Enerpac Tool Group Corp (EPAC) 2016 Q2 法說會逐字稿

Welcome to the Actuant Corporation's second-quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded Wednesday, March 16, 2016. I would -- it's now my pleasure to turn the conference over to Karen Bauer, Communications and Investor Relations Leader. Please go ahead, Ms. Bauer.

Good morning, and welcome to Actuant's second-quarter earnings conference call. On the call with me today are Bob Arzbaecher, Actuant's newly re-retired CEO; Randy Baker, new 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 this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Investors are cautioned that forward-looking statements are inherently uncertain, and that there are a number of factors that could cause actual results to differ materially from these statements. These factors are outlined in our SEC filings.

Consistent with prior quarters, we will utilize the one question, one follow-up rule, 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 good morning, everyone. Thank you for joining us on a second-quarter earnings call. To start the call, I'd like to introduce and welcome Randy Baker, as Actuant's new President and CEO. It's been about six months since I resumed my CEO duties at Actuant. And when I returned, I indicated I would focus on running the business, while Actuant's Board would focus on selecting a new CEO. The CEO search process was extensive, and included both internal and external candidates.

While I was not on the selection committee, I was involved in interviewing, discussing Actuant and its business strategies, and finally helping onboard Randy. Randy joined Actuant on March 1, and I, along with the rest of the Board, am excited to have him at the helm, and strongly believe he is the right leader to take Actuant to the next level. Randy has 30 years of experience in a variety of industries and organizations with broader size and scale than Actuant. The Board was particularly drawn by his track record of customer focus, new product development, and service revenue growth.

Now on to the second quarter. As you read in last week's pre-announcement and this morning's press release, our second-quarter results fell short of expectations. The industrial recession continues to weigh on demand, and we continue to face headwinds in most of our end markets. EPS of $0.21 a share, excluding impairment and restructuring charges, was at the high end of the guidance range, entirely due to the lower full-year effective tax rate. Cash flow came in as expected, and we used approximately $5 million to repurchase shares in the quarter. We also deployed approximately $15 million on a small tuck-in acquisition in the Industrial Segment. We feel good about the acquisition pipeline as it currently stands.

As I step back to retirement, I'm confident that Randy and the Actuant leadership team will do all the things within their control to drive cash flow, customer focus and operating results. I will remain on the Actuant Board of Directors, and be available to support Actuant in any way Randy sees fit. Mostly, that means getting out of his way. I'll turn the call over to Andy to go through the quarter details, and Randy will come back and provide his thoughts. Andy?

Thanks, Bob, and good morning, everyone. I'm going to start today's financial review on slide 4, with the reconciliation of second-quarter GAAP to non-GAAP results, to remove the current year restructuring costs and impairment charges.

As reported in last week's press release, we recognized a $169 million net impairment charge, to reduce the carrying value of our Cortland, Viking and Maximatecc businesses. The triggering event for the impairment charge for our energy businesses was the additional round of oil and gas customer capital expenditure reductions that's impacting our Cortland and Viking business units, which are tied to the exploration, drilling and commissioning value streams in the oil and gas industry. We also wrote down the carrying value of our Maximatecc business, the result of reduced forecasts.

Excluding the $169 million impairment charge, and about $4 million of restructuring expense, neither of which were included in our guidance, we generated earnings per share of $0.21 a share, compared to our second-quarter guidance of $0.17 to $0.22 a share. These adjusted results include the benefit of lower effective income tax rate that will provide both cash and earnings benefit for the balance of the fiscal year. Relative to our second-quarter guidance, the lower tax rate benefited EPS by about $0.05 a share.

Turning now to page 5, we have prepared a comparison of our second-quarter results, excluding the impairment charges in both years, as well as a restructuring cost this year. Our current-year second-quarter sales declined 13%, while adjusted operating profit declined at a higher rate, on account of lower gross profit margins. Our year-over-year EPS declined 25%, as a result of the lower operating profit, which is partially offset by the lower income tax rate and lower share count due to buybacks. I'll dissect these numbers in greater detail, starting with sales on slide 6.

Consolidated sales for the quarter were down 13%, with 5% of that due to currency rate changes and 8% being core sales declines. Our second-quarter core sales declined in all three segments, but the declines in the Industrial and the Engineered Solutions Segments were a little worse than we had expected. We attribute that to the weaker demand across a variety of industrial end markets, as well as destocking by off-highway OEMs. The weakness continued as our quarter progressed, and was evident in all geographic regions, with the Americas and the emerging markets being particularly soft.

Turning now to operating profit margins on slide 7, we saw the normal downward seasonal trend in the second quarter, on account of holiday shutdowns and the slow season for energy maintenance. Compounding that this quarter were two particular items: unfavorable sales mix and under-absorbed fixed overhead costs, due to OEM destocking.

Our consolidated second-quarter operating profit margin, excluding the restructuring costs and impairment charges in both years, declined 250 basis points, from 13.9% to 11.4% this year. Sales mix in the quarter was unfavorable, reflecting the largest core sales decline in our highest incremental margin businesses. Additionally, we had unfavorable mix within energy, as our Hydratight maintenance business grew over 10% during the quarter, but that primarily took place in its lower margin service product line. Overall, mix cost us 50 basis points of margin at the consolidated level -- at the gross profit level, as well, which flowed through the operating profit line.

Now, let's spend a few minutes on each of our three segments, starting first with the Industrial Segment on slide 8. Industrial Segment results reflected the weaker year-over-year demand, with distributors reporting challenging conditions in most verticals, including mining, energy and general industrial. All geographic regions reported weak demand, with softness throughout the quarter. We don't feel that much of the lower demand was due to destocking in this channel, as inventory levels at most of our distributors have not meaningfully changed.

Industrial Segment core sales declined 14% year over year in the second quarter, and as the green line on this graph indicates, the trend has been declining over the past year, reflecting recessionary conditions in most major end markets served by the Industrial Segment. The combination of lower volume, coupled with the 50 basis points of unfavorable headwind from a mix standpoint, hurt Industrial Segment operating profit margins by 350 basis points, on a year-over-year basis. Now, I'm going to move on to the Energy Segment on slide 9.

Core Energy Segment sales declined 8% year over year in the second quarter, compared to a 13% growth in the first quarter. Hydratight, which is our maintenance-oriented business unit in this segment, had another good quarter, but not as robust as the first quarter, due to the conclusion of the large Middle East service job we talked about last quarter. Despite sequentially lower revenue on that job, Hydratight continues to generate solid growth, with year-over-year core growth of over 10% in the second quarter.

It was a different story, however, for our other two Energy businesses that are more directly correlated to oil and gas capital spending. They collectively posted a year-over-year core sales decline of over a 30% in the quarter. We don't see the trend improving for exploration, drilling and commissioning in the balance of calendar 2016. We do, however, feel pretty good about the continued growth prospects for Hydratight, which is being driven by required maintenance on production assets. This reinforces our message from last quarter's call, that our maintenance revenue, which are about two-thirds of the Energy Segment sales, are not very correlated with oil and gas prices.

Second-quarter Energy Segment profit margins are traditionally the weakest of the year, due to lower maintenance levels from a seasonality standpoint. This was exacerbated in the second quarter, with high service mix in the Hydratight, high decremental margins coming through on the Viking rental revenue decline, and pricing pressures in both Viking and Cortland, given steep competition for the available business. Mix alone was over 400 basis points of headwind in the Industrial Segment, from a margin standpoint, in the second quarter. While margins will improve sequentially as we move back -- as we move into the back half of the fiscal year, they will remain below historical levels, given the volume and pricing headwinds in our CapEx-driven businesses. Now, we'll turn to Engineered Solutions on slide 10.

Core sales were down 4% in this segment, on a year-over-year basis, while the stronger US dollar was a 4% headwind. We continued to see pockets of strength in the Engineered Solutions Segment and on-highway vehicle markets, including heavy-duty truck and convertible top, both primarily in Europe. Off-highway end markets, including construction equipment, material handling, forestry and agriculture, continued to pose bigger headwinds for the segment. On our last quarterly earnings call, we noted that several off-highway OEMs were taking extended holiday shutdowns to reduce inventory levels. We saw this continue well past the traditional holiday season, with several of them reducing ongoing production levels, and a few delaying or scaling back new platform introductions in the back half of the year.

As a result, our margins in the Engineered Solutions Segment were pressured, due to lower production levels and the resulting weak overhead absorption. However, the segment did generate 80 basis points of margin expansion, year over year, as a result of cost reductions last year and in the first half of this year. Now, that's it for this segment deep dives this morning, and I'll shift to the balance sheet and cash flow.

We had a positive cash flow quarter, despite the typical second-quarter seasonal headwinds. Our year-to-date free cash flow of $23 million includes $6 million for the second quarter. During the quarter, we returned about $5 million of cash to shareholders via buybacks, and we deployed about $15 million in the Larzep acquisition in the Industrial Segment. We feel good about our year-to-date cash flow at the midpoint of the year, knowing that the lion's share of our annual free cash flow is always back-end loaded. Our quarter-end leverage was in line with expectations, at 2.5 times trailing net debt to EBITDA.

Now, I will cover guidance for the balance of the year. As we've communicated in the last 10 days, the general industrial economy remains challenged, and has weakened since our December earnings call. Despite a nice increase in oil and gas prices in the last month, commodity prices in general are at low levels, including energy, mining, agriculture, and other off-highway equipment markets are seeing sluggish demand as a result, and are reducing their inventories.

As you can see on slide 12, we've reduced our consolidated core sales forecast, our Industrial Segment core sales forecast, as well as Engineered Solutions Segment core sales outlooks for the year. We are now expecting consolidated full-year core sales to be down 4% to 6%, compared to our prior guidance of a 1% to 4% decline. Despite the cost reduction actions that will benefit us for the long-term, our margin expectations for the balance of the year have been reduced, due to the unfavorable mix that I've discussed, as well as these lower production volumes. With our largest core sales declines coming from our most profitable segments, we are expecting mix to work against us in the next two quarters, as it did in the second quarter. You can see our updated guidance here on slide 13.

Our full-year guidance reflects lower sales and EBITDA, but a claw-back in income taxes for the year. The lower tax expense reflects the reduced effective income tax rate that results from fixed dollar income tax credits having an outsized impact on the effective tax rate, because of lowered pretax earnings. Additionally, we've seen a favorable shift in earnings being generated in those countries with tax rates that are much lower than the US. We are now projecting a 5% effective income tax rate for the entire fiscal year, down from our prior 15% estimate, as a result of these factors. The lower taxes will also help our current-year free cash flow.

In terms of calendarization, the deeper we get into this fiscal year, the better the comparisons become, as a result of anniversarying some of last year's toughest quarters. As well as more stable currency rates that we've been seeing in the last six months. We expect the fourth-quarter comparisons to look better than the third, but unfortunately still expect to be feeling the headwinds from the industrial recession.

So, summing it all up, we are now projecting full-year sales in the $1.135 billion to $1.15 billion range, and EPS of $1.25 to $1.35 a share. Our third-quarter sales are expected to be in the $290 million to $300 million range, with corresponding earnings per share of $0.34 to $0.39 a share. As a result of lower cash taxes, we anticipate little change to our full-year free cash flow estimate, now in the $100 million to $105 million range. Consistent with past practice, our guidance does not include the impairment of restructuring charges, nor any future stock buybacks or acquisitions. That's it for my prepared remarks today. I will now turn the line over to Randy.

Thanks, Bob and Andy. I'm excited to be joining Actuant, with its long tradition of customer-focused cash flow and operational excellence. Actuant is a company with well-respected global brands, a sound business model, and achievable vision. Its track record for generating outstanding cash flow is impressive, and is clearly one of our best assets. I've confirmed, in my first couple of weeks, that it is truly a great organization with enormous potential. I plan to spend the next 90 to 120 days, as you would expect, meeting customers, touring facilities, and learning about the business and people.

As attractive as our future may be, Actuant is facing some significant end market challenges. We have missed investor expectations for a number of quarters, and we've under-performed versus our internal targets. Yet, our priorities are clear. We need to drive organic growth, we need to get our cost structure right, and we need to successfully allocate our strong free cash flow. That allocation process will continue to be disciplined, with top priorities being investments in core growth, tuck-in acquisitions, stock buybacks and debt reduction, in that order.

I've received many questions concerning about our 2018 vision of $300 million in EBITDA. It is achievable, and we are committed to the efforts required to make it a reality. Over the next two quarters, I will be formulating my detailed strategy, and communicating the changes at our investor conference in the fall. Rest assured, we will be highly focused on creating value for shareholders. I'm honored to be the Actuant CEO, and I'm looking forward to meeting and working with all of you. That's it for our prepared remarks. Operator, we can open it up for questions.

Thank you.

(Operator Instructions)

Charley Brady, SunTrust Robinson Humphrey.

Thanks, and good morning. On industrial, for a second, can you maybe parse out what the Enerpac tools business and the Enerpac -- the large project business looked like in the quarter? And whether that had any impact on the margin?

Yes. The IT business, which is a traditional Enerpac business, was down. Essentially -- it was essentially what drove the reduction. We did have a slight decline within IS, as well. So that mix did not help. The mix of those two did not help with the base IT business being down more than IS.

Can you talk about the cadence, as you went through the quarter? Was it continuing just down, month after month? Or was there any kind of stabilization, particularly as you exited the quarter?

Charley, this is Randy. We really didn't see any sequential change in order bookings rates. It really started slow and ended slow, so we really didn't believe that there was going to change substantially, at the end of the quarter.

Okay. I will get back in queue. Thanks.

Jeff Hammond, KeyBanc Capital Markets.

Good morning, guys. Welcome aboard, Randy.

Thanks.

Back on industrial, it seems like we're seeing a greater deceleration happening, at a time where a lot of distributors and companies are starting to talk about easier comps, and destocking abating. And I just want to understand better where you're seeing, particularly, this further step-down in activity? And what, maybe, your distributors are telling you is driving that behavior?

I would say that we do not believe much of the decline that we saw in industrial this quarter, or even the last quarter, was a result of destocking. Most of our distributors do not carry a lot of Enerpac product in inventory, because our turn rate on it is so quick. What orders come in today, it goes out tomorrow.

Essentially, what our distributors are telling us is, it is weak everywhere, in all markets. Certainly, if we're talking to someone that's down in Houston, or someone that's near the coal mines, it's going to be a different -- a much more negative story than other general fluid power distributors. But it isn't like there are pockets where we are seeing good growth in this area geographically, or in some specific niche. It's across the board.

It's weak out there. We do not -- we don't feel this has anything to do with market share at all. We've really poked and probed distributors on that.

And certainly, the end markets that are the worst would be mining, would be energy, and certainly we've got a tie-in with both of those. I think the other item, I would say, regarding our Enerpac business is, while we do sell through some industrial distributors, like a Granger or Fastenal, that clearly is not the normal type of distributor we have, where we're working with specialty fluid power distributors.

So they're -- we're selling tools through them, as opposed to a consumable, like a fastener or something like that. So that's definitely a difference between our typical distributor and those industrial distributors.

Okay. And then over on energy, you cited the mix in Hydratight. Can you talk about visibility, one, in general, on Hydratight? And if you think that mix dynamic with service continues into the second half?

Yes. I think the quick answer is, we do expect this mix to continue. We have reasonable visibility to the spring turnaround season around Hydratight, and it feels pretty good. This is not one specific region. It's not just the Middle East. It's not just the US. We're seeing pretty good strength.

Obviously, the North Sea is a little bit weaker than other regions, but it's pretty consistent out there, and in the service level will continue. I think it will continue to outperform, maybe, the sale of products, which are a little bit higher margins. So that mix will continue.

And certainly, across our businesses within the Energy Segment, there's no question that the mix is going to be a headwind, as Hydratight will be up, but the other two will be down. And Viking's decremental margins on its rental are significant, and will weigh on the overall segment margins.

Okay. Thanks, guys.

Matt McConnell, RBC Capital Markets.

Thank you, good morning.

Good morning.

Randy, I was hoping to ask about your view on some of the hallmarks of Actuant recently? And specifically, the four growth spaces that have been emphasized: ag, energy, infrastructure, mining?

And then I know you touched on it briefly on your prepared remarks, but capital allocation has historically been very focused on bolt-on M&A, and the occasional slightly larger deal. So what are your view on those two elements of how Actuant has historically been run?

Are those under review? Or when might you have any viewpoint on whether those are the strategies, going forward? And whether there could be adjustments?

You can imagine, for the last 2 1/2 weeks, I've been digging, in a lot of detail, on that exact topic. The areas I have probably the most interest in, right now, simply is the service revenue stream coming out of our energy sector. It is very impressive. They have got a great pipeline of jobs. And it's -- when you see over 1,000 field service people pulling wrenches on jobs around the world, making us money, it's an area that we undoubtedly will continue to drive a lot of growth in. I think that that element is going to be clearly on my gun sights, in the next couple of months.

As far as the general other streams that you saw, mining is going to be a tough market for a long time. There's no doubt about that. And so, there's service components in our industrial business that are going to become even more prevalent, because the equipment in those mines are actually being run at higher utilizations than ever before. Those fleets have been shut down, so what was large fleets of trucks are now cut down, to make sure the utilization rates are back up to 80%, which means they have to be better at doing service.

So I think that some of the tooling, and things we can do to help those mines, can be helpful. Ag is going to go through its cycle. I'm hopeful that we're going to see a good crop season this year. It sounds like a lot of people got into the fields early.

And I also think, that once that hay and forge business starts the fall order writing for those companies, of the big three, we are hoping to see some outflow of orders from our core business.

But I do think that there's targets in every single segment. I think the strategy is valid. I think there -- as I go through the next four or five months, there will be some tweaks to that strategy.

And relative to your question on capital allocation, and how we go after tuck-in acquisitions, I think that's a great idea. I think that what's been done in the past has been good, and it's provided growth that the Company desperately needed. So I see no change in that strategy, in the short term. Our pipeline has activity in it right now. And from what I've seen, it matches up to that strategy quite well.

Okay. Great. Thank you very much.

Mig Dobre, R.W. Baird.

Good morning, everyone. It's Joe Grabowski on for Mig this morning. I wanted to ask about the destocking in off-highway vehicles. Was it pretty uniform across the different off-highway end markets?

And then, how do you see it playing out over the next quarter? Is it -- do you think it's closer to the end of the destocking? Or do you think it lasts through the quarter? Some perspective there?

I would -- I'll tackle that one, and if Randy has any additional comments, he can come in. I would say it was pretty universal across the off-highway markets. We'd consider that being construction equipment and ag and forestry, material handling, mining, for that matter, as well, pretty consistent across.

We've had customers in each of those verticals adjust down their production schedules, or push new product introductions out, and whatnot. The -- I would say it's probably worse in the US than it is in Europe. On that, certainly, our on-highway stuff is not being impacted in the same way, being heavy-duty truck and automotive. So I guess that would be my two cents on it.

Great. Okay. Thanks. And then I guess my follow-up question -- and I hate to ask about the tax rate -- but it seems like the tax rate has been negative, three out of the last four quarters. And the guidance, maybe, is for it to be pretty close to zero, maybe, for the third quarter.

Just a little bit more, maybe, on what's driving the tax rate so low? And what -- I guess what the outlook is, maybe even past the next couple quarters? How long can these low tax rates sustain?

Sure. One of the reasons we had the negative tax rate this quarter is because we had a positive tax rate last quarter. And as you book -- the accounting rules, as you book taxes, you're looking towards the whole year, what is your rates going to be for the whole year? And you start off with that assumption, and if there's anything unusual in a particular quarter, a big credit or an adjustment or something, because of a change in planning, you run it through at that point in time.

So what we had this quarter is, essentially, we are reversing the expense we had in the first quarter. Because our outlook for the full year has come down from what we thought was going to be 15%, down to 5%. So you say, why is it down from 15%, now down to 5%? There's two items that I called out in particular, and I will just review them again.

Our highest tax jurisdiction, bar none, is the US. 3% state rates, our income in the US is down, our forecast for the year is down, relative to what our plan was, and relative to what it was in December. As a result of that, our mix improves.

Plus, where we are recognizing a little bit better profiles, or better outlooks, as some of our lower tax countries. There's countries out there that have tax rates that are less than half of what the US is, and we're seeing quite a shift, where we're seeing some income. So that mix is really helping us out, as we move on for the year.

The last item I would call out for taxes -- and again, not trying to get too technical on this thing. But if we have a fixed tax credit, say there is a fixed tax credit out there. I'll just throw out a number of $5 million. And you expect that your pretax earnings are going to be $100 million at the beginning of the year. That will have 500 basis points of impact on the tax rate.

If you get into the year, and you say, my taxable income is no longer $100 million, it's going to be $70 million, but I still have that same $5 million fixed tax credit out there, it's not impacted by what's happening with revenues. That will have a much bigger impact. And that is essentially -- those are the items that have really impacted us here, from a tax rate standpoint.

Great. That makes sense.

The other thing I just want to toss in there, just for clarity, this is cash taxes, absolutely. This is not an adjustment, where we are adjusting, reversing a tax reserve or something like that, on the balance sheet. This will benefit our free cash flow for the year, as has the stuff in the past.

Okay. Understood. Thanks. Thanks for taking my questions.

(Operator instructions)

Justin Bergner, Gabelli & Company.

Good morning, everyone, and congratulations, Randall, on your joining the Company.

Thank you.

My first question relates to the industrial side of the business. Are you still seeing sequential declines there? And once things stabilize, is there any possibility that the recovery will be V-shaped? Or is there nothing in what you're seeing to suggest that at the current time?

I will jump in, and Randy can come behind me, if I miss something here. Certainly, sequentially, from quarter one to quarter two, we saw a reduction in sales. That is normal, because of seasonality. And absolute dollars, we will see step up in Q3 relative to Q2, because of the seasonality.

We tend to look at core. What is happening core, year over year. And when you look back over the last three or four quarters, it's been a pretty clear trend, where it's been weakening on a year-over-year basis for quite some time. And the last three quarters, as an example.

So that has not improved. And as we mentioned during the quarter, it was not a situation where we had one bad month, and then two good months, so the quarter finished better. It actually was a modest weakening during the course of the quarter, from December to January to February.

So I wish I had better news on that standpoint. In terms of recovery, V, what it means, I'm not going to stick my neck out and say that we're expecting a V recovery in this thing. I'm just looking for an improvement in our daily order rates, which we're going to see because of seasonality here. But how does that compare to what we had last year? And that's really the thing we're watching right now.

Thank you. I appreciate the color. One other question, on capital allocation. Is there any change today to the acquisition strategy to focus on tuck-in acquisitions? And if not, what would allow Management and the Board to consider changing that acquisition strategy, going forward, particularly as you make progress, or intend to make progress, towards the $300 million EBITDA target?

Let me cover it in a couple ways. First of all, if you think about the $300 million target, we had about $40 million attributed to tuck-in acquisitions. And so from that perspective, I think that strategy is valid, and we have enough in the pipeline that we're on the road towards that end game.

What would change our strategy to go to larger ones, or different type of acquisitions? It would have to be a very good strategic fit. And if we found something that absolutely matched our strategy, and we felt that it was at a value rate that helped our Company, we would probably start looking at it.

But our short range -- I'm talking probably the 1 1/2 years in front of us, these $45 million to $100 million acquisition range are the right size for this size of company to consume and get value out of quickly. And to me, that's the most important thing is, we have to get value quickly out of it. It can't be a six-year turn around.

Thank you for taking my questions.

Stanley Elliott, Stifel.

Good morning, everyone, and Randy, welcome aboard. Randy, quick question for you. Could you talk about your thoughts on Actuant's new product development? They've had a lot of the -- they've had the G&I initiatives in for quite some time. You may be thinking about -- what are your thoughts, high level, on the process. I know is pretty early. Maybe things that they do well, things you guys could improve going forward?

Yes, I think that there's a couple elements that I've had personal experience with right now. Our joint integrity processes, I think, are spot on. I like what we're doing there, because it's differentiating who we are in the market space, and it's something that a lot of our competitors can't do. And particularly, if you are doing joint integrity, it's about the exact torque ratios that you put on individual bolts that get to a very, very tight and safe joint.

The second one that I really like in our Ag sector is, we have got some technology coming that I think is going to be very, very good. And having my background in Ag, particularly in the implement and attachment combine headers, there's some new transmission technologies we've come out with that effectively eliminate some of the maintenance requirements in the header, and also simplifies it a great deal.

And when you see things like that in agriculture, it's a big deal for the farmer. Because when you're in the field, you don't want to stop. You only have a few weeks when your corn or soybeans are ready to come in, and anything you can help them on their maintenance is a great win for them.

So we have good partners there, developing those products, and you'll see that out in the future. So the pipeline is there. I'm getting into it. I think that there's individual products -- and whether it's on-road trucks, anything there, the tools guys are constantly coming up with new attachments and usage.

So I'm confident it's in there. But my background is, we're going to press hard to find differentiated product that, quite honestly, the competition has no answer to. Because that will gain you share.

Great. And then, when you talk, broadly speaking, about the service revenue component being a larger piece of the business. Does that structurally change how we should think about Actuant's margin profile, going forward, with service revenues typically being a little bit less margin-rich than some of the equipment side?

Let me try to address that. In service, inherently, will drive a lower margin than some of the original equipment or components. But what I can tell you -- and Andy may want to get into a little bit further detail -- but our service margins are very, very healthy. And our utilization of those crews, which is a critical aspect of driving good service revenue, is outstanding. In fact, the project management capabilities that I've seen here would rival anything I saw in the mining industry. So, I think that that is something that we want to make sure we keep an eye on, but I also believe it's not going to dilute it in the long-term run.

The other comments I would just toss in there is, from a ROIC basis -- and we are very focused on ROIC here, as you know. Cash flow is everything. We love the service business, because it is a very high ROIC, and we don't have to invest a lot of brick and mortar in inventory, more importantly, in this thing.

And the beauty of service is, it pulls through high-margin product sales, and in our case, high-margin rental business, as well, within Hydratight, although not all of it does. But that's certainly part of it.

So the mix thing that I talked about earlier, with service and rental, it's not just that Hydratight is doing well, from a service, and suddenly, its service business is going gangbusters. It's also the fact that you've got high margins coming off, on the Viking business, because of the rental part there. And there is not as much service on that part of the business.

Great, guys. And one last one, if I could. Whether it's a U or a V shaped recovery, how should we think of incremental margins, with all these things moving behind the scenes? Thanks.

No change, I think, from what our historical view is. Industrial margins will be very robust on the way up. Certainly, we've talked about 40 range in the past, in Energy. We've talked about 30, and a little bit behind that, on the Engineered Solutions side. So, no change, no change.

Matt McConnell, RBC Capital Markets.

Thank you. I just wanted to follow up on what your long-term expectations are in Viking and Cortland? I know you've done a lot of restructuring across the whole Company, including Energy. But how are you setting up the cost structure in those two businesses specifically? And what are your expectations for offshore oil and gas activity, in the medium- and longer-term?

I think that the cost structures that I've reviewed thus far, we have taken major trimming. And we've moved assets around, to try to utilize them better, particularly in the Viking business. And on the Cortland side, we've gone into other segments, because they are an optical cable business, and they found other places that they can sell that product.

But the fact is, when you look at the oil production, whether it's offshore or onshore, it will recover. I don't believe that's a long-term effect. So we believe it's a solid business, and we've structured it to weather the down cycle. And that Energy Segment right now is offsetting those decremental margins, with service revenue in the Hydratight business. So I think we're in good shape.

Okay. Thank you.

Justin Bergner, Gabelli & Company.

Thank you for taking my follow-up question. Just to delve a bit further, on the cost side. Clearly, you recently announced some major cost-cutting initiatives, due to weak end market conditions, and those end market conditions have weakened further.

Is there anything that you're contemplating, in terms of incremental cost cutting? Or how would you think about the end market weakness that would necessitate a further round of cost cutting?

Good question. Something near and dear to my heart, obviously. We talked, at the beginning of the year, about a $25 million program, from a restructuring standpoint. And when we teed that up, we had not approved each and every project.

I can tell you that each month, we are approving more and more, as we go along. So that $25 million is very solid. I think the savings that we communicated, as well, in that being roughly a two-year payback, is valid.

I am not limited in any way, from a mindset standpoint, that I've used up the $25 million, and therefore we are done, because that clearly is not the case. We are still looking. We will keep on uncovering and turning over stones, to look for new opportunities going forward.

If we see that we are going to exceed that $25 million in any meaningful way, we absolutely will communicate it to you guys, on quarterly earnings calls. But today, we're not saying, hey, there's another $10 million or $20 million or whatnot. But we're not feeling any kind of limits, or feeling inhibited at all, because of that.

Great. Thanks for clarity.

We have no further questions at this time. Mr. Lampereur, I will turn the call back to you.

Thanks, everybody, for joining the call today. I'll be around all day to take any follow-ups that you have. Just a note for your calendar, our third-quarter call will be on June 22. Thanks much.

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.