Enerpac Tool Group Corp (EPAC) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Actuant Corporation's third-quarter earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded Wednesday, June 20, 2018. It is now my pleasure to turn the conference ever to Karen Bauer, Communications and Investor Relations Leader. Please go ahead, Ms. Bauer.

Thank you. Good morning and welcome to Actuant's third-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.

During today's call we will reference non-GAAP metrics such as adjusted profit margins or adjusted earnings per share. You can find a reconciliation of GAAP to non-GAAP metrics within the schedules attached to this morning's press release.

I also want to remind everyone that any forward-looking statements made during this call are subject to risks and uncertainties, the most important of which are described in our press release and SEC filings.

Finally, consistent with prior quarters, we'll utilize the one question, one follow-up rule in order to keep today's call to an hour. Thank you in advance for following this. And with that I'll turn the call over to Randy.

Thanks, Karen, and good morning, everybody, and thanks for joining our third-quarter earnings call. I'm going to start today on slide 3. I'm pleased to report that we delivered both sales and earnings above our guidance range for the third quarter along with strong cash flow.

Total sales were $317 million with continued strong double-digit core sales growth in Enerpac Industrial Tools, solid OEM demand in Engineered Solutions and stabilization in Energy maintenance. Adjusted diluted EPS was $0.39 a share, at the high-end of our range with margins up 130 basis points year-over-year.

While we still have some net uncovered inflation, HLT project costs and investment spending, the 28% overall consolidated incremental margins were a big step function improvement for the Company. Our cash flow was robust and reflected an uptick in earnings, working capital reductions and cash tax benefited planning actions. Our leverage improved to 2.6, which gives us ample liquidity to fund capital allocation priorities. In summary, this was a good quarter for our teams and a great basis for the balance of the year.

I'll turn the call over to Rick now and he'll go through the details on the quarter and then I'll come back with some additional updates, including guidance.

Terrific. Thanks, Randy, and good morning, everyone. First let's walk through the one-time items that are excluded from the adjusted results for the quarter, as shown on slide 4. Starting with taxes, we recorded an adjustment to last quarter's initial estimate of income tax US reform.

With the issuance of further guidance by the IRS in the third quarter, we had to adjust our provisional estimates related to repatriation of foreign earnings and a revaluation of certain deferred tax assets and liabilities. This resulted in a net $5 million tax benefit recorded in the third quarter.

The new law is very complex and, as the details are further clarified, we may see additional adjustments in future quarters. Our restructuring charges in the quarter totaling $1.2 million were offset by the realization of tax benefits from our year-to-date restructuring actions.

On to our adjusted third quarter, turning to slide 5. Fiscal 2018 third-quarter sales increased 7%. We had a 4% currency benefit. The net impact of Viking and Mirage resulted in a 1% sales reduction. Core sales therefore increased 4%. Adjusted operating profit improved for the third consecutive quarter, up 130 basis points. Our effective income tax rate was approximately 9%, just slightly above our expectations. The adjusted EPS for the second quarter was $0.39 compared to $0.32 last year.

Turning to slide 6, our core sales of 4% were just above the top of our guidance range of 1% to 3%. Total Industrial segment sales were above expectations with continued strong tool demand despite tougher comparisons. This more than offset a 35% decline in Heavy Lift sales and a modest reduction of our concrete tensioning product sales.

Engineered solution sales also exceeded expectations with strong demand across substantially all product lines and a bit better than expected China truck sales in the quarter. Energy core sales stabilized as anticipated.

On slide 7, you can see the nice increase in year-over-year margins. This was largely due to the significant improvement in Energy results, as the other two segments had roughly flat margins. I will talk through the components of the segment margins shortly, but let me point out here the corporate expenses were unusually high when compared to the prior year. This increase is largely related to incentive compensation, Board transition, legal and other external service costs.

Now let's get into some of the segment details, starting with the Industrial segment on slide 8. Core sales for Industrial increased by 4% year-over-year. Industrial tool sales remained robust, again up low double digits despite tougher comps.

We continue to see very broad-based growth across geographies and end markets. We believe we are outperforming the overall market by a couple hundred basis points due to our continued focus on sales coverage and new product launches.

We did experience about a 35% decline in Heavy Lift sales. This reflects the lumpy nature of its sales and our decision to move away from specialty project work. Concrete tensioning sales declined modestly as we stabilized the operations and worked to claw back lost shares resulting from poor delivery.

From a profitability standpoint, Industrial's margins were about level with our prior year. However, if we peel back the onion, the standard Industrial Tools portion of the business had incrementals in the 40% range -- that was double of what we had been running -- due to stronger volumes, pricing and anniversarying the investment spending that began a year ago. While we expect incrementals will be very -- will vary based on mix, we fell right in the middle of the range of what we would call the normalized incremental margins for tools, between 35% and 45%.

Within Heavy Lifting, we did see the impact of cost overruns on the custom solutions portion of the business, but to a much lesser extent. We have successfully executed the restructuring actions that we outlined last quarter and we will see the benefit in our fourth quarter.

Similarly, the volume and inefficiency issues with concrete tensioning did lessen but remain a drag on margins in the quarter. In total, between the Heavy Lift and concrete tensioning items, we experienced approximately $1 million in margin headwind. This is down substantially from the $3 million in the second quarter and we expect continued improvement in the fourth quarter.

Now let's turn to the Energy segment results on slide 9. Overall core sales declined just 1% and sequentially improved from the minus 8% last quarter. Hydratight's core sales rate of change was about flat compared to down low double digits in the prior quarter.

As we noted last quarter, the Middle East continues to have the most stability in terms of maintenance activity levels and we saw a nice increase in demand ahead of their normal seasonal slowdown. The North Sea and Brazil also saw nice improvement.

The US was the weakest region from a top-line standpoint, which also reflects our reduced focus on commodity type service work. Cortland saw a modest increase in core sales on improvement in both oil and gas as well as medical end markets. Quoting activity in offshore Energy continues to come up off the bottom.

Adjusted operating margins improved substantially both year-over-year and sequentially. Obviously a portion of that is associated with the elimination of Viking losses. However, we saw the benefits of our restructuring actions across a number of regions as well as more favorable mix by both region and product line.

Turning to Engineered Solutions on slide 10. We saw strong performance again from a top-line standpoint, delivering 7% core sales growth despite difficult year-over-year comparisons. Our OEM customers are experiencing solid end market fundamentals and have been re-establishing inventory in their channels.

The sales growth continues to be broad-based across off-highway markets including agricultural, construction, forestry, mining, among others. Europe truck production levels remain solid while our China-based production, which was down about 10%, benefited from the market share shifts in the quarter.

So, it was better than we anticipated. We expect to continue to be lumpy, however, with the fourth quarter down closer to 30%. Profit margins in Engineered Solution were about level with prior year, hitting our 10% EBITDA short-term bogie. We did have the benefit of higher volumes but continue to experience some pressures from inflation, higher wages and other inefficiencies in order to keep customer service levels high.

We have some price increases already in effect and are in the midst of negotiations with additional customers. So while we continue to see net inflation headwinds, we believe this is temporary in nature as more pricing is expected to layer in over time. We did see higher preproduction engineering investment in support of new launches along with an unfavorable product line mix.

Turning now to liquidity on slide 11, cash flow was strong in the quarter, reflective of the seasonally strong earnings, a modest improvement in working capital and the cash benefit of certain prior tax planning actions. While we saw working capital reductions, we were not happy with the current levels, especially related to inventory, and we are targeting meaningful reductions as we move through the fourth quarter.

Our net debt to pro forma EBITDA leverage stands at 2.6 times, pretty -- down pretty meaningfully as a result of the cash generation and improvement in EBITDA. While we would expect further improvement in the fourth quarter and, as Randy noted, that positions us well to execute our capital allocation priorities in the future.

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

Thanks, Rick. Let's turn over to slide 12. I want to spend a few minutes on our new tool company acquisition we completed in the quarter and summarize our new product launches. We acquired a specialized tool company called Equalizer in the quarter. Based in the UK, this $5 million product line, some of which are already privately labeled within the Enerpac catalog.

This acquisition accelerates our product development plans in specialty tools, injects new engineering talent and leverages our great distribution channel. This is a good example of the type of product line acquisitions we intend to make within the tools space.

During the quarter we launched a few new tools in Enerpac, including a refresh of the Bottle Jack line and a series of robust chain cutters. Our distributors are pleased with the focus on new products, including related marketing materials and training. Reinvigorating new product development has led to stronger dealership relationships and aiding in new tool concepts.

Engineered Solutions also continues to see customer adoption of innovative new product categories. For example, CrossControls has expanded its display technology line within John Deere's construction equipment models. I'm pleased with the progress but recognize we still have a lot of work to do on optimizing the product development process and launch velocity.

Moving over to slide 13. The macroeconomic factors driving our end markets continue to remain positive. We see tougher comparisons and we anniversary some of the big upswings in demand, but the end markets appear to be favorable. Oil and gas prices have fluctuated between $60 and $70 range with some variability largely associated with geopolitical factors.

As noted in last quarter, we see improved quote activity associated with CapEx projects and maintenance activity levels have stabilized. Off-highway mobile equipment continues to experience strong demand in both agriculture and construction equipment markets globally.

The general Industrial market continues to see good demand and distributors are reporting good retail activity and pricing dynamics. And finally, the European on-highway truck market remains strong with the latest registration data reflecting a 12% increase in heavy trucks and is up 6% year to date. China truck sales have declined on average and we anticipate calendar year to run about 25% off last year peak levels.

Turning over to slide 14. Core sales have been a bit better than expected all year and we see a similar trend for the final quarter. We expect Q4 core sales to increase 3% to 5%, which will bring the full-year number to approximately 5%.

A few reminders related to the sales trend. First, we have now fully anniversaried the recovery of the majority of our end markets so the comparisons are expected to become more difficult. Secondly, Energy is now stabilized and should see easier comparisons as we move forward. And finally, we are proactively reducing specialty project activity within Industrial's Heavy Lifting business to improve long-term profitability.

Moving over to slide 15. With one quarter to go in the fiscal year, our current view that the underlying demand and profit trends have been -- we have experienced will not change meaningfully for the fourth quarter. As such, we are anticipating the fourth-quarter sales to be in the $290 million to $300 million range, down seasonally from Q3 with European OEM shutdowns, lower summer Middle East Energy maintenance activity, and we expect to see negative impact from foreign currency exchange.

This results in EPS of $0.32 to $0.37 per share for the fourth quarter and $1.03 to $1.08 for the full year. 2018 sales guidance will be in the range of $1.170 billion to $1.180 billion. And finally, as noted in the press release, we continue to expect a full-year free cash flow of approximately $70 million to $75 million with greater than 100% conversion rate.

Turning over to slide 16. Finally, before we move to Q&A I want to take a minute to walk through how we are thinking about the operating segments and leadership. As you'll recall, we added Jeff Schmaling to our team in February as the combined Industrial and Energy segment President. He has been working to identify and leverage the strengths of the tool companies and service companies within Actuant.

As part of this process, we have started combining the Enerpac Industrial Tools and the Hydratight businesses from an operating standpoint. As many of you have heard me discuss, our intent is to leverage the Hydratight maintenance center in order to sell a broader array of tools and services.

We have also combined the product development groups in both businesses and launched tool centers of excellence globally. (technical difficulty) objective is the formation of a very powerful and growing tool company with one of the finest distribution channels in the world.

Roger Roundhouse, President of the Engineered Solution business, will lead the newly expanded component and system related businesses. This is essentially a mini diversified Industrial component business with broad exposure to on- and off-highway vehicles, medical, aerospace and civil construction. This will bring the standardization of component manufacturing, development and sales to all of our customers and further improve the results.

We are building out our fiscal 2019 plans with these newly defined segments and we will provide our 2019 fiscal guidance with that framework. We will also restate quarterly information for comparability. This will be done in conjunction with our fourth-quarter earnings currently scheduled for September 26. And with that, operator, let's open it up for questions.

(Operator Instructions). Jeff Hammond, KeyBanc Capital Markets.

So just on Energy, just trying to get a sense of how much of the margin improvement you think was self-help and how sustainable that is. And then just any real signs in North America or Asia where things are maybe stabilizing or starting to get better there? Thanks.

So the margin expansion in Energy is partially due to the divestiture of Viking. That's helped us, as Rick mentioned. But I think most importantly, in Hydratight we made some serious changes to the structure. Our North American business has essentially doubled its profitability and sequentially it's improved dramatically from where we were in the first couple of quarters. So that's helped us a great deal.

The second element is the Mideast operations have continued to grow. In fact, they are probably up between 15% and 20% on a revenue basis. So that extra volume in one of our higher margin regions, plus fixing one of our stressed regions, have contributed to turning around the profitability of Hydratight and improving it.

And then lastly, Cortland has also improved in profitability. We had made some major restructuring actions in a couple of the businesses. We shut down some of the un-performing businesses and -- which has resulted in a much better profile for Cortland. So all in all we're very, very pleased with the progress in the Energy segment, which is comprised of Hydratight and Cortland.

Okay. And then just, Randy, you've got the two new segments you're talking about, maybe the one that seems more core and then the other businesses. Maybe just speak about where are you in evaluating divestitures and when might we see a little more portfolio action out of the new Engineered Components and Systems segment? Thanks.

Yes, and I'll refer you back to what we said in October of last year. We had identified about $100 million of targeted revenue that was falling in those two buckets we discussed. Bucket one being businesses that were far outside of our strategy and were struggling to be fixed, and that was the example of Viking.

And then the other side of businesses that Roger and his team have done an excellent job of turning around and making them profitable, but in the long run don't have a good core fit. So that's roughly $100 million.

I think the structure we have laid out, the important element of that is that we're combining our best tool businesses into one very, very powerful group. In standpoint of R&D, of M&A activity and performance I have no doubt that Jeff and the team are going to do a great job growing the tool company.

And on the other side, Roger is running a very good diversified Industrial business. And we have good market exposure. We have improved our core sales across the board and we're capturing more platforms with end-users. So, that's turning into a better and better business. I think bringing focus and clarity to that structure is the important part.

Yes. Thanks, guys.

Mig Dobre, Baird.

Sticking with Energy, just maybe a little more color on your view as to the cadence of Hydratight recovery. I understand that you're probably not in a position where you want to comment on next year, but things have been rough here for a while.

So I guess your view as to whether or not we're going to see a gradual recovery or more of a hockey stick. And what does that mean in terms of your capacity? And I'm thinking about labor specifically. Will you need to maybe ramp up employment? Do you have the right people in place?

Yes, we believe it's going to be more of a gradual recovery. As we have improved the operating profit profiles of all of our regions, that's the biggest impact. Volume is playing a piece of it. As I said, our Mideast operations is growing and we see some nice expansion there, but we're not expecting a huge and hockey stick style expansion in North Sea, in the US operations, Latin America or Asia.

We have some nice projects that are kicking in now, but we are being very measured on our forward view on things. You've seen the volatility in oil; I think anything in that $60 to $70 range is healthy and it's certainly driving better quote activity. But I think we all have to be very cautious about how we view the Energy maintenance markets going forward.

And that's why we're putting a lot of focus on selling our tool platforms within Hydratight. Our rental facilities as well as our tool sales have to be a top priority so that as service levels recover or don't recover it has less impact, and that's in fact what we've done.

And on the labor front and capacity?

Our current view on labor utilization is we would like to keep it around 70% utilized. Now, Jeff and I have very I think long-term views on labor utilization. As we creep above that 70% mark based on our geographies, we're going to have to scramble to get additional labor in. We haven't had that issue as yet, but I don't think in the short term it's -- labor is going to be a constraint of revenue increase.

Keep in mind; we talked about before these restructuring activities, part of that was ensuring that we had the right service techs, right level to achieve this 70% utilization. So we strike a balance with the trained service techs that are part of us. And then industry wide there's a flexible labor force that we use to balance out demand levels. So we feel pretty good about our ability to respond to any increase in demand.

Okay. Then maybe one on Industrial, on Industrial margins specifically. Maybe, Rick, you can walk us back a little bit through the prior three quarters. What were some of the one-time items, and maybe stack them up in terms of dollar impact or percentage hit to margin, that you think will not repeat in the upcoming fiscal year? Trying to get a better sense for what normal incrementals will look like going forward.

Well, I think we've talked a lot about the two major items, and that's Heavy Lift -- putting aside the lumpy nature of it. We talk specifically about anywhere from -- somewhere between $2 million and $3 million of headwind this past year from Heavy Lift and $1 million to $2 million from PHI. Those are the things that we see lessening going forward in terms of a margin drag.

And then as we said in the quarter, we're anniversarying the investment spend so we don't have to digest that, if you will, going forward. So I think with those two things we should be reverting back to the mean, all things equal. There will be a mix impact there on a quarterly basis, but you should see closer to the normalized performance.

I appreciate it. Thank you.

Ann Duignan, JPMorgan.

Maybe you could dig a little deeper into the comments on working capital. We did note in our alert that your days on hand remained quite elevated. So maybe you could just talk a little bit about what's going on in working capital and what the plans are there. Thanks.

Sure. As I said in my comments, inventory levels are really the driver in the increase in primary working capital. A lot of that was intentional ahead of the increased demand and ahead of new platforms.

We do, however, feel like we have an opportunity here in the -- as we work through the fourth quarter, kind of saw it in the third quarter, to get those inventory levels down. Obviously when you look at the end of fiscal 2017 versus where we are now, primary working capital is up, but we will see a meaningful reduction here in the fourth quarter.

And is that going to weigh on margins then because you don't get the absorption? Are you going to under produce (multiple speakers)?

No.

Sales?

No. Keep in mind that we're largely an assembler. And so, the inventory that we're talking about will not be a -- the reduction we're talking about will not be as a result of us curtailing production in any way. We have the demand to support our production levels and some of those were raw material coming in that will also support demand.

So, no anticipated impact on production and absorption as a result of us bringing down the inventory levels. Engineered Solutions is the majority of that, but also Industrial, which kind of facilitates not having a meaningful impact production wise.

Okay. And as a follow-up then, could you just discuss in more detail price/cost? I know you alluded to it in Engineered Solutions, but just a little deeper dive into whether it was a positive or a negative by segment and what the outlook is.

So from a -- just to make sure, separating the two. Pricing we've talked about both segments going out and doing price increases. Some regions are further along but we continue -- and it's by customer -- so we continue that process and will continue that process through the end of the year.

The good news is so far we've been able to get the pricing that we've gone after and we will continue to negotiate. Obviously by customer, by business, by region that negotiation takes on different timing and a different process.

From a cost perspective, obviously you see the normal steel and other commodity cost increases that we've seen all year long. Between our sourcing efforts and the pricing efforts we believe on an overall basis we've been able to cover anticipated inflation. That's obviously before any impact of tariffs or 232/301. That's just normal pricing impact.

Okay. And just a quick follow-up. Will the tariffs that were announced last week -- are you importing any components that will be impacted beyond the steel and aluminum?

Well, I mean, the tariffs that were implemented were far-reaching and extremely broad, so the obvious answer is yes, we certainly have products that are covered under the list, which basically includes all. But what that will land at, what it will be and how it will impact us, that seems to change every day. So I don't really have a good answer with regard to 301.

Okay. I'll leave it there in the interest of time. Thank you. I appreciate the color.

Charley Brady, SunTrust Robinson Humphrey.

Just a question on your commentary on Cortland, how you've deemphasized some unprofitable product lines. Is that coming out of the Energy segment or -- and is there still going to be an Energy piece to Cortland now that it's going to be in this new Engineered Components segment?

And then also just on the Hydratight business, in combination with Enerpac, is the distribution of those products -- have they always been fairly similar or separate? My understanding was the customer base is obviously a bit separate, particularly on the Energy side. How are you marrying that together?

And is the sales mix of that going to change materially from a third rental, a third service, a third -- tool sales to something that's going to bit different, maybe with one of those being deemphasized?

Okay. Question one then on the Cortland Energy exposure, what we've said about Cortland is we intend to eliminate or minimize our exposure to Energy. And so, that it is in process right now.

The remaining business that will be Cortland is going to be -- is primarily a material sciences company which makes high-strength material fibers for use within all sorts of applications, whether it's mining, offshore, medical, all those areas, and it creates a more profitable business.

And so, we focused on regional locations that were primarily Energy-related that were not making money and we simply shut them down and took those centers back to a primary location, which had a nice effect on the profitability. And obviously there was almost no effect on the revenue because most of that had gone away.

So that's the Cortland Energy story. As it sits in our ES business, it should be thought of as a material science company that has a fairly nice growing med piece.

And then on the Hydratight distribution, this is something that Jeff and I are pretty passionate about. Because historically, Hydratight did have a third, a third, a third model, which was rental, product sales and service. Now, what you have to remember is that Hydratight only sold a very narrow line of torque and tension products manufactured by Hydratight. And then we did carry a few complementary lines but not widely distributed and mostly placed in the rental fleet for our own use.

Now, how we're going to operate going forward. Of the 24 service branches we have globally, the idea is that we need to be pushing the entire tool product line through those locations. The only caveat that I would put on that is that we will not damage any successful local Enerpac distributor. We intend to cover uncovered space with full distribution.

And Jeff and I have done this for years together, of looking at distribution and how do you close up uncovered areas. And then most importantly, how do you have strong store sales and start measuring it like all the other OEMs do, which is same-store growth? And the way you do that is get a very strong mix of product sales, service rentals and service sales. And that's the strategy going forward. And I could tell you that's -- we're hot after it right now.

Thanks.

Seth Weber, RBC.

A few follow-up questions here. Just thinking through the pricing commentary, I mean it sounds like -- what I think I heard was you expect to be neutral-ish this year. But you are continuing to push price increases here at the end of the year. So, is there a scenario where you could actually be positive on price/cost next year? Is that a fair way to think about it?

I mean, yes, there's a scenario. Our intent is to certainly cover known inflation and, in some instances, do normal pricing increases. When we say we're covered, it's kind of -- as we exit the year, we're somewhat neutral. When we go into 2019 we will revisit that as we look at our 2019 guidance and as we get further along with our pricing.

Right, Rick. But I think what I heard you say was you are still in negotiations with -- on the ES business. And so, it sounds like there could be some additional either surcharges or increases coming through there. That's fair?

That's fair.

Yes, typically the way it works with a large OEM is that you will notify your intent to trigger price increases as per their contracts. And then that goes into a negotiation of the actual amount that they are going to take. And so, there's a bit of a -- there's a negotiation with large OEMs, and so that's what Roger and the team are working through right now.

Right and --.

Okay.

Just to be clear, it's not for the fiscal year. It's just the pricing that you get on, as Randy described, normal pricing escalators that are in the existing contracts, so not limited to fiscal 2019 and certainly not fiscal 2018.

Sorry, Rick. I didn't catch the first part of what you said.

I think when Rick initially said it will be neutral, it wasn't a commentary about the full fiscal year. We've certainly seen headwinds, right? We've been putting the pricing in. As we exit the year we'll be in a neutral state, again, assuming whatever happens with new tariffs. But that is not a commentary on the full fiscal year. It's as we exit, given the pricing we're still negotiating, we expect to get that covered.

That's helpful, Karen, thanks. And then just going back to the Energy margin point, low to mid-8s here in the third quarter. I mean, is that -- you said mix was a little bit positive, but should we think about this sort of mid- to high single digits as the run rate going into next year at this point? Or was just mix just unusually strong in the third quarter?

No, I think that going forward, if you break Hydratight down into what is the normalized run rate, it will continue to improve. Rick, if you want to give some commentary of what we think going forward, but that's what we've done to that business to improve it, to bring it off the bottom and to get it in the operating range that we've talked about publicly.

So Q4, just to back up a bit, you will see year-over-year some improvement because Q4 of last year was the bottom. So certainly year-over-year you will see improvement and you don't have Viking in those numbers. So coming off of Q3 to Q4 there's a seasonal dip, but you are going to see year-over-year improvement. Now, relative to 2019, Randy's comments are probably as much as we have today relative to 2019 performance.

Okay. Maybe if I could squeeze one more. I think I heard you say on the ES business there was an unfavorable mix there. Do you expect that mix to continue or is there something that could flip back in your favor?

What we talked about was China, which is obviously down, and we expect that to be worse than we saw in Q3 but continue to be lumpy. So that's really the mix -- the most part of the mix that we were speaking of.

So if China is worse Q4 versus Q3, that's -- how does that swing the margin?

It's just a little bit. If you remember, we said China was -- we expect it to be down calendar year like 25%. It was only down 10% in Q3, so it was a little bit of headwind, but Q4 we expect China to be down about 30%. But these are relatively small numbers given China overall volumes run about $35 million, so it's on the margin a little bit negative but it's not a huge swing.

Okay. I'm just trying to understand. Is China better-than-average margin for the segment or --?

Yes, China is higher than average margins. Yes.

Okay. Okay, great. Thank you very much, everybody.

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

I have a couple cleanup oriented questions here. The increase in the sales guidance I guess not being accompanied by an increase in the earnings guidance, at least relative to management expectations, is that a function of higher inflation than had been expected a quarter ago? Or what's inhibiting earnings guidance from going up with sales guidance?

No, I would say if I look back at Q3 and where I had pegged that sales guidance, I probably wasn't accurately reflecting where we were from an FX standpoint and even kind of the low and high end of the range. So to be honest, I'd say last quarter I should have had the sales guidance on the full-year basis a little bit higher.

So this is just matching up here what Q4 is in line with probably generally what most people had. Add it to nine months year to date, that's what the math comes out to be. So the margin to sales is similar to what we've seen all year. I would tell you my full-year sales was probably too low when we guided last quarter.

Okay, that's helpful. And then on the Energy side, should we think about anything unusual in the 3Q mix as it relates to the mix within the different parts of Hydratight? And I guess as a corollary to that, I assume that the mix of Hydratight relative to Cortland may decline in non-3Q quarters.

Yes.

Sure. Within Hydratight, I think the big thing we see happening is the shift from product and service. I think we talked about getting away from the commodity type service. So, when you have a quarter that's weighted toward product you're going to get a favorable mix out of that. And then as we scale down commodity type service, just in general, you should see a little bit of margin uptick mix aside.

Okay, that's helpful. Then was there any additional restructuring that occurred in Energy in the third quarter as it relates to Hydratight that allowed the business to exceed expectations or your expectations? Or was it more that it delivered against your expectations following prior restructuring actions?

I think it's the latter. The restructuring in the Energy segment of recent is more Cortland focused. The Energy restructuring was baked into our guidance.

Okay, thank you.

Mig Dobre, Baird.

Just a small cleanup item. On corporate expenses, can you maybe delineate what was one-time in nature in the quarter here? And I'm also wondering on incentive comp, where are you running right now versus what you would consider to be a normalized incentive comp level?

In terms of corporate expenses, I think we've historically said normal is about $7 million-ish. And so, for the quarter, when you think about one-time in nature, we certainly had higher Board transition costs and legal costs in the quarter than we would normally have and no other activity. Those are going to be nonrecurring items. So from a quarter perspective that's what I would look at.

Incentive comp, without getting into the details, it's -- based on performance, it's higher this year than where we where a year ago. But I don't know that there's a normalized incentive comp number that I can give you.

And as you know, our incentive comp program is based on three elements: the top-line sales growth or core sales growth, our performance on margins and then the cash flow. And so, if you look at those elements, you can imagine our first and second quarter had a significant drag on those incentive comp items.

As the teams did a great job of clawing back and performing better in Q3, that that reset it and helped them get back to a normalized rate. So, self-inflicted wounds in Q1 and Q3 -- or in Q1 and Q2 certainly had an IC, or an incentive comp, impact that we felt.

Right. Now, normalized meaning increased, not normalized. There is no normalized bonus level, but it resulted in some of the increase getting closer to target.

Yes, to put it plainly, I'm just trying to figure out, as I'm thinking about next year, if I need to account for some kind of a catch-up of any sort that I don't know about in incentive comp within this line item. Sounds like that's not the case.

No.

Okay. Thanks. Thank you, that's it.

There are no further questions at this time. I will now turn the call back to the presenters for their closing remarks.

Great. Well thanks, everyone, for joining our call today. I'll be around all day to take any follow-up questions you may have. As Randy noted when we were talking about the segments, we intend to release our year-end results on September 26, so you can mark your calendar for that Q4 call. Have a great day.

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.