looking for, so. That is like a 61 --.

It will be around 61.

Very good. Well, thanks, guys.

Ajay Kejriwal, FBR Capital Markets

So on your free cash flow, looks like you have cut that guide a lot more than the EPS, and I know share buybacks are helping EPS but that's really not all of it. So maybe just help bridge that; is your expectation on free cash flow a lot weaker than where it was last quarter?

Our guide last quarter was $150 million for the full year. We are at $110 million to $120 million right now, so obviously it has come down. Currency is a huge driver in that.

Our EBITDA has come down quite a bit, because of currency and because of the reductions in the end-markets that we built into the forecast here. So, again, it is 100%, 110% or so conversion of net income. I think we are doing what we can from a managing it standpoint and I think it is a good number.

Yes, my question was more about the disconnect between EPS versus cash flow. The reason that you mentioned is about the (multiple speakers).

It is the shares and the taxes because EBITDA is really only -- is down about 25.

Okay, all right; that is helpful. And then, on the leverage ratio, you are at 2.2 times and I guess that is based on trailing 12-month EBITDA on pro forma. It is probably a little higher.

So I guess the question is what are some of the constraints that might limit the flexibility that you have on buybacks? Are they debt covenants, or is it more just corporate policy? How should we think about your flexibility from here on?

Our covenant is either 3.5 or 3.75 maximum leverage, depending on acquisitions occurring around that test. So certainly there is a lot of flexibility with regard to that. I think it is more governed internally just based on we would want to be generally in the 1.5 to 2.5 range and if we have got M&A in the pipeline that is going to -- that is certainly going to impact our buyback activity and just what we are thinking about the business confidence level in the business and that sort of thing.

So it's more how we are managing it versus the covenant this year.

Got it, thank you.

Mig Dobre, Robert Baird.

Just going back to Energy, as I understood it, and I appreciated all the color as we look out over the next call it two to four quarters. But we are going to exit the fiscal year with Hydratight maybe down 5% to 10%, Cortland and Viking down double-digit as well. So I guess my question is we are positioned for maybe double-digit core declines into fiscal 2016, would a 10% headcount reduction be consistent with that expectation or is there more that needs to be done?

And I guess the corollary here would be in terms of the way we should be thinking about decremental margins going forward, how do we think about the savings versus the fact that Viking, for instance, should have very high decremental margins on that revenue -- revenue loss?

Yes, let me just talk about the is 10% enough. I think the team -- you have got to remember we finished the last quarter, we are up 2%, we anticipate it coming down as we have described in our guidance. I think the team is doing an excellent job in addressing these cost issues and getting ahead of the curve here. And so, I think from that perspective we are being very responsive.

I think if you look at -- and if you look at other people in the marketplace, Mig, the Schlumberger's, the Halliburton's and some of the headcount reductions that they are looking at, I think we are probably north of what they are contemplating at this stage of the game and they are pure place in energy.

The team is also looking at additional contingency plans, this is something that we do as part of our normal business process. And so, if we find that things deteriorate even more then we will be able to implement those actions. So I think at this stage of the game it is what we need to do and we're actually a little bit ahead of the curve on that. Andy, do you want to cover the other piece of this question?

Yes, Mig, if you can repeat the second part of the question again as far as (multiple speakers).

Sure. So I mean basically what you are saying is you are reducing the headcount by 10, but core growth is going to be down double-digit as well. So I am trying to figure out what decremental margins should look like in this environment, recognizing that Viking should have relatively high decremental margins from what I have been told.

Correct, correct. The decrementals for Hydratight and Cortland typically in a -- 30% to 40% at the gross profit level or the EBITDA level as well. For Viking it is dependent on if the revenue is coming out are rental, whether they are rental or whether they are sales of product and kit and that sort of stuff makes a very big difference.

If it is rental the decremental is probably 80%, if it is product sales less than 20%. Blended it is somewhere in the middle, probably I'd say 60% somewhere -- 60% there without -- these would be without other cost reductions. So that is contribution margin.

So what we are trying to do is reduce cost to mitigate that. So to Mark's comment earlier, don't incrementalize these cost savings. That is what they are intended to do is to offset part of but not all of the reduction there.

I appreciate the color. And then I guess my follow-up is back to Engineered. There has been considerable restructuring there in the past few years, sounds like more of it is needed. Can you give us some color looking at your main product lines as to which one of them, if any, are -- have negative operating margin at this point? And do we need a volume bump there or can you return those businesses to profitability just through cost management and facility reductions and such?

We are not going to get into talking about individual margins and which businesses are positive and not positive right now. But I mean I did make the comment earlier on what has happened with automotive, that it is kind of at a breakeven [OP] level at this point in time.

I absolutely need volumes there in order to get anywhere back to the mid-teens that we had in that particular business. You just cannot do it without the volume, even with the benefit of the savings that we are getting from moving to Turkey. So in that product line certainly we need volume.

Truck volume will certainly help, margins are okay in the business overall. But just as a reference point in truck, volumes today -- volumes last year were still below the volume levels back in 2008. We have never fully rebounded in European truck on this thing.

So there are cost downs from a structural standpoint that are going beyond this thing, but the revenues in the business are off. So it is a combination of that and going forward we are trying to reduce the cost based through restructuring and whatnot.

From an Ag standpoint, Ag is among our highest margins in the segment. These are very good margins in here, certainly been -- it has been great with Weasler and with the Ag seeder and whatnot. But as that Ag seeder line has cut off, as a reference point there, it is coming off $10 million year-over-year at contribution margins that are very high, very high. So that is kind of what's weighting on us there.

So there are other things that we are looking at in the segment from a cost down standpoint. We want to get through the ones we are on right now just so we have got good execution on them. But certainly it is something we are looking at what more can we do within here.

Because generally the facilities in here, we are down to single plants supporting these product lines in a lot of cases. And you still want to make product, you still -- you really can't consolidate that plant to nothing.

Yes. And one of the things from a growth standpoint, and Andy is right on relative to the volume is what we need. When we went through these plant moves over the past year or so we anticipated our volume would be higher than the current run rates. And so we need to structure even further.

But what we have really done is also redeployed a lot of our resources in the (technical difficulty) to assist the segment in focusing on service quality and delivery to improve the revenue stream and get at least as much as we can out of these stagnant markets. So we continue to look at ways to drive that but it is a volume issue.

All right, very helpful. Thank you, guys.

Charley Brady, BMO Capital Markets.

Hi, guys, this is actually Patrick standing in for Charley. Thanks for taking my question. I just wanted to get some color on -- it looks like freight costs sort of hurt margins on both the Industrial and Engineered Solutions segment. I just wanted to maybe get -- maybe you guys can quantify what that hit is and how much can we expect that to carry through to the third quarter or if any?

It was expedited freight or air freight essentially was one of many factors I called out individually. It is not like millions and millions. We probably had $1 million of incremental expedited freight in the quarter. This was predominantly in Industrial and in our truck business and in Engineered Solutions where they are very reliant on a China supply chain for this.

So with everything getting backed up on the West Coast we had to air freight stuff in to keep top product in stock within Enerpac and to keep production lines moving as it relates to truck.

Will there be a little bit of carry over on this? Possibly, but it seemed like the worst was back in the November -- -- excuse me, was in the December timeframe, December/January (technical difficulty). We think it's -- we've got enough inventory in now to handle the next couple months until the backlog is worked down out on the West Coast.

So, I am not expecting really any incremental air freight here, so I would expect a $1 million reduction sequentially on this thing. I don't think it is going to take more -- it is going to spill over into this quarter.

And part of this expedited air freight issue is the intent -- given the softness of the end markets that we are in, an intent focus on meeting customer needs, having fill rates as high as they possibly can be to pick up as much revenue as we can. And so, that has really been the mantra within the businesses.

Okay, got it. Did you guys talk about how much core sales declines were in truck and convertible top earlier? I may have missed that, but if not can you maybe add a little color there?

Yes, truck was I would say mid-single-digit decline and auto was (technical difficulty) year over year.

Sorry, something sort of blocked off. Can you repeat the auto?

Sure. The auto was a 10% decline year-over-year and the truck was a 4% decline year-over-year.

Right. And do you -- what are your expectations for Ag for the rest of the year?

We expect -- there is two different pieces of Ag. Two-thirds of it or more is tied in with the implement side of it or the replacement part that was positive core 1% in the quarter. We expect that to go down -- trend down during the balance of the year, probably toward mid-single-digit down.

The other part is more -- I call it the big Ag, it would be the equipment that some of the displays and some of the seeder product that we talked about earlier, that stuff is off in line with what you are seeing on build rates. It's off in the 30% to 50% range. And I expect that pace to continue on for the balance of the year -- fiscal year.

Great. And if I may just throw in one more.

You are the last question, that is the only reason I am letting you --.

Got it, thanks, guys. Just jumping on a question earlier in terms of buy back. Will most of them be funded through your cash flow or are you guys willing to draw down part of the revolver to do it?

I think we are comfortable with where our leverage is right now. We want to be in the 1.5 to 2.5 zone. Just this quarter and the last quarter are the first time in three years that we have been within that zone, right.

So it is going to be predicated on what is our cash flow and, probably more importantly, what is the funnel for acquisitions and what kind of needs we have there. So you can model in -- free cash flow coming in in this I don't expect to necessarily move above this target --

Stated range.

-- this target range here for more than a quarter or two. If there is a deal that is pending and that sort of stuff, but it is going to be just -- if somewhat fungible cash comes in, we pay down the revolver, we borrow it back to fund the buybacks.

Okay, thanks a lot.

And, gentlemen, we have no other questions at this time.

Well, thanks, everyone, for joining the call today. We will be around all day to answer any follow-ups you have. And just a reminder that our third-quarter call will take place on June 17, so you can mark that on your calendar. Thank you.

Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and you can now disconnect your lines.