Enerpac Tool Group Corp (EPAC) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation's first-quarter earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded Wednesday, December 21, 2016.

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

Great. Good morning and welcome to Actuant's first-quarter earnings conference call. On the call with me today are Randy Baker, Actuant's CEO; Andy Lampereur, current CFO; and Rick Dillon, our incoming 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. 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 will turn the call over to Randy.

Thanks, Karen. Good morning, everybody, and thanks for joining our first-quarter conference call.

I would like to begin today by welcoming Rick Dillon to Actuant. As we announced a few weeks ago, Rick became our next -- will become our next CFO. He brings an enormous and strong industrial background, and he is going to make a great addition to the team, so welcome aboard, Rick.

Secondly, I would like to recognize and thank Andy Lampereur for his service to Actuant. Andy is one of Actuant's founding team members and was a key contributor to the Company and its success. And on behalf of the Board of Directors, Andy, thank you very much.

So, starting over on Slide 4, I am very pleased with our results in the quarter. We met our commitments in sales and earnings, excluding the impact of restructuring and transition charges. Core sales were consistent with our guidance in all three segments and on a consolidated basis.

We saw the expected stabilization in easier comparisons in our industrial and engineered solutions segments and, as expected, our energy segment had difficult year-over-year topline performance given last year's non-reoccurring Hydratight projects.

I'll cover the industry dynamics later in the call, but I would describe most of our end markets as sequentially stable.

Diluted EPS, excluding restructuring and transition charges, were slightly above the $0.14 to $0.19 guidance range with benefit of a lower than anticipated tax rate, which added about $0.02 a share. We generated $8 million of free cash flow in the quarter and the net debt leverage was about 2.7, both of which were within our guidelines and expectations.

Now I will turn the call over to Andy to run through the details on the quarter, and then I will come back with additional updates and guidance.

Thanks, Randy, and good morning everyone. I'm going to start my review with the bridge schedule on Slide 4, which removes both the restructuring and previously announced transition charges from our GAAP results to align them with what was contemplated our guidance for the quarter. Excluding the combined $0.12 a share drag from these two items, our adjusted operating profit was $19 million and our adjusted EPS was $0.20 a share, which is $0.01 above our $0.14 to $0.19 a share guidance range.

Slide 5 is a comparison of our adjusted first-quarter results for the first quarter of 2016 and 2017. As forecasted, our fiscal 2017 results declined year-over-year due primarily to weak end market demand and difficult energy comps, which led to a 13% year-over-year sales decline. Our operating profit declined from $30 million to $19 million as a result of lower sales and profit margins, the latter due to reduced production levels and unfavorable sales mix. Our adjusted earnings per share in the current year was $0.20 a share compared to $0.31 last year, again reflecting the combination of lower sales and margins partially offset by the benefit of a lower effective income tax rate.

Turning now to Slide 6, we will start with a discussion of core sales related change. On a year-over-year basis, our first-quarter sales declined 14% on a core basis and reflect lower year-over-year sales in all three segments. This was in line with the 14% to 16% forecasted core sales decline that we had projected in the quarter on our last earnings call with the sequential core sales reduction from the fourth quarter due to a very tough comp in energy versus a year ago. On a core basis, the industrial segment was down 4%, energy was down 31%, and engineered solutions down 5%.

I will provide more color in my segment level reviews, but can summarize market demand as being pretty similar to what we discussed on our last earnings call. Overall, it was stable. We expect the trend to be less worse in the second quarter as comps get easier, especially in energy.

Slide 7 summarizes our quarterly adjusted operating profit margin trend. Consolidated first-quarter op margin was 7.2% compared to 9.8% in the first quarter of last year. This 260 basis point year-over-year decline reflects lower sales volume and reduced absorption due to lower production levels and unfavorable sales mix with some of our highest incremental margin business units such as Hydratight and Viking generating sizable sales reductions.

While down, our first-quarter margins were in line with expectations. We continue to expect profit margins will rebound in the second half as restructuring benefits and increased volumes take hold.

Now I'll spend a few minutes on each of our three segments, starting first with the industrial segment here on Slide 8. The industrial segment reported first-quarter sales that were 2% below the prior year. Our core sales were down 4% while acquisitions provided a 2% benefit and currency changes were not meaningful. The 4% core sales decline for industrial was a sequential improvement from the 8%, 9%, and 14% year-over-year declines we saw in each of the last three quarters, which we take as continued stabilization of market demand. Geographically, we saw this less worse year-over-year core sales rated change in each of the three geographic regions, which is another good sign.

The Americas continues to be the weakest of the three regions for industrial. One area of growth within the industrial segment is the Precision-Hayes business, which provides concrete pre- and post-tensioning products to the construction, infrastructure and mining markets. It had good growth in the first quarter, which we expect will continue.

Consistent with our full-year view from last year -- last quarter, we anticipate improving core sales trend rates from industrial as we move deeper into this fiscal year as comps continue to get easier, new products are introduced, and our second-tier branding strategy takes hold.

From a profitability standpoint, industrial's 22.3% first-quarter operating profit margin was down 160 basis points from last year on lower volume and unfavorable sales mix. We continue to be confident of this segment's margins and their ability to rebound sharply to historical levels when the volume returns.

Now on to Slide 9 where we will discuss energy segment results. As expected, our year-over-year sales declined significantly in the energy segment with reductions in each of the three primary businesses. Viking and Cortland each posted year-over-year declines of over 35% on difficult comps and continued weak offshore oil and gas drilling and exploration. Meanwhile Hydratight's prior-year first quarter included about $15 million of revenue from a large Middle East service job and about $5 million of US service jobs that had been pushed out from the fourth quarter of 2015 into the first quarter of 2016, so a really tough comp quarter for Hydratight.

We will continue to see CapEx spending headwinds and difficult service comps from last year in the second quarter before we see easier comps for energy in the second half of fiscal 2017.

Profit margins took a hit in the quarter in the energy segment on lower revenue and sharply reduced Viking rental revenue, which comes with high variable margins given the rental nature of that business. With seasonality in the offshore oil and gas market, including weak manpower utilization, second-quarter energy profit margins are expected to continue to be weak before improving in the second half on better volume and utilization.

I will wrap up my segment level discussion with engineered solutions on Slide 10. Totaled ES sales were down 8% year-over-year to $94 million, which includes a 5% core sales decline. We saw a continuation of trends from the last few quarters with weakened market demand exacerbated by OEM destocking. Heavy duty truck was a notable exception with strong growth in China offsetting moderating trends in Europe.

We also noted that inventory levels are improving in the ag space and some OEMs reported encouraging preorders for the upcoming year.

Not surprisingly, profit margins in engineered solutions were pressured with the lower production levels and the resulting weak overhead absorption. Looking ahead, we expect similar demand trends for the near-term, which should give way to growth when OEMs end their destocking and start production on new models that we have already won.

We're also making progress on facility consolidation activities in this segment, which should benefit margins in the back half of the current year.

So, that's it for my comments on the first-quarter P&L. To summarize it in two words, as expected.

I will now shift gears and discuss cash flow and capitalization. We had a very good start in terms of cash flow, generating about $8 million in the first quarter. Seasonally, this is normally one of our weaker quarters due to the annual funding of our 401(k) and bonus plans.

We ended the quarter pretty much even with the start at about $400 million of net debt and net debt to EBITDA leverage of 2.7 times.

I am confident of the $85 million to $95 million free cash flow forecast for the year when combined with our $175 million of cash and our untapped $600 million revolver. These provide plenty of funding for capital deployment and operating needs for the balance of the year.

That's it for my prepared remarks today. I will turn the line back over to Randy.

Thanks, Andy. Turning over to Slide 12, we get many questions from investors related to our industrial growth strategy, and clearly it is an important element of our 2021 vision we outlined in our investor day, and has implications for the second half of 2017.

As you recall, we have four areas of focus: product range expansion, regional penetration, channel effectiveness and expanding our served industries. All areas are showing initial signs of progress, especially in the second tier product range in the industrial tools space.

Our Simplex and Larzep brands are beginning to show share gain, and we're adding new distribution in two regions. This strategy includes differentiated products with price points designed to address markets not covered by Enerpac. We also expect margins to be similar to Enerpac as the cost structure has been set to meet the market requirements. In summary, we expect true incremental sales growth from our second tier product range. Overall, I am pleased with the progress in all of our strategy and deployment, which is our best tool for topline growth in a very challenging market.

Moving on to Slide 13, and an update on the macroeconomic factors we are currently facing, oil prices had trended up on plant OPEC and non-OPEC production cuts. However, the market needs discipline to reduce oversupply and maintain price consistency. We continue to remain focused on maintenance, especially in those regions where production cuts may facilitate increased activity.

Off-highway mobile equipment in demand, notably agriculture, remains weak. Manufacturers continue to reduce their dealer inventory. However, we believe we are closer to the end of the destocking, which did lend itself to production rate increases in the latter part of our fiscal year.

Commodity markets are increasing on a year-to-date basis. Primary metals are up between 20% and 60%. This is a very cautious sign of global market growth and increased consumption. The general industrial market is stabilized and is reflecting easier comparisons, but shows little signs of demand growth. The industrial distributors are anecdotally commenting on improved optimism given the oil and other commodity prices increasing and potential infrastructure spend in the US. However, it has not translated to actual order activity.

In the vehicular market, China on-road truck is very robust supported by overloading regulation enforcement. However, European truck size first monthly registration decline in October after nearly two years of growth. Going forward, we expect this market to flatten.

Moving on to Slide 14, market dynamics are consistent with the expectation we projected in our fiscal year and, therefore, we maintaining our 2017 core guidance by segment. As earlier stated, we are executing our growth strategies with the objective of outpacing market conditions.

So, moving on to Slide 15, we are maintaining our sales guidance range for 2017 of $1.075 billion to $1.125 billion, but we have increased our EPS guidance by $0.10 a share to $1.10 to $1.30. The $0.10 a share increase is a result of first-quarter performance and initiatives that are anticipated to reduce the current-year tax rate.

Our restructuring projects are on track. While there are minor puts and takes within the various underlying businesses, we do not currently expect much variation from the original guidance range.

We continue to expect free cash flow of approximately $85 million to $95 million for the fiscal year.

The second quarter is typically our weakest of the year and we are expecting sales in the range of $250 million to $260 million with EPS of $0.08 to $0.13 a share.

Slide 16 illustrates the seasonal flow and the impact of holiday shutdowns and lower service utilization. The EPS rebound in the back half of the year is amplified by a lower tax rate, core sales growth and completed restructuring projects. Both Q2 and the full-year guidance excludes restructuring, transition charges, and any future acquisitions or divestitures.

In closing, I am sure you picked up the theme of the day, as expected. Actuant met its commitments for the first quarter, and I am pleased with our progress in driving a performance-based culture.

Again, I would like to thank Andy for his leadership and distinguished service to Actuant. He developed a truly strong financial organization and a foundation for the Company.

And, finally, I would like to wish all of you a very safe and happy holiday season.

Operator, with that, let's open it up for Q&A.

(Operator Instructions). Allison Poliniak, Wells Fargo.

On the industrial growth strategy, Randy, that you outlined, could you help us understand? Is it -- you had talked about incremental growth. Do you expect to see that in the back half, which is giving you some comfort, or is it more fiscal 2018? And any ability to quantify what you would expect in terms of above-market growth with that?

As we talked about in the investor meeting, we have a lot of projects that are designed to drive growth, and the objective is always to have enough of them that offset any market conditions. Where we are seeing some improvement, obviously, is in our second-tier brand. And in the fourth quarter, I'm really hopeful we are going to start seeing some incremental sales out of that.

Secondly, we are driving some things in our Asia-Pacific market that I really believe are going to start yielding some growth, and then certainly our coverage strategy in North America and in Europe, we are trying to get a higher concentration of feet on the ground to better cover these markets. All of these things are designed to give us incremental sales volume, and part of that is contemplated in our third and fourth quarter.

Great, thank you. And then if I remember correctly, last quarter, you highlighted potentially 25 to 50 basis points of margin expansion this year. Are you still comfortable with that range?

Yes, I think we're still targeting that same type of ZIP code.

Yes.

Great, okay. Well, thank you and best of luck, Andy.

Ann Duignan, JPMorgan.

Best wishes, Andy, also. Let's start with maybe sequentially moving into the back half. What would you anticipate incremental profits to be for each of the segments? If I look at the decrementals this past quarter, energy was quite weak and the others were in the mid-20s%. So, what should we think about once we start to get some volume?

I don't think we're going to provide it by segment. There are -- overall, in terms of segment by quarter, overall, what we have consistently said with our business is the industrial segment has got 40% to 50% normal incremental margins, energy is 30% to 40%, and then engineered solutions would be more in the 20% range. Some of that is turned on its head when you look at the back half of the year, because restructuring savings are coming in in a couple of these segments, and that will have quite a impact on engineered solutions in particular.

So, we have got a lot of restructuring programs in place, some of which will be benefiting Q3, more of them coming through in Q4 from a saving standpoint. But clearly there are some decent incremental margins coming through in the back half of the year on this thing.

And, Ann, I think you can gather from our focus on industrial that we know that's where the biggest increments can come from, so we (multiple speakers).

Absolutely, absolutely. From a mix standpoint, we will be helped, because we are anticipating growth in industrial, as Randy mentioned, in the back half of the year, and that will help from an overall mix, because it is our highest margin business.

Actually, that's good color. I appreciate that.

And then as my follow-up, it is kind of more philosophical. At your analyst day, we were sort of surprised when you issued EPS growth targets of 15% to 20% based on an estimate of this year's earnings because we have never seen that before. Usually, companies begin with the prior year and use an actual year as the base. But now you have raised 2017 estimates, which makes that 15% to 20% growth even more difficult. Can you just talk about philosophically why you chose to use 2017 estimates as your base for the five-year outlook?

I guess I would -- we built up, certainly, the next five years based on what we thought 2017 would be, 2018 would be. But when we are talking about 15% to 20% EPS growth, that includes 2017, so that is coming off of 2016. That is coming off of the growth there. So, I'm not quite sure where you are coming from I guess on your question on that, because we clearly are looking at a five-year CAGR not off of 2017, but off of 2016.

Okay, great. Then maybe I misunderstood. So, I will take it off-line and maybe go through it with you again off-line. So, great. Thank you. Those where my calls. I appreciate it.

Jeff Hammond, KeyBanc Capital Markets.

So, you mentioned the OpEx cuts and we have seen crude kind of bounce here. Just any tone change within any of the businesses on that move?

And then maybe just on the Hydratight and refinery business, we are hearing chatter that maybe you're going to start to see some normalization and refinery turnarounds. Maybe just comment on what you are hearing anecdotally there.

Yes, I think the thing that -- the OPEC move is very positive, and you saw the nice bounce on the Brent crude and standard crude. And it really is a very positive move for us.

And one thing to keep in mind, that US refineries is relatively small for us. We do refinery turnarounds, but it is only -- it is less than 5%. We look at the global footprint, but I will tell you that the idea of curtailing production, particularly in the Middle East, means that they have more maintenance hours available. And so we do think that's going to lend itself to a little bit of an increase in maintenance activity in some of the Middle East markets. And so we haven't seen any of that yet. We see some nice quote activity, but I do think that's going to help. Certainly, it is a great move by OPEC to signal that and the non-OPEC participants to come in line. The key is we have to make sure that the US producers don't go to full speed again because, if they do, they can damage it and drive the price down. So, it is on the mend, but let's keep an eye on it. We need at least two to three quarters of consistency for it to stick.

Okay, great. And then, Randy, I think the concern last quarter and maybe still the concern is the back-end loaded nature of the year. Can you speak to two things on that? One, maybe give us the tax cadence by quarter, first half, second half? And then I think you called out restructuring savings of $3 million to $5 million incremental. Most of that would be back half. Is there more savings in there or how does that flesh out first half, second half? Thanks.

The savings are back-end loaded in terms of the restructuring on that. Once we complete two consolidations that are scheduled, one to wrap up at the end of the second quarter, and another one to wrap up the end of the third quarter, those will be coming on.

We have approved some new restructuring activities, and we certainly alluded to that in our last call, but some of those will be more 2018 savings as opposed to 2017 savings, so I wouldn't necessarily take those into account.

In terms of the tax cadence, the rate clearly will be higher in the first half of the year than the second half of the year, as you can just see in our overall guidance that we laid out. In the second quarter, we called for a 5% to 10% tax rate, whereas, for the full year, we are probably looking low to mid-single digits, probably in the 2% to 5%, 2% to 6% range for the year. So, what it means is the tax rate will be lower in the back half of the year than what you have got in the front half of the year, and that will definitely benefit kind of that -- or accounts for some of the back-end loading, if you will, from an EPS standpoint.

Okay, very helpful. Thanks, guys. Best of luck, Andy.

Scott Graham, Bank of Montreal.

Good morning all. First of all, Andy, congratulations, a distinguished career as CFO of this Company. I wanted to really talk about two things. The first is kind of how mix -- it seems to be affecting a lot of the business. Could you go through mix by segment, just the overarching elements?

Okay. Yes, so within industrial, obviously, the Enerpac business, the Enerpac IT business in particular, is our highest margin business in the segments, whereas IS is behind that. Precision-Hayes is more in line with where IS is, so it is lower, clearly lower than base Enerpac, and Precision-Hayes was a business within the segment that showed some decent growth in the quarter, and we expect it to continue to grow going forward.

The other comment that isn't probably front of mind is Larzep. We acquired that in spring of last year. It's small, but clearly the margins that things came in with are not at 30%, even margins like the base ID business here. So, you've got some margin headwind as a result of that.

There's also some modest differences by geography as far as where the profit is made within Enerpac IT as an example. And we do very well in the Americas relative to the rest of the world, so that also comes into play.

If we move into the energy segment, in the highest incremental decremental margins by far in this business belong to our rental product lines. First and foremost would be Viking. And with that business being off considerably in the -- on a year-over-year basis, because we were still up against one of the really strong quarters of the run that we had in fiscal 2015 with the business, the decrementals there literally are 80% to 90%, so that weighs on it.

Hydratight rental business, similar situation, not quite as much of an impact because of revenues. The volume isn't quite as high. And then Hydratight margins would be north of Cortland overall.

Moving to the engineered solutions segment, what we have got going on there is that our highest margin businesses within that segment being our ag exposure as well as some of the CrossControl and maximatecc exposure, those are the businesses that are probably still -- they're down the most right now from a revenue standpoint, whereas our more stable business like automotive it doesn't generate great margins and truck, decent growth, but again the margins are not as robust as what you see in energy. So, there's just different margins by end markets even within some of these individual businesses, but as a general rule, that's the lay of the land.

Hugely helpful. Thank you. And if you could, in sort of a similar way, if we look at the energy and engineered solutions margins on a year-over-year basis, would you bucket the bridge in energy? It is a large energy margin decline. Is that mostly Hydratight?

If your question was -- let me just ask this, is your question was a majority of the margin decline in energy this quarter, was that a result of Hydratight?

I know that it's a volume problem and I know that it is a mix issue, certainly, as you have just laid out, but what I am saying is, if we look at it a little bit differently, it's a 700-ish basis point decline, would you say that a third or more of that was Hydratight? Is that the biggest piece?

I would say half of it is Hydratight. The other half would be the volume decline in the other business more slanted toward Viking because of those -- these 80% and 90% decrementals. Viking was -- that was down considerably in the quarter, all rental revenue. That has quite an impact on it despite cost reductions we had.

That's great. Thank you.

Mig Dobre, Baird.

Happy holidays everyone. And, yes, Andy, on my behalf as well, best of luck going forward. It has been a real pleasure working with you over the years. And really I was going to start with a question on earnings progression, but Jeff stole it from me. So, I guess I'm going to have to ask about something else.

And I guess my question is really around the tax rate where you certainly have done a remarkable job with the tax rate over the last few years. But, for me, I'm not, frankly, really understanding how Actuant can generate as low of a tax rate as it does, and whether or not that's in any way sustainable going forward, ex any changes, obviously, that Congress might implement.

Yes, so, our guidance going into the year was roughly 15% for the full year, and that was going to be a little bit back-end loaded as far as a little bit lower rates in that. And last year, we also had a similar situation where we went into the year I think saying 17% margins, and we -- excuse me, not margins, but tax rate, and we came in much lower.

Unfortunately, over the last two to three years, some of the reason the tax rate is low is we have fixed credits out there that don't change with profitability levels, with volume and whatnot, so some of those have a bigger impact on the overall tax rate, taking it down, than you have in a period of growing profits. That is part of the situation, but the reality is there is substantial work behind the scenes going on by the whole finance group, the tax group, in trying to look at ways how do we reduce our tax liability just the way the purchasing guys, how do I reduce my costs? Quality guys, how do I reduce cost of nonconformance and those sorts of things? So, we have a large tax group that is focused on this thing. There is nothing at all in this that I am uncomfortable with at all from a tax standpoint in terms of audit risk or anything like that on it. Part of this is the favorable structures that we've got in place. We have got -- because a lot of the acquisitions, acquisitions allow you to reorganize your business, restructure your business. The stronger dollar has helped as well. We have had some savings related to that from a tax play as well. So, there's just a lot of different levers that are played.

But what I want to do is bring you back to the strategic plan that we laid out a couple of months ago. I had a tax rate built in for that whole stretch, 15% to 20%, and I absolutely believe that we will be able to deliver a 15% to 20% effective tax rate going forward. Is a 2% to 5% tax rate that I am talking about right now, is that sustainable over the next five years? Heck, no. It isn't. But high teens is sustainable for this business. That's what was baked into the guidance; that's what was baked in our five-year targets and whatnot and I'm very comfortable that we will be able to continue to do that going forward.

But, again, not to parse this too finely, but my understanding from what you just said is that if, for some reason, the profitability doesn't improve meaningfully given the way you are structured, you continue to have these sort of tax tailwinds given your credit situation. Is that --?

We probably won't have as much of them as we've had in the past, because some of the levers that we pulled we have -- we won't be able to do them going forward. But, again, I am very comfortable with a teens tax rate going forward with this business.

Again, when you look at where our profits are, half our revenues are outside of North America. The US by far, by far, not even close, is our highest tax jurisdiction we're in, and we're in a lot of different markets where the tax rates -- our effective rates there are 10% or less. So, that's having quite an impact on our overall mix here.

Okay, great. And then my follow-up is on energy. There are a lot of moving pieces here given all of the projects you had last year, obviously Viking and Cortland being down. As you're looking going forward, is it fair to assume that Viking and Cortland are now at a point where, sequentially, these businesses can stabilize, or do you expect to see continued erosion? And I'm talking ex seasonality here.

Let's deal with Viking first, because that's the most stressed business. We think we're at a stable revenue stream on Viking. There are a few spots in the world where there are semisubmersible platforms in the water, and we have those projects. So, we are running the business for cash flow purposes at this point, making sure we are covering our D&A on it. It is a stressed business. There is no way to characterize it any differently. It is a very upstream product and service that we provide to the industry.

Cortland is in much better shape. We have been actively pursuing ways to expand where we sell product. And I can tell you that our percentages of non-oil and gas revenues has grown substantially in that business. In fact, we have broken the 50% mark due to some real strong efforts by that team.

It would be great to see some additional subsea umbilical work. That sort of thing I think is going to pick up first. The seismic work, I don't see that coming in the short term. That could be multiple years out. So, we know that, if we can manage how we structure the sales in that business and attack non-oil and gas segments, that business can be profitable and do pretty well.

Okay. But just to be clear, in your guidance, in your outlook, for this segment, do you have Viking and Cortland sequentially getting better, worse, or flat?

From a seasonality standpoint, they will follow the normal trend. So when we are talking about stabilizing or whatnot, that is the pace, right? You still will see year-over-year declines in Viking, absolutely, for the next couple of quarters. We hit the first really bad one in the fourth quarter. This would be our second quarter, so we have got another couple of quarters here before we -- the trailing 12-month number doesn't decline, so that business is going to half here year-over-year and we talked about that. That's not new news on it.

So, yes, you will continue to see core sales being pretty nasty comps in a couple of these businesses, but, sequentially, we expect Cortland to pick up as they normally do in the back half of the year. And you can see it on Slide 14 in our deck here as far as what the expectations are overall for the segment. But some stuff got pushed out of Cortland from Quarter 1 into Quarter 2 and Quarter 3, so I think a little bit of a head fake there, but we do believe the pace on that business is stabilized, as Randy said, on the oil and gas side.

Great, thank you.

Charley Brady, SunTrust Robinson Humphrey.

I want to clarify your commentary on the European truck, which, as you noted, was down for the first time in about 21 months in October. Is your expectation embedded in your guidance, did I hear you correctly, you are expecting Euro truck flat in 2017?

Yes, it should flatten out. And if you look at how the European truck market had trended over the last couple of years, it has gone through a replacement cycle, so we are on the back half of that -- backside of that replacement cycle. So, we are expecting that to soften we go through the year.

Okay, can you --.

Just to (multiple speakers) clarify is Europe will soften as the year goes along. The rest of world tied in with truck is growing. So overall, overall truck business will be flattish to down a hair, but Europe we do expect to continue to moderate as we go forward.

Yes, I mentioned that the Chinese truck industry is doing quite well at the moment.

Absolutely.

How much -- can you remind us how much of truck in ES is China?

20%.

Yes, about 20%, 25%.

Yes (multiple speakers).

All right, that's helpful. One more follow-up for me. Can you comment on what you are seeing, if anything, on raw material costs, particularly what steel costs have done?

We're watching it very closely. In fact, we just did a review on the producer price indexes and various raw material indexes. We haven't seen any substantial increases from suppliers yet. They are making noises along that line in some markets, but no major price increases. But we've got to keep an eye on that one because, with copper and iron ore and everything on the move, it is only a matter of time before we get some pressure there.

So, your guidance is not embedding an assumption of increased raws from where we are currently?

There is some assumption on it going forward, but a lot of it is muted because of the stronger dollar. I mean we are buying a lot of the stuff coming out of Asia as the RMB is weakening against the dollar. We're going to be getting some benefit from that going the other way. So, it is not a significant factor in our guidance for the year.

Okay, thanks. Appreciate it. That's all the questions for me. And, Andy, again, I will repeat what everyone else said. Congrats and best of luck in the future.

(Operator Instructions). Justin Bergner, Gabelli & Company.

Good morning everyone, and, Andy, congratulations on your Actuant career and looking forward to future endeavors.

My first question just relates to the sequential second-quarter earnings guidance. If I look at the last five years, the second quarter was about $0.10 per share below the first quarter, but the sales declined sequentially about $20 million from 1Q to 2Q on average over the last five years. I guess, this year, you are expecting sales to decline about $10 million sequentially, but you are expecting a similar $0.10 earnings decline.

So, are there any sequential margin headwinds looking into the second quarter versus the first quarter and a unique seasonality this year that would explain what seems like a slightly weaker sequential bridge?

The biggest impact is mix in the various businesses.

Okay. And where might the -- I guess where would the mix be more challenging in the second quarter than in the first quarter?

Well, particularly in energy, your mix is -- as you track into the second quarter in energy, we wind up with a lot of underutilized labor. And, so, what that does is it puts pressure on your margins and you have an unutilized labor component. And quite honestly, we have seen that in the past, but since last year, we had most of those people working through finishing out those projects. The pure labor utilization rate was much higher last year.

So, here is the issue. When you hire people and you train them to the level of training we do at Hydratight, you don't want to lose them, so you do have to absorb some of those costs as you prepare for the next job.

Thank you. That's actually a very helpful perspective.

Secondly, on the tax rate, is the benefit in the current fiscal year on the tax rate only on the adjusted tax rate, or is it also on the cash tax rate? In other words, is the free cash flow guide now going to be boosted from a lower cash tax rate?

Yes, we don't have -- that's a great question. We do not have baked into our free cash flow that, and the reason being is we expect the benefit of this lower rate to be coming through in next year's cash taxes as opposed to this year's. So, you will see a benefit next year for it as opposed to this year from a cash flow standpoint, but the P&L benefit is this year in the tax rate.

Okay, great. Thanks, and happy holidays everyone.

Ms. Bauer, there are no further questions at this time. I will turn the call back to you. Please continue with your closing remarks.

Great. Well, thanks for joining our call today. Just a reminder for your planning, our Q2 call will be held on March 22. I will be around all day to answer any follow-up questions you have and, yes, happy holidays everybody. Bye-bye.

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.