Enerpac Tool Group Corp (EPAC) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation First Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded Wednesday, December 20, 2017.

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 Randy Baker, Actuant's CEO; and Rick Dillon, 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.

(Operator Instructions) Thank you in advance for following this practice. And with that, I'll turn the call over to Randy.

Thanks, Karen. Good morning, everybody. Let's start on Slide 3. I was pleased with the results in the quarter. Total sales exceeded our expectations, and we delivered EPS at the high end of our guidance range. Our Industrial segment grew nicely in the quarter. Tool sales were up 9%. Heavy lifting technologies increased by more than 40%. Engineered Solutions was up 20%, repeating the great performance we saw in our fourth quarter. Energy sales stabilized in the quarter and project forecasting has improved.

From a margin standpoint, though, our Industrial segment delivered weaker-than-expected performance due to our higher mix of the heavy lifting sales, coupled with discrete cost of legacy projects. This effectively weakens rate performance on our tool sales in the segment margins. Engineered Solutions continues to achieve higher profitability and margin performance, growing at nearly 270 basis points in the quarter. And finally, Energy continues to suffer from lower sales volume, but we'll begin to see the effects of our cost-reduction actions.

Despite these factors and a modestly higher tax rate in the quarter, we still achieved the high end of our EPS guidance. On December 1, we completed the divestiture of the Viking business, which was an important first step in reshaping our Energy segment portfolio. As I've communicated, our objective is to minimize Actuant's exposure to upstream oil and gas exploration and well development. We also completed the acquisition of the margin -- of the Mirage company, which is a great addition to our tool product line and gives us a full range of machining equipment.

In summary, it's a great start to the new fiscal year. We have great evidence that our objectives are beginning to deliver on our strategy. But we have to continue to drive on our sales performance. We have to fix our margin issues. And we need to continue to drive new product development. And ultimately, we know that we need to pull cost out of our Energy business and reshape it.

So with that, I'm going to turn it over to Rick to walk through the details in the quarter. And I'll come back with guidance and a few updates.

Thanks, Randy, and good morning, everyone. Let's turn to Slide 4 to walk through our adjusted results in more detail. Fiscal 2008 (sic) [2018] quarter sales -- first quarter sales was slightly above our guidance range, up 9% on a year-over-year basis. We had 3% currency benefit, with core sales up 6% compared to flat core sales in our fourth quarter. Adjusted operating profit improved 11% or 20 basis points. While not as robust as we would have liked, given the sales performance, it was the first year-over-year quarterly improvement in the adjusted operating margin percent since Q4 of fiscal 2013.

Excluding restructuring charges, our effective income tax rate was approximately 15% compared to 5% to 10% guidance and about 5% in the prior year. The increase in the effective tax rate above our guidance reflects the impact of approximately $800,000 of incremental tax expense on lower earnings associated primarily with recent changes in the European tax regulations. Our adjusted EPS for the quarter was $0.19, representing the high end of our range and $0.01 below last year's $0.20.

Turning to Slide 5. Our core sales increased 6%, which is well above our expectation of flat to minus 2%. Total Industrial sales exceeded expectations on robust heavy lifting project activity. Engineered Solutions also outperformed with continued very strong demand across a variety of markets, including heavy-duty truck, agriculture and off-highway equipment. While negative, Energy core sales were a bit better than our latest outlook on strong non-Energy related Cortland rope and cable demand.

On Slide 6, we summarize the quarterly adjusted operating profit margin trends, where you can see a modest improvement in year-over-year margins. While we clearly have strong volumes, we did see sales mix headwinds and increases in other costs, including some onetime warranty provisioning as well as the impact of continued investments in commercial effectiveness.

So let's walk through our performance by segment, starting with the Industrial segment on Slide 7. Core sales for Industrial increased by 9% from the prior year, accelerating from last quarter's 5%, led by over 40% growth in the lumpy heavy lifting business. We continued to see strong demand within industrial tools globally and across various markets. We believe this sustained demand is attributable to both an improving Industrial economy as well as our investment in internal growth strategies. We did experience a sales decline in the concrete tensioning product category as we continue our efforts to improve production efficiencies.

From a profitability standpoint, Industrial's margins were down year-over-year. We are seeing the expected incremental margins on the higher tools volumes in the 35% to 40% range, even with the growth investments in commercial and engineering resources. Unfortunately, the heavy lifting revenue mix was poor. And that, combined with discrete costs associated with the closeout of certain legacy projects, resulted in an operating loss for that product line.

Many heavy lifting projects involve developing customized fit-for-purpose products for specific customer applications. The project can range anywhere from 6 months to 2 years. Depending on the duration and the complexity of the project, overall profitability can sometimes come under pressure. As such, going forward, we have significantly narrowed the scope and type of projects we are quoting and have revised the quote process to improve the long-term profitability of this portion of the segment. Facility consolidation inefficiencies continued at the concrete tensioning facility, although we are seeing slow, but steady progress.

Now let's turn to the Energy segment results on Slide 8. Overall core sales declined 12%, but sequentially improved from the minus 25% last quarter. As Randy noted, we completed the divestiture of Viking on December 1, and this is the final quarter that Viking will be included in our results. It performed in line with expectations for the quarter. Hydratight's core sales rate of change stabilized and was down mid-teens year-over-year compared to down about 20% last quarter. Customers across the various served markets and regions continued their trend of maintenance deferrals, pushouts and scope reductions. This was the most acute in the Asia Pacific region.

Encouragingly, we did experience some modest increase in year-over-year activity in the Middle East. Cortland delivered a double-digit core sales growth in the quarter on the strength of medical, defense and other non-Energy-related cable and rope demand despite flat oil and gas activity. Adjusted operating margins were down year-over-year, but they improved sequentially through the benefits -- due to the benefits of cost-reduction actions, non-energy Cortland volume growth and a good regional mix within Hydratight. We continue our restructuring and service excellence projects within Energy. We have identified many opportunities through these efforts. While we are encouraged by the early results, we also recognize that there is work to be done in each region in order to fully harvest the identified opportunities.

Turning to Engineered Solutions on Slide 9. We saw outstanding performance again from a top line standpoint, delivering 20% core sales growth for the second consecutive quarter. As you have heard from many of the segment's customers, demand is improving and inventories are in good shape, which supports strong build levels. This is broad-based across off-highway markets, including agriculture, construction, forestry and mining among others. Europe truck production rates for our customers grew double digits and China production was quite strong in the quarter. While Europe has remained more resilient than expected, China customer order rates have started showing the declines we have been anticipating, with the year-over-year decline in the month of November. This will certainly impact the sequential revenues in the second quarter.

Profit margins in Engineered Solutions improved 270 basis points year-over-year on the higher volume and the benefit of prior restructuring and lean revitalization efforts. However, this was partially offset by various cost increases, including warranty, raw material and preproduction engineering support for new product platforms.

Turning now to liquidity on Slide 10. As is typical, we utilize cash in the first quarter, largely related to the payment of annual bonuses after fiscal year-end along with an increase in working capital on the stronger sales activity. Our net debt increased with the cash usage and the $28 million payment to buy out the lease obligations required to facilitate the Viking divestiture. On a pro forma basis, our leverage ticked up to 2.9x, but that is expected to decline as the year progresses based on full year cash flow expectations and pro forma EBITDA improvement.

Finally, we have been tracking the pending U.S. tax reform bill and continue to model those developments. Our initial reactions are mixed. The reduction in the U.S. corporate tax rate has an overall cash and earnings benefit; however, limiting interest deductibility and additional tax on repatriation of foreign earnings will result in a small detriment. That being said, we continue to pursue planning opportunities to reduce our cash taxes consistent with our past practices. As we have noted consistently in the past, the sustainable ongoing or normalized effective tax rate for Actuant is in that mid- to high teens range, and that is excluding the benefit of any tax planning. Based on our current view of the soon-to-be-enacted tax law, we don't believe the new normal will be significantly different. We will continue to monitor this as the law and pending regulations are finalized and can provide more specific disclosures as necessary.

With that, Randy, I'll turn the call back over to you.

Thanks, Rick. Let's look over to Slide 11, personnel and engineering investments we're making across the organization. Our continued sales growth is very encouraging and we are starting to launch some great new products.

In the first quarter, we launched multiple new tools, which continue to expand our target industries and applications. The new wind energy tool platform additions provide better assembly control quality to this growing industry sector. Within Energy, we received a significant pipeline services award in Asia Pacific, which is part of the extension of the forklift service capabilities. Engineered Solutions saw several new platform wins, and we continue to invest in engineering and test capabilities to support our customers. Overall, I'm pleased with the progress, which represents an investment and a cultural change in the organization.

Flipping over to Slide 12. The macroeconomic factors impacting the end markets continue to be largely positive. Oil and gas prices have increased as demand improved, along with supply reductions bringing inventories into balance. While higher prices don't directly impact activity, it does ultimately improve confidence around market dynamics and eventually investments in both OpEx and CapEx.

Off-highway mobile equipment continues to strengthen. The agriculture sector dynamics have improved in area of used equipment and the stock-to-use ratios. And all major manufacturers of construction equipment -- in the construction equipment market are reporting improved customer demand and rental fleet utilization. The general industrial market continues to be strong and distributors reporting good quota activity. Industry reporting indicates a solid growth range of between 2% and 8%. And finally, the on-highway truck market remained strong through the first quarter, but we see reductions in production plants, notably in China, for the remainder of calendar '18.

Turning over to Slide 13. In general, the core sales expectations we set at the beginning of the year remain valid. A portion of the increase in core growth in the first quarter, notably heavy lifting and Cortland, is simply timing between the first and second quarter. The modest change in our core growth expectations are highlighted in green on the slide and simply represent a higher-than-expected truck volume in Europe and in China in the first quarter. We anticipate more difficult comparison as we progress, resulting in a low- to single-digit range in the balance of the year.

Moving over to Slide 14. We've maintained our projections for sales, and we adjusted diluted EPS for the full year. The sales will be in the range of $1.1 billion to $1.13 billion, with EPS in the range of $1.05 to $1.15 a share. The effective tax rate range for the year is unchanged at 5% to 10%, but we would expect Q2 would be similar to Q1 and then low single digits in the back half of the year.

For the second quarter, which is the seasonally weakest, we expect sales in the range of $265 million to $270 million (Sic-see press release "$265m to $275m"), with EPS from $0.10 to $0.15 a share. As I noted in the commentary on HLT, activity levels are lumpy and the strong course growth we saw in Q1 will revert to negative in Q2, causing the Industrial core growth in the second quarter to be in the low single-digit range.

The Viking and Mirage transaction timing lined up with our initial guidance; however, as we've noted in the press release, there are several divestiture and impairment amounts recorded in the second quarter. And finally, we are maintaining our free cash flow guidance for the full year of between $85 million and $95 million.

And with that, operator, let's flip it over to questions.

(Operator Instructions) And our first question comes from the line of Allison Poliniak with Wells Fargo.

Touching on Industrial and the mix issues and the discrete costs, could you help us understand, it sounds like the mix issue is going to reverse in Q2, just in the nature of what's being sold. In terms of the discrete costs, the HLT, I imagine, goes away. But could you maybe comment on the facility consolidation there? Just trying to understand what cost we should assume in the second quarter?

In the Industrial segment, we try to give a lot of clarity on exactly where the costs came from. They were 100% associated with the heavy lifting technologies business. Some of them related to legacy issues on contracts that we're closing out. Now there are 2 that are remaining that we have to finish for the balance of the year. So they may have some impact on the balance of the year, but less so. The second issue is that we're trying to eliminate or minimize a number of very complex projects, which are really not in our core area. And what we've done in the past, I think we've accepted some larger and more complicated build in an effort to drive some peripheral sales, but in fact, it hasn't panned out for us. So if you look at that, on the sales that we had in Q1 associated with the heavy lifting business, as Rick mentioned, it was a complete loss for us. So that effectively diluted what would have been a nice margin-accretive quarter for us for our Industrial business. So just to summarize, we had some legacy projects we quoted out. There's a couple of more that are remaining we've got to work our way through. The impact will be less. The mix issue will be better weighted towards the more profitable gantries and standard products, but it will have an effect that we'll have lower sales volumes in that segment in the future quarters, which will affect the total core growth of the segment. So the reality is we know what it is, we're dealing with it, and I think that we'll have it under control.

That's great. And then those HLT projects that maybe weren't as favorable for you guys, I mean, is there a way to quantify that a little bit? Was it 80% of the projects maybe you shouldn't have gotten involved with, any sense for that?

Well, I mean, there were several large ones, one on the R�union Island that was very big. It was a highly complicated project. It did have a lot of content of hydraulic and lifting equipment in it. But the reality was that the project scopes were massive and we were building equipment that, in some cases, were the largest ever constructed on the planet. And when you're estimating jobs like those, it becomes difficult to hit the actual manufactured cost in a very precise manner. And so we've got to be very cautious about how we would approach anything like that in the future.

Our next question comes from the line of Scott Graham with BMO Capital Markets.

The mix issue, I want to maybe ask that question of the ES business. Was there anything in that business that kind of you could identify as being a negative for mix?

No, I'd say, from a mix standpoint, as we see a little bit of decline of some of our Asia truck, that's a nice mix, positive for us. But I think in general, Roger and his team in our ES group have had a very broad-based growth across multiple industry sectors, which is creating, I think, a very positive mix. And we still have ways to go on our margin improvement plan, but I do see incremental improvement every single quarter. And that's been going now -- I think this is the fourth or fifth quarter where we've seen nice improvements from our ES team, and I would expect that to continue. The balancing effect, obviously, is as the truck business in Asia slows and those production plans are decreased, our objective is to make sure that there's offsetting volume from ag, on-highway or off-highway construction machinery and mining and other elements that help offset that. But I do think that from a mix standpoint, we're starting to get a good global blend of component supply.

Got you. Two other questions. Could you maybe talk about the orders in -- you can -- please, by all means, given it is company-wide, but any more specifics you can do by saying would be helpful. The orders as the quarter progressed as well as maybe how was pricing in each segment?

Okay. On the orders, and I'll deal with each segment individually to try to give you a framework on that. On the ES segment, we work on known production orders based on our manufacturing production PO. So the major manufacturers release their production requirements anywhere from 8 weeks to 12 weeks prior to the actual production requirement. As we go through the year, ES will see tougher comps, though, because they've had such good performance and good growth, I think that'll temper a little bit. So I wouldn't bank on 20% incremental growth every quarter. Although I would love it, I don't think that Roger's team can maintain that level of growth and comparisons. When you look at the Industrial segment, we track daily order rates on a very detailed level. And I can see those from every part of the world on a daily basis. And so we see good sequential growth. It is steady. I don't see any particular region having larger than others, which makes us think that this is more sustainable on the Industrial side. Now Energy is where the wild card is. That tends to be a little more lumpy. We are driving our tool sales in that segment, though, because that will be more consistent. As I mentioned in my commentary, we did get an order in Asia Pacific for a major build of one of the largest petrochem sites in the world, which is a great win for us. There's good quote activity, but the time lines between closing, service work and the initial quote activity can be as much as 7 months. And then that's always subject to the particular site and company approving that maintenance activity. So I think, in summary, it's pretty consistent on 2 of our segments, and Energy continues to be a little bit of an unknown and more lumpy.

Got you. On the pricing?

And then on the pricing element, we have standard price increases that are contractual within the ES group. So that's very structural. On the Industrial side, we have pricing that's scheduled in the summer. We typically would launch pricing between May, June time frame. We could accelerate that based on economic conditions. We are seeing some pressure on input costs. And so we could accelerate those pricing. So from that element, I think that the -- we have that well under control and are planning for it. On the Energy side, there's no doubt that there's continued too much capacity for general service work around the world, which does impact pricing. Now on specialty service, whether it's hot tapping and some of the more dangerous and specialty work that we do, I think the pricing has been more consistent. And then certainly on the tool sector and Energy, we've seen pricing pressure on rental and day rates of rental tools, but I think that's more stabilized now.

Our next question comes from the line of Ann Duignan with JPMorgan.

Could you just talk a little bit about your margin expectations in the back half for each segment? I'm really struggling to get back to your guidance in the back half.

So from a segment perspective, you saw each of � well, start with Engineered Solutions. You saw them drive significant margin expansion with 207 basis points. In the back half of the year, as Randy mentioned, you start to see those comps get a little bit more difficult, so you won't see that continued margin expansion from Engineered Solutions. We expect that to be kind of low to mid -- sorry, low single digits in the back half actually. And then on a Energy perspective, again, we're anniversarying the downturn in the -- starting in Q2, but really accelerated in Q3 and Q4. So we do expect Energy to be a little bit better, combined with some of the savings from the restructuring activities that we did here toward the end of the year and continue to execute here in the first quarter. Industrial, as we talked about, back half of the year, we expect -- as the year progresses, we expect a better mix, which -- with the heavy lifting business kind of rightsizing or more normalizing that activity and the continued growth in tools. So we -- again, we expect that margin to start to look better. As we go forward, on a year-over-year basis, the comps as well for Industrial will get little a bit tougher in the back half of the year as we start to anniversary some of the improvement.

But overall, in back half, margins in Industrial, look like they have to improve significantly to reach your...

That's correct.

Okay. And then if I look at what you said was a disappointment or what some of the costs that crept in, you talked, I think, about warranty issues in Industrial and then warranty raw material and preproduction cost in ES. Can you talk about each of those and why those might not repeat themselves again going forward, especially preproduction costs for ramping up new products?

Let me cover part of that, Ann, and then Rick can chime in on some more of it. When you win new platform work, it requires pre-engineering approvals. And a lot of work that goes in to-date will start delivering in 2019 and 2020 and sometimes beyond that. So it's an investment you make now for the future. Rick, you want to cover the rest?

When you look at Industrial, the majority of that actually was really the heavy lifting activity and the project closeout. There's a little bit of warranty rolling through there, but for the most part, it's what we discussed earlier in terms of the legacy projects and the lower margins. On the Engineered Solutions, it's exactly the preproduction cost. We've got a little bit of warranty provisioning, which is -- ties into the incremental sales volume and warranty rates that we haven't seen before as well as some commodity or raw material pricing. And that's -- as we've historically said, for the Industrial and the Engineered Solutions, we have been able to take price on the ES side that tends to lag given the nature of our business and the platforms and the pricing. But certainly our escalator's there, but kick -- those kick in on a lagging basis.

Okay. But my point was why wouldn't the preproduction costs continue as you're ramping up new products? And then on the nonmaterial, it lags. It lags by how many quarters? When does that get better?

Well, you're always going to have the preproduction costs. In fact, you want them, because that means you -- we won some platforms. I think that there's going to be some commonality of platform wins on the next gen of particular companies, whether it's auto truck or even some of the aerospace customers we're working with. So you may be able to use some of that engineering work, but you just never want to bank on that, because every OEM has a very specific requirement.

And the lag in raw material cost, when does that get better?

Well, I think that on any time we're seeing increases on the raw input costs, we're trying to get ahead of that on pricing. You've always got to make sure that you're keeping ahead of that from a price standpoint. Now the raw material input costs, we're working hard on our COGS and annualized cost-reduction projects. And if you're doing your job right, our productivity improvements in the manufacturing and on our negotiated price variances should offset that increase you'd see on normalized economics. What you can't bank on is when you have large run-ups in iron ore input cost and steel and copper input. Then it becomes more difficult, and then you have to do react with pricing.

Again, I don't mean to harp on it, but I'm assuming you've long-term contracts with your OEM customers in ES and there are probably inflation clauses that lag. I'm just trying to get a sense of when we'd see the margin improvement as the inflation clauses kick in?

No, I think that you always -- in all the contracts we have, there could be some legacy ones that don't have good pricing control. But you typically have a lag effect as commodity input price -- Producer Price Index increases, you're going to have price actions that flow through.

Now as Randy described, given the multiple contracts, it's going to kind of phase in over the back half. It's varied when those clauses kick in. So it's difficult to say at the end of this quarter, we'll have all of it baked in. On the Industrial side, we usually can get ahead of those, and we've had no difficulty getting our prices out there, which contemplate cost increases. But on ES, we don't have an exact answer. Each contract is different and the terms and the escalators kick in at different times. But we do expect that we'll be able to start reducing the impact of that as the year progresses.

Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

So can -- if you spike -- can you spike up the core tools growth in the quarter? And then just on the tensioning inefficiencies, I think you were saying that was going to wrap up. But how long does that kind of carry through?

The tools growth in the quarter, I mentioned in my commentary, was about 9%. So it was -- what we've said is we try to outpace the industry demands -- or the industry levels. So as I said, we're about 2% to 8% industry growth. And when we're running about 9%, we know we're capturing some share. So I'm actually really, really happy with our tools performance in Enerpac, and to a certain extent, in the Hydratight business. And what was your second question?

Precision-Hayes inefficiency.

The Precision-Hayes inefficiencies, we've got 3 of our new machine tools up and running. Now we've worked hard with this supplier for the machine tools. It's been a very difficult contractual discussion with them. We do have -- we returned one unit completely and got a refund. They redesigned and redelivered too. They've proven that they can now make the line rates of making the product for us. And so we have all 5 units now in the process of being commissioned. I expect, by January 20, at least that's the current view on the topic, that we will be at full production capacity on our wedges and we'd be putting this issue behind us.

Okay. And then on energy, I mean, your 2Q guide looks a little bit low. And I thought with Viking out, Energy would look a little bit better. But are we still at a loss in 2Q for energy?

Moderate to breakeven, if you pull Viking out and then kind of still see some indicators of profitability improvement, we should get back close to breakeven.

Yes. And then as we mentioned in our fourth quarter and in Q1, we're working through some additional cost actions in the Hydratight business to rightsize it, and that will definitely improve the overall profitability. As well as Cortland, as you know, is still -- has a piece of that business, which is highly Energy related. And we're investigating opportunities to improve that and to do something different there as well. So there is still some headwinds there, but we do see definitely improvement in the Hydratight business. And obviously, Cortland did better in the quarter.

Our next question comes from the line of with Josh Pokrzywinski with Wolfe Research.

Yes, just a follow-up on some of the questions on, I guess, first half to second half margin progression. Rick, thanks for the color there on Energy. I think that answers some of it. But it seems like from the run rates that we're talking about as of 2Q guidance that you need to pick up, call it, $16 million or so of EBITDA a quarter on pretty, undemanding revenue bounce. And I guess, you could see Energy being a piece of that, maybe 1/3 of that. But is really the rest of it just better second half profitability in Industrial as we kind of get through some of these inefficiencies and mix issues? Is it just that simple or should we just be keying in on more like a mid-20s margin in Industrial in the second half?

I mean, that's exactly it. As the mix corrects itself and we become certainly more tool-centric in the back half, you'll see some of that -- you'll see that margin flip. We also just have far more volume in the back half, both on Energy and Industrial, which will contribute to the mix for the back half. And it's seasonally our highest -- the back half is always higher than the front half. That's been our historic trend.

And if you think about it, it's always hard to -- with our offset fiscal year, our third and fourth quarter are essentially right on top of the most productive construction times, wherein a lot of our tools are being most used. And so those seasonally, we -- our second quarter is always very weak. And then if you look at the pressure waves over time, third and fourth quarter are always was the strongest. That's because how we sit in terms of those summer months and those production times.

Got you. That's helpful. And on the ES revenue guidance specifically, I think if I follow the first half, second half loading there, very hard to get to that guidance and still stay in the range. I guess, by that, I mean it's hard to have ES growing in 2Q to be at high single digits for the first half. And if that's the case, it seems like there is the acceleration elsewhere to get to the consolidated revenue. I mean, I guess, maybe not to put too fine a point on, does ES actually grow in the second quarter?

Yes. It's going to grow. It's just not going to be a 20% growth rate. I think that's the hard...

So I guess, like, mathematically, high single digits versus the 20%, knowing that you have some seasonality that gets in the way as well. It does get you pretty close to flat, if not down?

Yes. And you've got to remember, in ES, there's a couple elements in play in our second quarter. A lot of the major OEMs, they're closing out their fiscal years. So you can imagine, in December, they're not particularly interested in taking a whole bunch of new inventory in for the January production rate, because some of them are shut down and those lines are idle, so they don't want to receive that material for use until the lines are ready for it. So it's a balancing. That happens every single year. It's nothing new. And then as we progress through the quarter, we would expect to see the Chinese truck demand to temper a bit. So that's why we're not reflecting a 20% growth rate for Q2. It's going to be in the single-digit ranges like we reflected. So I would love it if Roger and the team did another 20% quarter, but I just don't see that on the horizon.

Right, right, understood. Yes, I was just trying to unpack the math a bit. And then just one follow-up on Energy if I could. You guys called out some strong non-energy demand there on the Cortland side. How lumpy should we consider that? Is that something that's contemplated sustaining itself into the second half?

Well, this has been a strategy change that we've been working for quite some time now to develop a business that is not energy-dependent. And when you think about Cortland, it's a materials technology company and it applies fiber technology into multiple industries and we're starting to see some success there. So we broke the 50% mark on the revenue splits between energy-related customers and non-energy related customers. Really it was in 2016, we started seeing that. And now, that's accelerated and growing. So we hope, and our objective is to make sure that, that -- the nature of that business becomes more consistent in as we supply to med companies as well as to non-oil and gas, fiber, supply whether it's ropes and assemblies and even cabling applications that are non-oil and gas related. So the actions we're taking within that business to restructure it and to change its product mix away from energy, and also to in some cases, deal with some products and locations within that to reshape it, it will work, and we've seen that working. And that'll help the overall profitability of that business.

Our next question comes from the line of Justin Bergner with Gabelli.

First question relates to just the guide for the Industrial segment for the year. Is it safe to say that if you weren't rethinking certain heavy lifting projects, that the Industrial guide would have been higher for the year?

Well, I think if you think about the core sales growth, and if we dial back some of the larger projects going forward, the actual impact of core sales growth as a total segment will be lower than maybe we had expected going into the year. It'll still be quite positive and it will be in the single-digit range. But the reality is, we're not going to take a project that we intend to lose money on, and that's actually good for the business not to take it. And so you may see an effect in the future where -- and if we did -- took deals unbridled, we might see a higher core sales growth number. But the fact is, it will improve some margin and improves the profitability by not being so aggressive on the types of big projects we do. So that's the impact of the heavy lifting technologies' structural changes we're making right now.

Got it. So if I look at the segment sales guide, I guess, it's unchanged for core growth. I mean, I realize you are giving up some sales volume, but should I assume that the core tools business is compensating for that to leave your guidance unchanged? Or should I expect you to meet the lower end of the range?

Well, keep in mind, a couple of things on heavy lifting. There's a long process for those projects, as I mentioned, 6 months to 2 years from start to finish of the project. And so the impact this year, it's not that significant. So Randy's talking about changing our quoting and certainly doing all of those things going forward. So from a guide perspective, we're -- that's why we're able to hold. We anticipated a certain level of heavy lifting, we're still anticipating that. And the project business is just a portion of the overall heavy lifting business activity.

Okay. And then, you made a comment earlier, I just want to clarify, I think the heavy lifting -- there are heavy lifting losses, was that for just these customized projects? Or is that for the whole heavy lifting business including the moneymaking parts of the business?

It was in fact at the whole business, which was unfortunate, because we have really great performance from our tool sector. And then when -- as where a relatively small percentage of the overall sales footprint creates a negative profitability irrespectively drags the margin profile of the whole business down. And that's what happened.

A few projects that caused that. So it's not like everything we sold in heavy lifting was negative, there were profitable pieces of it. But because of these cost overruns and discrete items, warranty things, that drove that product line to a negative profit.

Our next question comes from line of Mig Dobre with Baird.

This is Joe Grabowski on for Mig this morning. I know a lot of the questions have kind of got into first half versus second half guide, and I'm going to kind of go there again. If I look at second quarter last year, you guys made $0.11. I assume Viking lost may be $0.04, $0.05 in the quarter. So may be ex-Viking, you made $0.15. This year, the second quarter guidance for sales to be up $16 million, but for earnings ex-Viking to be flat to down. So is it more heavy lifting headwind in the quarter? Kind of what are the puts and takes in the quarter that will make earnings ex-Viking flat to down on higher sales?

Well, there is a couple of things. The impact of heavy lifting, as Randy mentioned, we have maybe 1 or 2 projects to digest. So that definitely will impact the second quarter. The Cortland sales will reverse that run rate. So we've got a significant Q1 benefit from some of these non-energy businesses or product or sales tick up, that will be a little bit negative in Q2. We talked about the China truck being down in Q2, and then we will continue to have our investments both at ES and continued investment in Industrial. So those are the things that weren't -- some of it wasn't there in Q2 of last year, some of them are new to Q2 of this year.

Got it. Okay. That makes sense. And just a quick question on the tax rate first half versus second half. It looks like tax rate second half of this year is going to be lower than first half, kind of what's driving that?

A part of that, I mean, it was true last year as well. Part of that is driven by the lower income in the first half of the year. And we're -- we filed tax returns, et cetera, in the back half of the year. So we were able to chew up on certain of our estimates in the back half of the year. So you always have this back half lower mix. And then also we have some planning activity that will be -- that will hit us in the back half. Last year, we saw some of that hit in Q1, that's the 5% in Q1. We have that planned right now for Q4.

Got it. Okay. And I know you kind of said the new tax bill is -- I think I heard it was sort of a wash for your tax rate. In total, are you incorporating the new tax bill in your second half tax guidance?

It is not in our second half tax guidance. So one of the thing -- we're a fiscal year tax filer. So any movement in the U.S. rate would be on a pro rata basis whenever it's finalized. And it will take time for the repatriation activity wherever that lands to really have an impact.

(Operator Instructions) Our next question comes from the line of Seth Weber with RBC Capital Markets.

Actually had -- a bunch of my questions have been asked and answered. On the margin and -- excuse me, on the guidance. But just to put it a bow on it, do you think that second quarter Industrial margin is up year-over-year or down year-over-year for the 20.8%?

It should be up. That's my expectation. We should see margin improvement in Q2 on our Industrial business. And it's not going to be huge. But as we've said, we want our operating leverage in that business absent any major cost issues that we dealt with in Q1 to be in that 35% to 45%. So on incremental revenue, we should be seeing that. What I don't want to overcommit to in this context is that the heavy lifting issues that we dealt with in Q1 ,which was somewhat of a surprise that it doesn't reoccur in Q2, because we still have some deliveries to make relative to 2 major projects in our second quarter, and then there should be some revenue in quarter 3 that we may have to deal with as well. So my expectation and where we're driving the company to is to get to that operating leverage number in the Industrial business and we should be able to get there.

Okay. And then just you've mentioned a couple times the anticipated decline in China truck for 2018. Can you kind of ring fence that for us, is that like a 10% number, or is it 20%? We've heard from some of your -- some of the industry players a pretty wide range of numbers that are out there. Could you just update us with what you're thinking?

We're at the final ending point. I think we will see a new norm because the absolute truck fleet is larger now than when we started. But we've been watching the year-over-year progression on the sales growth. And in our fourth quarter, with the first time we've seen in a single month of a negative comp. Now we're just slightly negative, about a point negative year-over-year in the month of November. So from a reality standpoint, is that we've been tracking it. We know it's slowing, and we've got very good contact with those 3 or 4 big suppliers over there. And I think that the other element is we've managed our inventory levels very tightly with those companies, so that we don't get caught with any major inventory miss where we've got to work through 2 or 3 quarters of inventory. So we know where it's going. What I can't say in real precisely level is what's the new norm for China truck volume. But I would expect that it should have a number in that $30 million range on average.

30%.

30%, I'm sorry.

30%?

Any other comments from Rick?

No. I mean we anticipated 30% decline. We anticipated that in our guide, most of that was back half that would start in Q2.

Okay. And then, Randy, I think, you mentioned in your prepared remarks you're still looking at additional opportunities to cut costs in Energy. Can you -- is there any update there? Can you size any of that for us when we might see some more (inaudible)?

You'll see a bit of restructuring charges in Q2 associated with the Energy business. We have 2 regions which are still struggling from a profitability standpoint. And I believe it's -- we're holding the restructuring outlook that we laid in for the whole year. But for Q2, I'd expect to see some more there, because we want to make sure 2 regions are solidly profitable on today's revenue base.

So we described last call Energy Phase 2 restructuring charges of $4 million to $5 million with annualized savings of $2 million to $3 million. So that's really unchanged. You'll see that savings kind of come into our back half of the year and the run rate will be $2 million to $3 million.

There are no further questions at this time.

Great. Thanks, everyone, for joining the call today. I'll be around all day to take follow-up questions. For your planning purposes, our second quarter earnings will be released, Wednesday, March 21. With that, have a safe and wonderful holiday season everyone. 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.