Enerpac Tool Group Corp (EPAC) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation fourth-quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded Wednesday, September 30, 2015. It is now my pleasure to turn the conference over to Karen Bauer, Communications and Investor Relations Leader. Please go ahead.

Good morning, and welcome to Actuant's fourth-quarter earnings conference call. On the call with me today are Bob Arzbaecher Actuant's CEO, and Andy Lampereur, CFO. The earnings release and slide presentation for today's call are available on 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 (technical difficulties) differ materially from these statements. These factors are outlined in our SEC filings. Consistent with prior quarters, we'll utilize the one question, one follow-up rule, in order to keep today's call to an hour. Thank you in advance for following this practice, and with that, I'll turn the call over to Bob.

Thanks, Karen, and thanks for joining us on today's call. I can honestly say I didn't expect to be back doing quarterly earnings calls, but here I am, back in the saddle again. I've spent the last month immersing myself in the business, and while there's always more to do, I feel like I'm up to full speed.

Just briefly, I'll comment on the Board's decision to make the CEO change. This was not a reflection of a strategy change, and as you saw in this morning's press release, not an issue related to fourth quarter. It was about leadership, business predictability, and execution. The Board's nominating and governance committee is leading the CEO search, which is expected to take six to nine months to complete. I am prepared to stay on as Actuant's CEO as long as it takes, to ensure that we have the right successor.

Now onto earnings. As you read in this morning's release, we delivered $0.37 of fourth-quarter EPS, above the guidance range. Excluding the benefit of lower income taxes, EPS was in line with our outlook. Core sales were also consistent with our expectations.

While end markets remain weak, they have generally behaved as anticipated. We generated strong fourth-quarter cash flow, resulting in our 15th consecutive year of free cash flow conversion of at least 100%, which is an accomplishment we are all proud of. Looking at our free cash flow, in relation to our market cap, today we have over a 10% cash flow yield. I'll provide more detail on our three-year vision as Andy goes through the fourth-quarter details, and the FY16 guidance. Andy?

Good morning, everyone. I'm going to start today's financial review on slide 4, with the summary P&L. Fourth-quarter sales were $300 million, and EPS was $0.37 a share. Compared to last year, both sales and earnings were hurt by the stronger US dollar, inventory destocking, and weaker end market demand. As with last quarter, our sales declined 15% year over year, and our SAE costs were down slightly more, but lower gross profit margins resulted in operating profit margin erosion. Significantly lower income taxes, as well as fewer shares, also comes into play in year-over-year comparisons.

Versus guidance, our fourth-quarter sales and margins were in line with our expectations. As anticipated, production levels and absorption declined in response to continued weakened market demand, exacerbated by inventory destocking efforts by both us and our customers. This, along with $3 million of restructuring costs, weighed on profit margins in the quarter.

As you can see here on slide 5, our core sales in the quarter declined 7%, in line with our guidance of minus 7% to minus 9%, and the 8% decline in the third quarter. Consolidated fourth-quarter sales were down the same 15% that we saw in the third quarter, with the strong US dollar accounting for 8% of that decline.

Each of our three segments reported core sales declines, with Energy's year-over-year trend being a little better than last quarter, and Engineered Solutions slightly worse. We continued to see weak demand globally, with sales in traditionally higher growth markets, such as India, China and Brazil weakening sequentially, as well. With the exception of mid-single-digit core sales growth in heavy-duty truck and resi and commercial construction, all of our primary end markets continue to be challenged. I will provide more color on sales by segment shortly.

Consolidated fourth-quarter operating profit margins were 9.6%, down 400 basis points from a year ago. All three segments were impacted by reduced production levels and volume, which led to lower fixed cost absorption. This was contemplated in our guidance for the quarter, as were the approximate $3 million of downsizing costs incurred across our businesses. We reduced our inventory by $12 million on a core basis in the fourth quarter alone, and that, coupled with customer destocking as well, had an ugly impact on our profit margins. From a cost standpoint, we were pleased with the continued progress in reducing our SAE costs, where headcount declined 7%, compared to a 5% core sales decline for the entire fiscal year.

Results in the Industrial segment were pretty much in line with our expectations, and reflected soft demand, in part due to distributor destocking efforts. As you can see on slide 7, fourth-quarter core sales were down 5% year-over-year, and included results from Hayes for the first time. Within Enerpac, we saw core declines in both the integrated solutions and industrial tool product lines. With the exception of Europe, which had a decent quarter, other regions were all down.

The weak demand has spread beyond mining and energy markets, based on end-user and distributor feedback, and is leading distributors to reduce inventory levels to match this demand. This lower demand and our efforts to reduce inventory levels hurt industrial segment margins in the fourth quarter, which declined 300 basis points year-over-year. Unfavorable sales mix and the stronger US dollar also provided margin headwinds. From a 100,000-foot level, Industrial performed in line with our fourth-quarter expectations.

Turning now to slide 8, with some comments on the energy segment. On an aggregate basis, the segment came in slightly better than our expectations, due to Hydratight and Viking. Hydratight actually had 1% core sales growth, as it benefited from some of the service jobs that had been deferred from the third quarter. Viking posted its first core sales decline of the year, and was down 14% core, following double-digit growth in each of the last three quarters, which was better than we had expected, due to some small jobs that Viking picked up in the North Sea.

Cortland revenues in the quarter were down in the mid-20% range, in line with our expectations, and the trend from the current year. The combination of high service revenue at Hydratight and lower year-over-year Viking revenue, with Viking's high decremental margins, as well as additional downsizing costs in this segment, resulted in a 570 basis point decline in segment margins, compared to last year. These lower margins were not a surprise, and had been baked into our guidance.

While conditions in the oil and gas market certainly can't be described as positive, we continue to be encouraged by the fact that not everything has come to a screeching halt. As we have said throughout the year, new jobs are being put up for bid, and we are winning our fair share of them. During the quarter, Hydratight had two significant wins.

First, a significant maintenance job in the Middle East that's already in process, as well as its largest subsea connector order ever. Both of these wins will benefit FY16 revenues, and reinforce the fact that a large part of Actuant's oil and gas business is maintenance and OpEx oriented, and mission-critical, as long as oil and gas is being extracted and processed.

Now we'll turn to the Engineered Solutions segment on slide 9. Overall segment sales were down 17%, with core sales being down 7%. While European truck demand continued to show year-over-year improvement, trends in ag and off-highway equipment weakened sequentially. Part of this incremental weakness was a result of destocking efforts by OEMs, but underlying demand in most end markets was poor. As a reference point, we supply Engineered Solutions systems into many of CAT's end markets, and we echo the weakness they communicated in their restructuring announcement last week.

Profit margins in this segment were disappointing, but again in line with our guidance. We typically have several planned shutdowns in the fourth quarter that mirror those of our OEM customers, so fixed manufacturing cost absorption was poor, and this was exacerbated by our own inventory reduction efforts, which were successful in bringing down Engineered Solutions' segment inventory by 7% in the quarter. Restructuring costs associated with maximatecc's manufacturing footprint, as well as a strong US dollar, were also headwinds in the Engineered Solutions segment.

That's it for my comments on the segments, and now I will shift to the balance sheet and cash flow. We hit and exceeded our fourth-quarter free cash flow target, resulting in full-year free cash flow of $113 million. Included were sizable primary working capital reductions, and an expected income tax refund.

Our full-year FY15 free cash flow once again exceeded our net income, excluding the second-quarter impairment charge, making it the 15th consecutive year of free cash flow conversion of at least 100%. Consistent with our messaging over the last six months, we scaled back buybacks, with about 300,000 shares repurchased in the fourth-quarter. For the full year, we deployed over $200 million of capital in buybacks, largely reflecting the deployment of last year's divestiture proceeds.

Now let's turn to 2016 guidance here on slide 11. Our guidance reflects the market conditions I just reviewed. We expect these trends to continue in the first half of FY16, and then give way to sequential improvement. We expect that the first two quarters of the year will look a lot like the last few, with core sales down in the high single digits. As we get deeper into FY16, we expect to have stabilization and easier comps, which is how we arrive at our full-year core sales guidance of minus 1% to 4%.

By segment, we expect Industrial core sales to be down 1% to 4%, not much different than this year, other than the calendarization, where the weaker quarters in FY16 will be at the front end of the year, compared to the back end, as in FY15. We expect Energy segment core sales to be similar to the fourth-quarter run rate in the first half of the new year, and then improving in the back half on these easier comps, and the benefit of some of the new project wins I just covered. By business, Viking core sales rates will be weaker than in FY15, while Cortland and Hydratight will be less worse.

Engineered Solutions' core sales are expected to be down low single digits in FY16, benefiting from growth in truck, and some of the wins in maximatecc. We are expecting ag to be down high single digits. In addition to the core sales changes, we'll have an approximate $40 million year-over-year sales headwind, due to the stronger US dollar based on today's rates. As a reference point, the stronger dollar impacted our reported fourth-quarter sales comparisons by $30 million alone.

On slide 12, you can see what these core sales assumptions mean for the full year in our first-quarter guidance. We are projecting full-year EPS guidance of $1.20 to $1.40 a share, on sales of $1.16 to $1.2 billion. For the first quarter, we expect EPS of $0.20 to $0.25 a share, on sales of $275 million to $285 million. We will bridge the full-year EPS on slide 13 in just a minute.

Our EPS guidance in both cases assumes 60 million shares outstanding for EPS purposes, and consistent with past practice, includes no future stock buybacks. It also does not include restructuring charges or potential acquisitions that Bob will discuss shortly. And guidance will be updated quarterly, based on actual activity.

We prepared slide 13 to bridge the FY15 EPS of $1.65, excluding the impairment charge in the second quarter to $1.30, which is the midpoint of our FY16 EPS guidance. We have a $0.04 a share benefit carryover from the impact of completed buybacks in FY15. Again, we have not built in any further stock buybacks into our guidance, consistent with past practices.

Our effective tax rate in 2015 was very low due to favorable planning and audit closures, and creates a $0.15 to $0.20 a share EPS headwind in FY16. At an estimated 17% to 19% effective tax rate in FY16, our tax rate is still lower than most peers. The stronger US dollar will be a headwind for us in the first half of FY16, assuming it doesn't change from today, and based on today's rates, this is about $0.08 a share headwind between translation and transactions. The decremental profit hit on the forecasted 1% to 4% core sales decline, plus all other items, cost $0.14 a share in EPS.

Taking all factors into account, end markets, currency and other items, we are not forecasting full-year earnings growth, but hope to do so in the back of the year. That's it for our prepared remarks on guidance. I'll now turn things back over to Bob.

Thanks, Andy. Before talking about capital allocation priorities, I wanted to talk about our free cash flow, the fuel that creates growth. As Andy just reviewed, we've had 15 consecutive years of free cash flow conversion over 100%. Few companies can match that. We use this cash flow to fund our growth initiatives, stock buybacks, and acquisitions.

We have several tuck-in M&A targets in the pipeline right now that are looking promising, and hopefully will have one or two cross the finish line. We are focused on tuck-in acquisitions with tight fits to our best businesses, Enerpac, Hydratight, and agriculture. Tuck-ins are modest in size, strategic to our core businesses, and will make them even better by improving the competitive mode, and providing synergies around them. One final word about capital allocation. Regardless of M&A activity, we still expect to continue to deploy some capital in opportunistic stock buybacks during the year.

Moving to restructuring, we are seeing success in our G&I investments, and as Andy highlighted a couple new wins in the Energy segment, our results of that targeted investments. While we are protecting these investments, we are also going to incrementally reduce our cost structure, to better position Actuant for higher profit margins down the road. As highlighted in today's press release, we are planning on taking restructuring actions totaling $25 million over the next 18 months. The majority of this will be recognized in 2016, and will be slightly over a two-year payback.

You can categorize these actions in two primary buckets: One bucket is simplification, by reducing organizational structure and layers. The second involves facility consolidations that will be done to reduce our fixed costs, and help drive future margin expansion. We have excluded these charges from the FY16 guidance that Andy just reviewed, as the timing and the amounts are inherently difficult to estimate. Because of the scale and scope of these actions, and the average two-year payback, the savings benefits begin in earnest in FY17, but only modest savings in the back half of FY16. Rest assured, we will provide quarterly updates on the savings and costs, as we move through the year.

Now shifting gears, since I've been back, it's become obvious to me that we need to do a better job of communicating both internally and externally about where Actuant is headed. Not just next quarter or next year, but a longer-term vision for the Company. As shown on slide 16, we have announced an EBITDA target for Actuant of $300 million in EBITDA, and 18% EBITDA margin by the end of FY18. This target was the outcome of the annual strategic planning process that was reviewed and approved by the Board of Directors in our July meeting.

We don't take these a strategic long-term targets lightly. I know firsthand the importance of the mantra, set, manage, and deliver. Set the expectations for the organization, manage the critical drivers to success and minimize the risks that can derail a plan, and then you will deliver the results. While I'm only here until a new CEO is hired, the Actuant organization is already behind this 2018 vision.

So let's discuss some of the key items that will make this vision a success. To grow EBITDA from $190 million to $300 million, we need to drive three things: First, we need to implement and execute our 2016 restructuring plan flawlessly and so the savings can be realized quickly. The combination of these restructuring benefits and normal continuous improvement under our lead operating system should generate sizable EBITDA improvement by 2018, and this will be net of some incremental investments we want to deploy on our growth and innovation efforts.

Second, we need to have improvement in our served markets, especially energy, mining, and agriculture. While I don't see this recovering in 2016, I think financial results at Actuant are going to feel much better after we anniversary our slowdowns in energy and industrial, and begin to look forward into 2017. In addition, after spending time with our segments, I'm convinced that our leadership positions in our served markets will yield strong incremental returns as the economy improves. We continue to work on growth and innovation projects, which will augment that growth, as we get from -- that we get from a recovery.

Finally, acquisitions. As I discussed previously, our acquisition funnel is looking good. My expectation is we will deploy the majority of our free cash flow on tuck-in acquisitions over the next three years. I'll cover this 2018 vision with a little more detail at investor day next week. Obviously, everything has risk in it, and economic and geopolitical events could affect the outcome of this vision, but the leadership team feels strongly that we can achieve it, and we are taking the appropriate actions today to position Actuant for a $300 million EBITDA and an 18% EBITDA margin by 2018.

In summary, 2016 will undoubtedly be a transitional year for Actuant, with the restructuring actions I've described, and a new CEO by the end of the fiscal year. We are aggressively driving cost to position us for higher profits and margins in the future. Our cash flow and balance sheet liquidity are strong, and will easily support our capital allocation priorities.

Operator, that wraps up our prepared remarks. Let's turn the phones over for the Q&A session.

(Operator Instructions)

Matt McConnell, RBC Capital Markets.

Could you give us a little more granularity on that $300 million EBITDA forecast? Talk about your level of conviction on that, and maybe specifically on the $50 million that you expect to come from an end market recovery? Maybe go through, how did you get to that $50 million number? What are you assuming from the end markets during the forecast period?

Well, to try to all of that in a one- or two-minute response is going to be a little difficult, so I'm going to remind you to come to investor day next week, and you'll probably get a little more, but let me talk about it in a few general terms today. The first piece is, just to set you on expectations, Actuant did about $260 million of EBITDA in 2013, 2014 timeframe. Before Electrical was sold, before RV was sold, but before Viking was bought. And those three, probably the dispositions were probably about $35 million to $40 million in EBITDA, and then offset by Viking coming back the other way at about $20 million.

So when I backstop it, what are we looking at? We're expecting modest recovery, not all the way back to the 2014 level across every business, but getting back to the 2013, 2014 neighborhood, which gets us a big chunk of that piece of that $50 million. That growth in innovation will continue to add value too. Some of the markets we play in, like resi and commercial construction, with the Hayes acquisitions will add some growth. So it's broken down business by business. I don't think I'm going to guide you to that. It's a big bucket, and there will obviously be changes between those buckets that I listed. But hopefully that gives you some comfort that this was a top-down and a bottoms-up analysis.

Okay. Great. Thanks. I'll stay tuned, and certainly get more when we see you next week. And then maybe switching gears to Industrial, it's just been so volatile lately for you and the sector. Could you give us a sense of what you're seeing there, like how big of an impact did destocking have on your Industrial segment this quarter? What drove the modest increase in Europe? How weak did China get? Just any incremental insight there would be helpful.

Okay. I'll start and Andy, you follow-up. As Andy said in his prepared remarks, Industrial did what we expected it was going to do for the quarter. So there was not any large change in the predictability of the business. When we look at the pieces, China was incrementally weaker, and the Asia-Pac region, which is influenced by China demand, I think, also felt some of that. We did better in Europe and we did okay in North America. Andy, anything you'd add to that?

No. I think you got it.

Okay. Great. Thanks very much.

Allison Poliniak, Wells Fargo.

Good to hear your voice, Bob. Just going back to Matt's question on the inventory side with Industrial, we've been through this destocking, I guess this is our second quarter. How far do you think we're into that? It seemed like distributors were running pretty lean. Any thoughts on that, how far that should go at this point?

A lot of our G2 or feedback on this thing is based on what we're hearing from North American distributors in particular. Where we're definitely seeing it, in the Canadian distributors and South American distributors, and Brazil as well. They have definitely peeled back their inventory levels pretty much. In the US, we are hearing distributors did not bite, if you remember, back in the May quarter they did not bite on buying ahead of our price increase. And the feedback from them was, we're trying to reduce inventory not increase inventory, so why do we want to load up right now?

So I think they're just, this malaise, if you will, clearly has spread much way beyond just Energy and Mining, and it's impacting other areas of Industrial as well. And I think distributors were expecting a bigger second half than what they're going to see play out, and they're peeling it back. But beyond that, we don't have specific data, how much inventory we have in our system or in our distribution system out there, because these are all independent businesses, smaller businesses. It's quite a bit different than say, looking in the Home Depot channel and seeing what's out there. Just cannot do it.

But to use a baseball analogy, I think we're in the later innings of the stock -- destocking that's going on in distributors. The challenge, and it was in Andy's prepared remarks, we were still growing in the first quarter with Enerpac of last year. So I don't think it was going to be destocking related, but we are to be challenged for those core growth numbers, until you get into the third and fourth quarter. As I said, this business was predictable in the fourth quarter, and so destocking tends to be something that isn't predictable. So if I'm saying we hit our numbers, I'm saying destocking was a manageable number. And I think we're in the later innings of that.

That's great. Thanks, that's helpful. Just on a global perspective, obviously Actuant's had a focus on emerging economies, and they're certainly challenged today. Maybe just give your thoughts on the long-term opportunity for Actuant, as you're seeing it today?

I continue to be favorably inclined to grow our emerging businesses. I think India, we've won a number of truck wins recently, as some of the big OEMs in Europe globalize their distribution and their fleet. We've done well in some energy markets in new things that we hadn't done in the past, so we're doing more rental in China. That's been beneficial. So I'm pretty optimistic that what you're seeing now isn't, when you take a longer-term horizon, isn't going to last in some of the industrial markets that we're in. We don't do a lot of commercial construction in China. I think that's going to be a very difficult market. We don't play a lot in that kind of area. Our stuff is more infrastructure, roads and ports and bridges, and things like that.

When I think about India, I think we're in good shape. We've got a great leader there that represents all the Actuant businesses. I feel pretty good. Brazil is a place that's tough. You've got Petrobras really feeling it, and obviously that influences Actuant's business along with a lot of others. Agriculture isn't any picnic down there, either and those are our two big markets there. So out of the three, I guess I'd put Brazil a little lower than the other two. Andy, anything you want to add to that?

But I think what you're saying is right. Even in markets where the economy is slow, like Brazil, there is a lot of interest in customers down there from some of our other products that we're just starting to introduce down there, so we're optimistic that we will pick up some share down there and be able to grow over time. We're not focused on the next quarter.

Great.

We also have some positive in both China and India on our sourcing strategies there, because obviously, with those economies down, sourcing -- we've had some success with cost reductions in talking to vendors, and people who supply our cost system product. It's a little more of a buyers market, so to speak, in that regard. So there's puts and takes.

Okay. Perfect. Thank you.

Jeff Hammond, KeyBanc Capital Markets.

I just wanted to understand a little bit better how you're thinking about decrementals in the Energy business, as you move through the year, given the moving pieces in the different businesses. And where do you think margins really trough out for Energy, and maybe longer-term within that 2018 framework, what do you think is the new normal for the Energy segment?

I guess I'll attack the first part of that question, Jeff. From a margin standpoint with Energy, if you remember what has happened this year, Viking just went negative for the first quarter of FY15, and Viking by far has the biggest incremental and decremental margin, so that's going to put pressure on our margins for next fiscal year within Energy. Our next highest margins in the segment are with Hydratight, and that's the least impacted from an economic standpoint. It's more tied in with maintenance and OpEx and that sort of thing. And certainly we expect some down core sales quarters coming up in the first half of the year here. It's not the scale of what you're going to see go down in Viking, as an example.

So I don't think we've hit the bottom quite yet. I think we're awfully close, I think, on margins in the Energy segment. Could they drift down another 100 basis points from where we're at right now? They could, over the course of the next couple of quarters on this thing. But we certainly are not expecting margin degradation or erosion much more than that in FY16.

And I think as we get to the back half of the year, you're going to see improvement coming up, as Cortland in particular should be coming out, and we've anniversaried some of the slowdowns, and people do have to do maintenance on the Hydratight side. Of course the other piece here is the savings coming in from maintenance -- excuse me, from the restructuring projects, that we already kicked off last year. We layered another batch into it late in the fourth quarter, and we'll be doing a few more incremental things here in 2016, as well.

I think when you look longer-term to the 2018 timeframe, Jeff, we don't see any reason we can't return to more historical norms within Energy. There's nothing fundamentally different about the mix. If anything, with the Viking stronger margins, newer to the thing, I would think we could return to the 2013, 2014 type of margins that we experienced in this business before it slowed down.

Okay. Just on the $25 million restructuring, are you able to bucket it between simplification and facility consolidation? And should we think of any of the particular regions or businesses as getting a greater percentage of that number?

The facilities side or leases is probably a little bit more than half of it, overall. But in terms of how it spreads out geographically, or how it spreads out across the segments, each of the three segments will be participating in this thing. It's pretty spread out across all of them.

Thanks.

Mig Dobre, Robert Baird.

Bob, welcome back. First question for me is just trying to attain a little more comfort with the FY16 guidance. If I just look at the first-quarter guidance, the EPS that is, it amounts to about 17% of the total EPS figure for the year. And we also know that in the second quarter, we typically see a step-down in earnings, just due to seasonality. If I look back historically, what I see in my model is that roughly 20% to 25% of the full-year earnings are generated in the first quarter. You're guiding for 17% this time and we know that the second quarter typically has some seasonal headwinds. How do we get comfortable with the fact that the back half seems to have such a significant ramp in earnings to deliver the full-year? Especially given that your cost savings are not really going to start flowing until FY17, per your comments earlier. What happens, and in what segment do we have to see those significant ramps as the second half arrives?

When I listen to your comments on the spread for the seasonality of the calendarization of the forecast here, I hear what you're saying, but when I look at laid out in front me for the year, I'm taking into account what we're talking about, as far as more currency headwinds in the first part of the year. We're seeing this destocking, this slowdown, more sluggishness, if you will, on the Energy side in the base Viking business, which is the higher margins on this stuff.

We expect things to be probably less worse as we get into the back half of the year, as it relates to Hydratight, as it relates to Cortland. We'll have been negative for six quarters within Cortland, by the time we hit the midpoint of the year. And the last time around, when we saw this in the Great Recession we had 20%-type increases in that business in the following four quarters. So there is a bit of a rebound in there.

We talked earlier about some of the wins that are coming through in the energy sector, and that connector win is sizable, is going to be hitting in the back half of the year. That is a very profitable product line for Hydratight, as well. So I think I look at those factors, the little bit of carryover destocking that we expect in the first half of the year to work its way through, and I guess we're comfortable with our guidance. Of course, there will be some restructuring savings coming through in the back half of the year, not a lot but you're going to see a little bit in the fourth-quarter. As we roll through that, you won't see in the first quarter and that's a piece of it as well.

Okay. I appreciate so basically a lot of it would depend on Energy? Am I correct in that?

Energy and Industrial.

And Industrial. All right.

Industrial does get impacted by Energy. So it might be one and the same, but we think Mining and Energy that come through in the Industrial segment will be less worse in the back half of the year.

Okay. I appreciate that. Switching to the 2018 target, and I think Matt was asking about this $50 million figure as well. Asking this question maybe a little bit differently, if the lower for longer thesis is proven to be correct, meaning that these end markets simply won't recover as quickly as we all hope they will, what does that mean for your operating strategy?

Well, I've read in earnest all the lower longer theories that are out there, and I don't actually disagree with them, and I'm not saying that our guidance for the back half of the year doesn't incorporate some of that. What I think continues to be misunderstood about Actuant's Energy assets is how much of it is OpEx versus CapEx related, and how much of it has nothing to do with the price of oil. So the large order that Andy talked about that we're doing, that's a joint integrity, it's for a refinery. Okay? Refineries are doing fine right now. The input cost is low. There are plenty of gas. There's no demand issue. Refineries are okay. Okay? So there are things like that, that continue to do well.

I think about chemical plants, fertilizer plants, there's a number of other markets that are joint integrity and are joint maintenance that we do, continues to move along. And so I think people attribute our businesses much more to price of oil than they probably should. And I just think we have much more of a maintenance side. As Andy said, Hydratight grew in the fourth quarter because of pent-up demand. You can't delay these turnarounds forever.

There are requirements from a safety point of view that these guys won't will not try to cut the corner on. They have to turnaround assets and we continue to see that be a big piece. We're seeing a lot of power gen turnarounds right now in the US. So there are chunks that I just don't think are well understood. In the lower, longer, while I believe it will impact some of our very front-end businesses, I don't think in totality, it's a theme that's going to bother us as much as you expect.

Okay. Thank you and good luck.

Charley Brady, SunTrust Robinson Humphrey.

Just a couple on Industrial. And can you tell us the degree of [IS] and tools were down in the quarter?

They were both similar in terms of their core for the quarter. They were both down. It certainly varied by region. Last year, we had a big IS project in the US, that didn't repeat this year. We had a big one over in Europe, but they were both down.

But IS down double digits, and I guess I'm trying to get to, when do we anniversary the large declines we saw in IS? More normalized, even if it's down it's not down 20% 30% type of levels?

It wasn't down double digits.

No.

They were down overall, PSL was in the number, this time core, so that was the growth, if you infer the other two down were just a little bit more than [that 5%].

Okay. Got you. That's helpful. Just on ES, what's your expectation for European truck growth in 2016?

I think we're looking at mid-single-digit growth. We had our business leader in here actually this week from Europe, and he was pretty bullish on what he's seeing in terms of order rates, what we had expected, what he had baked in and where the -- (multiple speakers).

It's off to a good start.

It's off to a good start. So we're feeling pretty good on that one right now. Certainly not gang buster, but we're expecting mid-single-digit type growth.

Great. Thanks. We'll see you next week.

Ann Duignan, JPMorgan.

This is Mike Conlon on for Ann. You noted that the negative mix in Hydratight hurt margins a bit in the quarter. Can you expand on that a little bit, and provide some color?

Sure. Within Hydratight, what we do, about one-third of our revenue comes from service, one-third comes from rental, and another third comes from product sales. As we called out, our service work was quite high in the quarter, and that carries the lowest margin of the three categories. So that's really what impacted our mix in the quarter.

Are the other two pieces of that of a similar margin, or how would we expect the mix to move going forward?

Well, next year it should be pretty good, especially in the back half of the year on this win that we talked about, the subsea connector win. First, the current quarter we're in, I called out the service job, a large service job in Middle East. That will probably put a damper, if you will, on margin.

But good utilization.

Flip side is utilization would be better. So when I look at it, as a result of those two factors, it's pointing to what I said earlier, Energy margins, Hydratight margins will probably be weaker in the first part of the year than in the back half of the year.

Thank you.

Scott Graham, Jefferies.

I have a little bit of a mass verification that I'm hoping you can help me with. I'm looking at the implied sales for FY18 of about $1.7 billion off of your page 16 chart, which suggests about 10% to 11% of growth a year, and if my math is correct on your tuck-ins, it seems like you're expecting about, oh, call it 7% of that from acquisitions and 4% organic. Is my math in the ballgame there?

I think your math is in the ballgame, but I'm going to do the same thing I did to Matt earlier. That will be a subject where we can get into a little more depth with you next week.

But you've got first year is going to be down in core growth, and then it's going to come back. So that's entering into -- that's entering into the core assumption or what you're seeing the perceived growth in the base business.

Got you. The other bucket with the market recovery, a question earlier before, maybe just a different slant. If we were to take Energy, Ag, Mining and Industrial, as we stand at the end of 2015, what percent of sales is that for the Company?

Energy, Ag, what was the other one?

Mining.

Mining and Industrial.

I don't have the fact sheet in front of me, but the updated fact sheet is on the website already, so just pull up the back page, and those are the four outlined on there.

Karen, you're the best. Thank you.

It's a little more than half.

It's more than half. I don't have Industrial right at my fingertips here, but Energy is 30%, and Ag is 10%.

Industrial is about 15%.

And Mining is a couple percent.

That's perfect. Thank you, guys and thank you, Karen. Last question. On the G&I, Mark obviously was a big fan of this, but at the same time fully acknowledged that G&I investments were not delivering what you had hoped for. So Bob, how does that change from here?

Yes. In fact, I had a major employee meeting this morning, and we talked about the exact same issue. So I think it's not that the prior investments -- they didn't work to the level we wanted, but you've got to understand, it's very similar to adding Kaizen Kanban to an organization. You've got to start by training the organization of the tools you have.

The Tracy tools, the Michael Tracy tools that we followed, are very analogous to what you do on a continuous improvement, in an OpEx point of view. So we had to learn the tools, okay? And the way our original investments were spent in G&I, there was a lot of training. There was a lot of small projects, peanut buttered across all the locations, so people could get used to using the tools. Okay?

And we had some great successes. The joint integrity that I talked about was absolutely one of our successes. The Ag Cedar, while it's having a tough year now because it's down, was a smashing success last year, contributed $20 million-ish revenue associated with that G&I. So there were lots of good examples that worked.

In the future, the organization is trained. We're not going to be spending as much time on training, and we're not going to be peanut buttering that investment across all locations. We're going to be putting it towards projects that tie exactly to one of our businesses. So there's some move afoot about smart pumps within in Enerpac, okay? We're not to a point where we're talking about it as a brand-new product line that's going to reinvent the world, but that's an area that we're excited about. Makes a lot of sense to us, from a safety and productivity point of view. Okay?

Hydratight in the under subsea clamping, there's a lot more we can do, in terms of remote actuation and different things. When you go over to Cortland, there's a lot more we're doing within structural health monitoring, is a product we call, that analyzes the inside of a rope, and that conversion from cable to rope that will help that. So our growth and innovation investments are much more targeted towards specific identifiable projects this time, versus spreading them across so the organization could try the tools, get trained, et cetera. So you had to do the first before you can get to the second.

That would be -- so I don't look back and worry about the past. I'm looking at it, and saying we needed to train people. Now we've got that done. Here we go, and the investments will be much more impactful.

So a lot of it is prioritization. We're prioritizing which are the businesses we really want to put the dollars in, and what are the best most impactful parts of this thing? So I agree. The two wins I talked about today, both of those were targeted G&I-type projects, and we are having success.

They're great examples.

We're just applying our dollars differently than we did three or four years ago. A lot smarter targeting them.

Okay. Those are great answers. I thank you for that. If you don't mind if I sneak one more in here, pricing in the quarter is that something you can talk about?

I'm going to let you sneak one more in, just because you're such a long serving analyst for Actuant. (laughter)

Then we're going to cut you off.

Karen would have cut you off. (laughter)

I know. I know.

The answer is, Scott, very diverse across the businesses. I don't think pricing had any impact in Industrial. It had a small impact on Hydratight, a bigger one on Viking, particularly in Norway. When I go to Engineered Solutions, nothing has risen to my attention the first month that would say there was any pricing issues.

Thanks a lot, guys.

(Operator Instructions)

Stanley Elliott, Stifel.

Bob, welcome back. Quick question about the destocking. Typically in your experience, how long does this last? Also, you mentioned we're in the latter part of the innings. Does the guidance anticipate any level of restocking in the back half of next year?

Like I say, I would think a six-month destocking would be about normal. We don't really last that much longer, because there's candidly not that much inventory in the field. It's not like cars or something. And do we have any -- we do not have any inventory build expected for the year.

And then switching gears to the free cash flow guide, could you guys helped me bridge that? If you're looking at the midpoint of EPS range, it's about $80 million or so net income, and the conversion ratio I guess to get the midpoint of the free cash flow guidance seems to be a little bit heavier than what you've done historically. Is it lower CapEx? Is it more working capital? Any sort of help there would be great.

Sure. This year we had a pretty tough, pretty challenging year from a free cash flow standpoint, because we had heavy income taxes. Some of the income taxes we paid out this year actually related to last year's divestitures. CapEx, next year, should be roughly in line with what we had this year. The biggest swing I think will be around income taxes in particular. One of the other items in here is that the beginning of this year, we paid out the retention agreements on the Viking acquisition which were about $5 million, and that was a one-time cash usage in FY15 that will not repeat. So when you start adding up some of the one-time hits you had in FY15, from a free cash flow standpoint, I certainly -- I feel good about the cash flow number for 2016. I really do.

Perfect. Thank you very much and see you next week.

Justin Bergner, Gabelli and Company.

My first question is a follow-up on the free cash flow question. If I take the high $70 million, maybe net $80 million of net income and add back $30 million difference between depreciation and amortization and CapEx is, similar to this year, I still come up a bit short of the $110 million to $120 million, so what gets me into that range, and does restructuring cash cost work against the free cash flow guidance?

It will be a bit of a drag, restructuring will be a bit of a drag this year. Some of the charges that we have for restructuring will be non-cash. Some of them will be lease charges, to cover a couple years of leases, so you have a little bit of drag, not just in the year you take the hit, but in the following year as well. One of the other items that you may or may not have factored in is equity compensation expense. You called out depreciation and amortization expense as non-cash items, offset by CapEx, but we've got another $12 million, $13 million pace in non-cash equity comp expense, coming through each year. There's some bonus expense baked in FY16 as well, that wouldn't be paid out in FY16. It would be paid out in FY17. So each of those items contributes to it.

Okay. That's helpful. The free cash flow is after restructuring expenses, or before? The $110 million to $120 million?

I have factored in net cash after.

Great. And then my second question if I may, one big picture question, which is how would today's presentation, and how would the 2018 outlook have looked or sounded different, if there hadn't been a CEO change?

Great question. One that we can only hypothesize, right? I'm glad you asked that question, because I didn't probably stress it enough in the presentation. This guidance and this plan was created, and the numbers that come up to that target of $300 million and 18%, were created as part of the strategic plan. We review that strategic plan in the early summer with the Board.

It's accumulated by a bottoms-up analysis of the segments, and put together. Andy puts the numbers together. We have to make some acquisition assumptions. We make some currency assumptions, and we come up with this plan, okay? So what you're seeing now is a change in the communication of that plan. We've always done a three year forward plan. We've never endorsed one in the future. Okay?

We've never come out with this kind of guidance. And there are plenty of companies who do very well. Honeywell would be an example of one, that does a great job of putting out a long-term target, and then rallying the organization to hit that plan, having annual milestones, et cetera. That's what we're trying to create within Actuant. So it's not a new process. I doubt the numbers would be any different. Whether Mark would have communicated it as passionately as I am, and rallying the organization around it, that would be different.

But I really want to leave you with the impression that this is not a Bob Arzbaecher-baked scenario that came up in the last month, and ta-da, here's the moment. This is a derivative, this is an outcome that comes out of the strategic planning process, and it's been packaged in a visionary way that we can put it in buckets that you can understand, and equally as important, that the important employees around the organization can understand, what are we driving to, what are we trying to get to?

The other two cents I would add to that is, when the change took place, one of the first things that Bob asked me, he said, tell me where we are going to be in 2018, so I pulled out the strategic plan, and I said, we're going to be at $300 million of EBITDA in 2018. His numbers were a little bit different as far as some of the composition, as far as how much came from savings, from -- (multiple speakers)

The restructuring was more robust.

From core growth and that sort of thing, but we ended up essentially, it is the strategic plan that's out there. So I guess you can theorize different ways, but that's where the number tied up to our strat plan.

Great. Thanks.

As a Board member, I had many discussions with Mark about creating this vision, that hey, with the current malaise in energy, nobody's buying Actuant stock for next quarter's earnings. They're looking for were this thing is, how's the market share, how do things look? He just was less comfortable putting out a goalpost, just to be candidly honest with you. He's just more uncomfortable with that. I'm not uncomfortable with that, and it's not just because I'm a one-year CEO. I'm comfortable with it because I see how it was built up from the grassroots strategic plan, and I want to rally the organization around it, because that's the way you hit these things, is to rally the organization around it.

Great. Thanks. Look forward to hearing more next week.

Thank you, and there are no further questions at this time. I'll turn the conference back over to you.

Great. Well, thanks, everyone for joining the call today. We'll be around all day to answer follow-ups you have. Just a note for your calendar, our first-quarter call will take place on December 17. As we mentioned, we have the investor day coming up, but the registration is closed, but as we've done the past couple of years, we'll post the slides and actually videotape of the ATU update, and then our pack overview on the website a day or so after the event. Thank you.

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 lines.