Enerpac Tool Group Corp (EPAC) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Actuant Corporation's first-quarter earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded Thursday, December 17, 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. Good morning and welcome to Actuant's first-quarter earnings conference call. On the call with me today are Bob Arzbaecher, Actuant's CEO; and Andy Lampereur, CFO. Our earnings release and the Slide presentation for today's call are available in the investors section of our website.

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

Consistent with prior quarters we will utilize the one question, one follow-up rule 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.

Thank you, Karen. As you saw this morning, we delivered results well above our guidance range for sales and earnings. While it rounded flat we did have a little bit of core sales growth for the quarter which was significantly better than expectations. The beat was due to strong activity from our energy segment specifically our Hydratight service business.

But despite strong energy sales there's plenty of challenges in most of our end-markets and we aren't seeing improved demand. EPS at $0.31 a share, excluding the restructuring charge, was also above our $0.20 to $0.25 per share guidance, due primarily to the higher sales. Consolidated operating profit came in as expected, taking into account the unfavorable sales mix across the portfolio.

We had strong free cash flow of [$17] million for the quarter, versus a cash outflow in the comparable prior year quarter -- overall, a great start to the year. I'll turn it over to Andy to go through some quarter details and then come back and discuss a couple of topics with you and updated guidance. Andy?

Good morning, everyone. I'm going to start today's financial review on Slide 5 with a summary income statement. First-quarter sales were $305 million, down 7% year-over-year due entirely to the stronger US dollar. Our gross profit margin was noticeably lower than the prior year on account of unfavorable sales mix.

The 11% reduction in SAE expense was greater than the sales decline for the third consecutive quarter as a result of continued belt-tightening and cost reductions. However the lower gross profit margins more than offset this SAE reduction leading to lower operating profit margins this year.

Excluding restructuring charges this quarter, our earnings per share this quarter was $0.31 a share which compares to $0.38 a share this first quarter of last year. Lower operating profit more than offset the benefit of share buybacks in this year's lower effective income tax rate.

In summary, while earnings were down year-over-year due to continued headwinds in most markets, they did exceed our expectations.

Before peeling the onion on first-quarter results, I'm going to provide a brief update on our restructuring program. We booked a $4.5 million pretax restructuring charge covering a number of projects that involve consolidating our footprint and reducing staffing levels. We've worked on several other projects that don't yet require or allow for restructuring charges to be booked at this point so those will be coming later this fiscal year.

We are happy with the progress made in the first quarter and expect another simulates similarly sized charge in the second quarter for restructuring as other projects advance further. We continue to expect restructuring charges to aggregate about $25 million between this fiscal year and the first half of next year and estimate slightly over a two-year payback once all of these are finalized.

Moving on now, let's dissect first-quarter 2016 results starting first with sales on Slide 6. Consolidated sales for the quarter were down 7%, as I mentioned earlier, all due to the stronger US dollar. Our flat core sales was a huge improvement sequentially from core sales declined in the last couple of quarters of 7% and 8%. By segment, our first quarter of sales were up 13% on a core basis and energy down 9% industrial and down 3% in Engineered Solutions. I'll provide color by segment in a few minutes.

With the exception of some energy-related markets we continued to see weak demand globally including the traditionally higher growth emerging markets. Pockets of strength from an end-market standpoint included European heavy duty truck and European and Chinese auto markets. Unfortunately we continue to encounter weak demand in most other markets with incremental softening in general industrial end-markets.

As mentioned, earlier sales mix in the quarter was not favorable, with some of our traditionally highest incremental margin product lines such as Enerpac's industrial tools and Viking's rental business posting the largest core sales declines of our product lines. Meanwhile the biggest revenue growth came from Hydratight service, which typically generates lower margins than the rest of energy.

So what this adds up to is poor sales mix which weighed on our margins in the first quarter. We were able to offset part of this, but not all, with lower SAE spending. In total, our first-quarter operating profit margin excluding restructuring cost was 9.8% which was up sequentially from last quarter but down from a year ago.

Now I'll spend a few minutes on each of our three segments starting with the industrial segment first here on Slide 8. Industrial segment results reflected sequentially weaker demand in the industrial tool product line and closer to flattish trends in both integrated solutions and precision (technical difficulty).

Things were weaker in the Americas and Asia than in Europe, with a very weak October weighing on quarterly results. Emerging market demand was poor and the stronger US dollar hurt sales into countries such as Brazil and Canada. Even within the industrial segment, sales mix in the quarter was not good with our higher-margin product lines declining much more than our lower project margin product lines.

That weighed on industrial segment operating profit margins, which were down in the 200 basis point range both sequentially and on a year-over-year basis.

I'll turn now to Slide 9 and cover the energy segment. Results there were much better than expected. Core sales advanced 13% with robust service growth at Hydratight and easier comps at Cortland. As expected, Viking sales were down significantly as some of the large Australian projects that had benefited from over the last 18 months were winding down. Operating profit margins for the segment were up 170 basis points sequentially but declined 50 basis points year-over-year. This was due to continued pricing pressure but much more so the unfavorable mix given the lower sales in our high-margin Viking rental business and significant growth in Hydratight's lower margin service business.

Considering the industrywide challenges, we are very happy with the first-quarter energy segment results and how the business responded, reacted to and withstood the headwinds in these markets.

Now we'll turn to Engineered Solutions on Slide 10. Segment level results improved sequentially with decent demand in European heavy duty truck and auto offsetting continued weakness in most of our other (inaudible). (technical difficulty) work down the inventory levels.

Segment operating profit margins improved sequentially but were down year-over-year 70 basis points due to lower absorption and the impact of the continued stronger US dollar. So that's it for segment deep dives this morning. I'll now shift to the balance sheet and cash flow.

We had a good free cash flow quarter, which reflected improved year-over-year primary working capital management and lower current year income tax payments. With $17 million of free cash flow generated this quarter, we are on track to hit our targeted $110 million to $120 million of full-year free cash flow.

During the quarter we paid out our annual $2 million cash dividend and we deployed a little below $5 million on the buyback of 200,000 additional shares. Quarter end net debt to EBITDA was in line with expectations at 2.3 times.

So that's it for my prepared remarks today -- I'll turn the line back over to Bob.

Thank you, Andy. We've met with many investors over the last quarter between our October investor meeting here in Milwaukee, sellside conferences and non-deal marketing visits. Based on these conversations we've picked up one common misconception about Actuant's energy segment.

Investors have been quick to assume that all of our energy exposure is directly correlated to oil and gas prices, yet our biggest energy business, Hydratight, at about 60% of the segment sales is primarily a maintenance service provider. Maintenance can be on an offshore rig, a refinery, petrochemical, nuclear, power-gen -- many, many other types of industries.

But the fact is while maintenance can get deferred and scopes can change, at the end of the day the assets are getting older and they need periodic scheduled maintenance to meet safety requirements.

This quarter was a great example -- a lot of our growth was in the US from work that had been deferred in the spring. Hydratight was up about 30% on a core basis. While we have the benefit of a big Middle East refinery job our Hydratight core sales would still have been up double digits without it. The core sales trend in Hydratight over the last four quarters has been up 2%, -12%, up 1%, and now up 30%.

Lumpy? Yes.

But looking at it on a trailing 12-month basis oil prices are down 50% yet Hydratight grew 6%. So the takeaway here for investors is to be careful not to group our energy segment with all other energy companies. There are a lot of other end-markets and applications within the broader energy spectrum and not all businesses move in the same direction or are directly linked to the price of oil and gas or CapEx spend -- and you just saw that from Hydratight this quarter.

Next, I'd like to provide a quick update on our CEO search process. It is well under way with an outside search firm narrowing down a list of external candidates and a round of Board level interviews with both internal and external candidates is scheduled for next month. There is significant interest and the Board is pleased both with the caliber of the talent as well as the progress of the search. Meanwhile I continue to enjoy my short-term assignment and am preparing for a successful transition to the new CEO as soon as that person has been selected.

Now moving on to acquisitions, while we've been pretty active we didn't complete any acquisitions in the quarter. We had one transaction in energy that was expected to close in the first half of fiscal 2016 completely move away from us due to increased seller price expectations. We have others that are looking promising and continue the progress towards the finish line. Most of these are in the $25 million to $75 million sweet spot, well aligned with our targeted industrial tools, energy services and agriculture secular growth themes.

In summary, we are busy on the M&A front but we are maintaining discipline.

To wrap up today's call I'd like to provide an update on guidance. As you can see here on Slide 14 for the most part things haven't changed a great deal since -- in terms of core sales guidance. Broadly speaking, the industrial economy remains challenged and has weakened a bit since the beginning of the fiscal year. The US dollar has strengthened against most other currencies, which puts cost and pricing pressure on our BUs. Commodity prices have continued to weaken and markets such as mining, agriculture, and off-highway have had sluggish demand and in some cases destocking.

In summary, not a lot of growth prospects.

We are a little more optimistic about our energy core sales prospects for the year on account of its strong start for the year in the first quarter and a little more cautious in the industrial segment due to the weakening we saw in the first quarter but in total our consolidated core sales guidance remains unchanged with an expected full-year core sales range of -1 to -4.

On Slide 15 we summarized other key assumptions for our EPS guidance for the second quarter and the full year. We exceeded our first-quarter guidance but remain cautious for the full year outlook, due to continued uncertainties and lackluster demand in most end markets. Therefore we have updated -- the updated full-year guidance reflects the increase in the low and end to reflect the first-quarter beat but we are maintaining the high end of our ranges. This puts our revised sales guidance at $1.165 billion to $1.2 billion in our revised EPS at $1.25 to $1.40 per share, excluding restructuring. We remain confident with our full-year free cash flow estimate of $110 million to $120 million.

Our second-quarter guidance is for sales of $270 million to $280 million reflecting a -4% to -5% core sales decline, which is sequentially weaker than what we just completed in the first quarter on account of the large Middle East service job.

Our second quarter is always seasonably our weakest of the year due to weather-related activity in energy, holiday shutdowns and a short month in February. We've been advised by several OEMs that they are extending holiday plant shutdowns from the typical one week to up to four weeks due to weak orders and in an attempt to reduce inventory. The combination of these factors puts pressure on margins which is evident by our second-quarter EPS guidance of $0.17 to $0.22 a share -- again, excluding restructuring charges.

We continue to expect the second half of fiscal 2016 to be better than the first half. We will anniversary most of the difficult comps that have happened about midway through the year -- both from an end-market and an FX standpoint. We want to make it clear we are not calling for improved second-half demand, simply stabilization and easier comps.

In summary I'm happy with the just completed quarter, cautious given the market uncertainties but confident in our full-year outlook.

That's it for my prepared remarks. Operator, let's open the line for questions.

(Operator Instructions) Charley Brady, SunTrust Robinson Humphrey.

Thanks. Good morning, guys, and Karen -- how are you? Just on the industrial business we've been hearing a lot of destocking talk. It sounds like destocking is maybe stretching into Q4, might go into Q1. Can you just give kind of what you are seeing from industrial destocking basis? Is it lessening? Is it getting worse? What are you seeing there?

I think there's less chatter this quarter in the last 90 days from our distributors out there, Charley. Them adjusting inventory levels down than we heard in the prior quarter. They don't carry a ton of inventory in the first place so don't think it's impacting us in a big way there. I think the destocking for us has felt actually more on the OEM side over on our Engineered Solutions segment.

Mig Dobre, Robert Baird.

Good morning, everyone. Maybe a little clarification on the Energy segment. I'm trying to figure out exactly what the impact of this Middle Eastern project was. My back of the envelope math, based on your comments, Bob, was that this contributed close to $14 million maybe to your energy revenue in the quarter. Is that correct? And how should we think about whatever is left in this project for the year and the flowthrough at some of the other quarters?

So you are a little high on the number but you are not out of the ballpark in terms of what we booked as revenue. There is some tail that will fall into December and then there's also some talk about other ancillary work we could do on the site that will flutter into the rest of the year. I think from that point of view those would be comparable to prior years and other kind of work that we do, so I wouldn't look to that to be incrementally that high.

The other thing I would add in there, Mig, is obviously that helped out our revenues in the quarter but if you were to pull that out our core sales in Hydratight that segment overall still would've been positive. And even within Hydratight, without that job, the Middle East was up, US was up a bunch, Asia was up, and even Europe -- which you think with the North Sea being probably ground zero -- it was down just a couple of points so overall service levels around the globe are actually very robust even without this large job.

The job itself really is a takeoff to some of our growth in innovation projects here. So this isn't a one-time win that just came popping in and now we're back down to nothing out there -- there's other wins that we've had as well but certainly not this magnitude.

But the reason we're forecasting negative core sales in the second quarter is second quarter is always a tough one from a service point of view for Hydratight. You are in the middle of the winter, a lot of these sites, particularly offshore, you just can't -- they are just too hostile environments to be there in the winter. So the quarter we just finished tends to be the strongest of the year for our service side of Hydratight and that was no exception this year.

Ann Duignan, JPMorgan.

Good morning, guys. One question, one follow-up. Could you give us a little bit more color on your comments that your OEM customers -- some of them have announced four-week shutdowns versus one week normally? I know you're probably not going to be willing to tell us which specific customers those are but maybe which industries or which regions?

And then could you comment -- I think you said in your opening remarks that China automotive was up or was strong for you guys. [China Metal] said the other day that China automotive was very weak and I'm just curious to get some color from what you're seeing in the China automotive industry.

All right. So your first question is correct -- I don't want to get into a customer-by-customer forecast but as you know, Ann, our business is predominantly in truck is [capfilled] and it's the Europeans contract -- European makers. I would say there's also some element of that in agriculture and off-highway equipment. So those are the markets that would be affected by that.

More so in the US, Ann. More so in the US than truck -- heavy-duty truck.

The second comment I would make would be on auto in China. This was an air emissions product that we have in China. It was a market share win that happened several years ago when we won this contract. So I don't think it's a reflection of autos in China as much as it is a reflection of market share wins that we had as a company.

Jeff Hammond, KeyBanc Capital Markets.

Good morning. So, just back on the energy, I guess, was the big incremental surprised at the service in the US or did some of that Middle East business pull forward? And then just kind of generally what kind of -- how do you think about the growth rate for Hydratight kind of over the prospective nine to 12 months?

We did have this larger job that we talked about earlier in the Middle East. That was in our forecast. I think it ended up beating our forecast by $1 million or $2 million so it was not a significant variance. It was just the robustness of the service growth really globally -- the US, in particular, was very strong in the quarter. That was the big driver, was just service overall elsewhere, relative to our guidance.

I think the Middle East contract came quicker than we thought -- I think we had it over four or maybe five months and it was an accelerated time frame from our original guidance and I think that drove some of it also. I think when you are talking about service long term for Hydratight we are just very positive about the outlook for service. These assets are older. They are many times past their useful life and still running and that creates demand for more service, not less.

Now it is lumpy as hell. As I went through in my prepared remarks, it jumps from +30% to -10% in a hurry. And I think we've tried to take that into account in our guidance. I think we tend to try to be conservative there and wait for actual results to beat, rather than try to predict every turnaround, and I think you see some of that in this quarter.

Matt McConnell, RBC Capital Markets.

Thank you, good morning. So just to follow up on the previous question, is there any common theme you saw that drove such an increase in maintenance activity -- whether that's particular customers or end markets or most of the data points we've heard haven't suggested anything has gotten better on capital or operating spending but any reason why it would all come through in such a strong way in this quarter specifically?

I think there was a bit of pent-up demand so there were some things that got pushed out of the summer that got moved into this quarter. I think as I said this earlier, this is the big quarter and I think people are anxious to get work done, and so I think those two drove it. So as Andy said some of this is our joint integrity strategy, where customers are looking to kind of outsource the whole thing to us. And the Middle East job was a great example. We did everything from planning which joints needed to be worked on all the way through the manpower and training local Saudi service technicians on how to do the work.

So it was kind of a cradle-to-grave process and that is exactly what our joint integrity strategy is tied to.

(Operator Instructions) Robert Wertheimer, Barclays.

Hi, good morning. Just quickly -- on industrial, you mentioned general industrial weakness call it in energy and mining. Are you seeing broad-based weakness across the US and okay Europe? I wonder if you can just give any other color on that segment -- whether you have seen it flow through the whole industrial economy or it's still very patchy?

Our weakest regions by far were the US and Asia. It was pretty broad-based across North America but Europe actually had an okay quarter -- a pretty good quarter in terms of industrial tools. As I mentioned, in the quarter we had a very weak October and from reading other companies reports as they were announcing earnings for the third quarter, they were commenting on a weak October. We certainly saw that, we exited the quarter certainly better than our overall results for the quarter in terms of the core, but there's no question in our mind things weakened sequentially from quarter 4 -- our fiscal fourth quarter into our first quarter here which is what's got us cautious overall on guidance.

From a volume point of view it was kind of a disappointing quarter in industrial. I don't think it's any different than your reading from other peer kind of companies. The outlook, we think, is conservative from here on out but that is the part of the business that from a topline was the weakest.

I think they did a pretty good job on the margin side offsetting that. But clearly that Enerpac industrial tool business is a bellwether for general industrial activity and it's really not a great picture right now.

Mig Dobre, Robert Baird.

Thank you for taking my follow-up. Can you guys help us out with ranging your margin expectations and what's embedded in your guidance at segment level?

We typically don't give out segment level guidance quarter by quarter. Clearly, our view for the full year margins in total, they would be down a hair in total for the year and by really for the full year by segment as well. As we move into the second quarter here, even though we had ugly mix this quarter within our segments and across them in the second quarter, as you've known over the years, has just really dropped down because of absorption and our production is low on that sort of thing so that will not change.

I expect certainly a pretty nice ramp-up in the back half of the year as we get a little bit of volume and some of these adjustments between sales and production balance out as well, and our mix gets a little bit better within energy hopefully. So that's a view but beyond that, Mig, I don't want to get into -- this is going to be down X by quarter or by segment.

In total, all three of them, we expect them to be down a little bit year-over-year for reasons we outlined.,

So I want to just add a couple of comments to where Andy is. I've said this to a number of investors.

This Company is going to feel a lot different when you get into the back half of the year and Andy in effect said that. As you guys know, we are very focused on $300 million of EBITDA and 18% EBITDA margins. And I think we are going to be moving quite solidly towards that in the back half of this year from where we are at today.

And when Andy says there's incremental volume we are not talking out growth, we are talking about normal seasonality as we get into the spring and you start picking up additional volume. It's not necessarily much growth year-over-year, it is growth sequentially.

So those are just a couple of comments I wanted to add to Andy's.

Stanley Elliott, Stifel.

Good morning, everyone. Thank you for taking my questions. A quick question kind of delving back into the energy business of the US -- was the whole market up like that? Or is -- with some of the activities kind of combinations I guess with some of your competitors in the space -- is there more of a share gain? And how sustainable do you think this is, going forward?

We don't have that true of a competitor in Hydratight's space that is a public peer that you can compare to. Team and Furmanite get close -- they don't really have product sales. Team is not as global as we are. They certainly will be more when they team up with Furmanite.

But I don't think there's a great comparable to be able to look at and make that adjustment. So, the Middle East job -- somebody was doing that work at the Saudi Aramco refinery before we got there so obviously there's an element of that that is market share-related. Other things in the US are jobs that we've had for years -- I think it's just normal turnaround activity.

Justin Bergner, Gabelli & Co.

Good morning, Bob. Good morning, Andy.

Good morning, Justin.

I just wanted to start off by asking in terms of your core sales guidance by segment for the fiscal year, would you hazard to say that your energy is tracking towards the high end of that in industrial towards the low end of the segment guidance? Or is it too early to jump to those conclusions?

Clearly with a 13 up in the first quarter, energy is off to a blistering start. We told you it will moderate in the second half or in the second quarter to bring that in line.

I think we feel pretty comfortable with Energy in that service activity doesn't shut down so we've got some momentum associated with that first-quarter activity. Industrial is the one that's got to turn the corner a little. Some of that is just the seasonality of the business and getting easier comps in the back half of the year. Engineered Solutions tracked exactly what we thought it was going to do -- I don't see any plus or minus on that.

Okay. Thank you. And one other question. In terms of the deal that got away from you, what sort of dollar amount was that? And could you sort of provide any detail on what type of asset you were looking at?

I think we told you it was kind of in the energy segment and it was in the middle to upper middle of the fairway I talked about on our prepared remarks.

Charley Brady, SunTrust Robinson Humphrey.

Thanks. A quick follow-up on Engineered Solutions. In the release you called out convertible comp being up, which I guess was a little bit surprising. Is there any kind of growth happening there? Was there a new product that's coming out or is it just kind of an easier comp year on year?

We have a couple of new platforms but we also have some that are exiting. I think it was just production, Charley -- nothing particularly different.

Okay. If I can throw in one more just on heavy truck -- Volvo came out with monthly numbers from November today -- really strong European truck. Are you seeing any acceleration in euro truck from where it's been over the past few months?

I wouldn't say we've seen any acceleration. It was a good quarter, as Andy talked about in his prepared remarks. We are probably 60 to 90 days of ahead of when Volvo builds that truck. So I think you are probably looking at some of the activity we saw in August, September, October.

Got it. Thanks.

Robert Wertheimer, Barclays.

Hi, thank you. I was just trying to squeeze that in before. So maybe this is a little bit detailed but I was curious -- I very much understand maintenance needs to get done in Hydratight and yet in some other industries we've seen people push maintenance out. Have you seen any major or noteworthy split between integrateds with maybe a larger upstream exposure or folks who are more pure maintenance in midstream or whatever you want to say, where you can kind of guess if there is an impact of delayed maintenance how big it might be? Or do you think that's not a factor or do you not know yet? Thanks.

It's a good question -- one we ask internally a lot. And I wouldn't say we can draw any correlation to upstream, downstream, midstream versus what they do in terms of this OpEx maintenance that we are so prevalent in.

Clearly we believe and know, just because we were working on a job, that some stuff got pushed out of the summer into the fall and we saw that come through this number. But there is a limit to how much they can do there just from a regulatory point of view -- different. It's different in different parts of the world so even that is hard to quantify. So it's just something that's always got that lumpiness to it but we clearly are going to great strides to send you guys the message that this is not necessarily tied to some of the CapEx reductions you are seeing and even OpEx reductions you are seeing. This stuff does have to get done.

Thanks.

Justin Bergner, Gabelli & Co.

Thank you for taking my follow-up. I just wanted to ask quickly if any of your cash flow priorities have changed with sort of the further weakening of the industrial backdrop and lower oil prices or is it unchanged from what you sort of played out at the investor day a few months back?

It's exactly where it was in the investor day.

Okay. Thank you.

And there are no further questions registered at this time.

Great. Thanks to everybody for joining the call today. I'll be around all day if you want to give me a call with any follow-ups. For your planning purposes, our second-quarter call will take place on March 16 and we all wish you a very safe and happy holiday season. 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.