Enerpac Tool Group Corp (EPAC) 2019 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Actuant Corporation's First Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, Thursday, December 20, 2018.

It is now my pleasure to turn the conference over to Barb Bolens, VP, Corporate Strategy, Investor Relations and Communications. Please go ahead, Ms. Bolens.

Thank you, operator, and good morning, everybody. We appreciate you joining us for our first quarter conference call for 2019.

On the call today to present the company's results are Randy Baker, Actuant's President and Chief Executive Officer; and Rick Dillon, Actuant's Chief Financial Officer.

Our earnings release and slide presentation for today's call are available on our website at actuant.com in the Investors Section. We're also recording this call and will archive it on our website.

Please go to Slide 2. During today's call, we will reference non-GAAP measures, such as adjusted profit margins and adjusted earnings. You can find a reconciliation of non-GAAP measures to GAAP in the schedules to this morning's release. We would also like to remind you that we will be making statements in today's call and presentation that are not historical facts and are considered forward-looking statements. We are making those statements pursuant to safe harbor provisions in federal securities law. Please see our SEC filings for the risks and other factors that may cause actual results to differ materially from forecasts, anticipated results or other forward-looking statements. Consistent with how we have conducted prior calls, we ask that we follow our one question, one follow-up practice in order to keep today's call to an hour and let us to address questions from as many participants as possible. We appreciate your cooperation. As this is our first quarter reporting in our new 2-segment structure, please note that we may refer to our Industrial Tools & Service segment as IT&S or tools and our Engineered Components & Systems segment as EC&S.

Now I'll turn the call over to Randy.

Thanks, Barb, and good morning, everybody. And before we get started today, I just want to wish everybody a very safe and happy holiday.

Flipping over to Slide 3, as you read in today's press release, Actuant delivered a solid first quarter. I'm very pleased with our execution in all aspects of our business and the continued progression toward a best-in-class performance.

Now let's walk through the progress we've made on the strategic objectives in the quarter. First, our core growth initiatives are driving greater commercial effectiveness and improved product vitality. As we discussed in our fourth quarter of 2018, we launched a large number of new products, which we expect to contribute to our 2019 growth. We are also continuing to drive the recent acquired Mirage and Equalizer business into our global Tools & Service organization. In terms of world-class operations and service, we'll be highlighting our progress on quality, cost, delivery and safety later in the call. But I'd like to say that we are pleased with the results we're achieving. We're also integrating the Enerpac and Hydratight business to leverage the strengths of the combined tool company. We continue to be disciplined on how we're allocating and deploying capital. The investments we made in our core businesses are yielding commercial and operational results. And from an M&A perspective, we are actively pursuing bolt-on and strategic acquisitions to drive growth in our tool business. And finally, I'll touch on portfolio management in a moment. But overall, I'm pleased with the continued progress we're making on our key strategic objectives and [our momentum] on financial results.

Turning over to Slide 4. Our core sales growth grew by 3% in the quarter with contributions from new product introductions, commercial performance, pricing and the continued positive market. As you can see, total sales were negatively impacted by 2% in the quarter due to a strong U.S. dollar, which muted the total sales expansion. Operating profit improved by 29% in the quarter with strong operating leverage, benefiting from better efficiency, pricing and fewer cost headwinds from onetime items. EPS increased by 42% versus our first quarter of last year and was a direct result of our efforts to improve the company. Cash progressed as expected in the quarter with normal usage. We completed the quarter on very solid financial ground with our financial leverage being significantly lower than last year at 2.1x. Overall, Actuant performed very well in our first quarter and is off to a good start in 2019.

So moving on to Slide 5. We announced today that further progression towards our portfolio repositioning strategy. As we discussed a year ago in our 2017 Investor Day, we have segmented the businesses under review into 2 categories. The first is comprised of highly cyclical and underperforming businesses, which serve the offshore oil gas exploration and well development industry. The second category is comprised of businesses which do not fit our long-term strategy, but have improved from a profitability and a performance standpoint. The composition of this portion of our portfolio represents approximately $100 million and may grow over time. As you read in today's press release, we have moved the Precision-Hayes and Cortland businesses to assets held-for-sale, both these businesses reside in the second category. Cortland has improved significantly and progressing well on the development of a meaningful medical component supply business. Cortland's use of fiber technology for the application in multiple industries have grown in sales and in profit. Precision-Hayes serves the concrete consumables market, which is not part of our long-term strategy of growing industrial tools. We believe both businesses will continue to improve more readily with owners who have business strategy more closely aligned with Cortland and Precision-Hayes. The sale of these 2 businesses advances our strategy and the focus on Industrial Tools & Service. This is part of our objective to focus capital allocation towards our best-performing segments, which allows us to continue to deliver improved shareholder returns.

I'll turn the call over to Rick now to go through the details on the quarter, and then I'll come back with the outlook and the guidance. Rick?

Thanks, Randy, and good morning, everyone. If we turn to Slide 6, just a few comments on our non-GAAP adjustments for this quarter. As Randy discussed, we made further progress on portfolio management and we are actively working to divest the remaining Cortland business and the Precision-Hayes International. As a result, we have [categorized] the associated assets and liabilities as held-for-sale on our balance sheet. During the quarter, we recorded a $34 million after-tax charge to write down these assets to their net realizable value.

Onto our adjusted first quarter results, turn to Slide 7. Fiscal 2019 first quarter sales increased 1%. Foreign currency provided a headwind of 2% in the quarter. The benefit from the Mirage and Equalizer acquisitions was offset entirely by the divestiture of Viking in the year-over-year comparison. This resulted in the core sales increase of 3%. Adjusted operating profit improved year-over-year for the fifth consecutive quarter, up 200 basis points and resulted from the slow -- the solid flow-through on incremental sales within our targeted range as well as a lift from the impact of our pricing actions. Our effective income tax rate was approximately 14% for the quarter, in line with our expectations. Adjusted EPS for the quarter was $0.27 compared to $0.19 last year and $0.02 over the top end of our guidance.

If we turn to Slide 8. Core sales of 3% was in line with our guidance range of 3% to 5%. IT&S segment sales continue to be solid, including double-digit demand across the Americas, Australia and Asia. Solid core sales growth for EC&S across all product lines and regions were partially offset by the expected decline in China truck sales. I'll provide more color on core sales improvement as we discuss the individual segment results.

If you turn to Slide 9, we've added 3 new waterfall charts to this quarterly presentation to hopefully provide additional clarity to the drivers of the net sales, adjusted operating profit and adjusted EBITDA. Our net sales, as we noted earlier, the net sales faced currency headwinds, reducing sales by $7 million or 2%. Volume and price drove a $10 million or 3% core sales improvement. We'll come back to the impact on pricing and tariffs shortly.

Now let's take a look at both the adjusted operating profit and adjusted EBITDA walk on Slide 10. As I noted earlier, adjusted year-over-year operating profit improved, again, this quarter by 29% or 200 basis points. Three items to focus on here. First, the elimination of $2 million in heavy lift specialty product revenues, resulting in an increase in operating profit of $1 million in the quarter. We will continue to focus on growing our standard heavy lift product sales going forward. Incremental sales from acquisitions and the elimination of losses from Viking resulted in a $2 million increase in operating profit. And for the last focus area, let's move to Slide 11 to review the impact of pricing and tariffs in the quarter and expectations for the year.

As you may recall, the 301 list 3 tariffs were enacted days before our earnings call and we now have better clarity on the impact. As a recap, in the tools business, we have implemented 2 pricing increases, one in January of 2018 and one effective September 1.

In the EC&S business, our pricing actions are negotiated on a contract-by-contract basis and that process was substantially complete for our large OEMs during fiscal 2018. These actions collectively were to cover inflation, including rising labor and freight costs, commodity prices and prior tariff activity. As you noted on the last call, the 10% increase from the September tariffs would erode our price realization for the year without future pricing actions, creating a headwind of $3 million to $4 million. We realized $4 million in pricing in the quarter, split evenly between the 2 segments. We paid approximately $3 million in tariffs with $1 million of this still sitting in inventory on the balance sheet at the end of the quarter. That results in net price realization for the quarter of approximately $2 million, and this is substantially all tied to the EC&S segment, where a longer conversion cycle allowed the benefit of pricing to outpace cost realization due to the inventory lag. We expect the full year gross benefit from pricing to be approximately $20 million. We anticipate the full year impact of tariffs alone to be approximately $10 million. The additional 25% of tariffs would -- which are now delayed till March, would add another $1 million for the year. The difference between the anticipated gross price realization and tariffs would offset additional commodity, general inflation and other cost increases, resulting in a more normal price realization of 1% to 2%. Both segments will be monitoring input costs, including incremental tariff activity and taking further price or surcharge actions with the goal of sustaining operating margins.

Now let's review some of the segment details, starting with IT&S segment on Slide 12. Core sales for IT&S increased by 4% year-over-year. We continue to see solid growth, which strengthened North America, Asia and Australia. Our tools sales were up high single digits and service sales were up double digits off of somewhat easy comps from last, year. Demand for project work in the Middle East continues to be steady. A $2 million decline in heavy lifting product sales in short periods of erratic demand in Europe during the quarter resulted from concerns around geopolitical and regional issues, partially offset the year-over-year growth in the rest of the world. Profit margins within the segment improved year-on-year, one of the primary drivers being the elimination of the heavy lifting custom project losses from last year. Incremental and sales growth, incrementals on sales growth were in line with our targeted range of 35% to 45%, and we believe we still have opportunity for improvement as we move throughout the year.

If we turn to EC&S on Slide 13. Core sales grew by 10% in the quarter, but were offset by FX as well as the impact of the prior year divestiture of Viking. The growth was driven by new product platforms in our automotive and off-highway vehicles and our pricing actions. Growth was across all regions with the exception of APAC where, as expected, we saw a significant year-over-year decline in our China truck business. We believe Q1 was the last quarter of difficult comparisons as we anniversaried the declines which started in 2018. We expect year-over-year demand in China to level off as we progress through the year. Our concrete tensioning business was a 14 -- saw a 14% increase during the quarter, continuing to regain market share loss due to the plant consolidation and delivery issues from the prior year. Profit margin increased as a result of improvements in operational effectiveness, pricing actions and favorable product mix.

If we turn to Slide 14. If you look at liquidity, cash flow was in line with our expectations as we normally use cash in the first quarter of our fiscal year. We saw strong EBITDA offset by increased working capital. Working capital was primarily the result of seasonal inventory builds, combined with some prebuying activity in advance of tariffs and Chinese New Year. Our net debt to pro forma EBITDA leverage ratios continue to show significant improvements year-over-year. We are currently at 2.1x, down from the 3.2x at the end of the first quarter of 2018. And we're right in the middle of our preferred range of 1.5x to 2.5x, giving us ample capacity to execute on our growth strategies.

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

Thanks, Rick. Moving over to Slide 15. As many of you recall, we began a focused progression towards lean operations in late 2016. The project included extensive training and a systematic improvement towards our quality, cost and delivery and safety goals. I'm very pleased with the progression at our manufacturing locations and the commitment of our employees. Our composite scores by plant have improved significantly, and our customers are now seeing a higher quality product delivered on time from safe and clean operations. As you can see, we have improved our quality of delivery and our safety to almost our target levels. However, we still have a gap to close in the cost reductions, but we have examples around the world of improved productivity. The progression towards lean operations is never complete, but we've made great progress.

And moving over to Slide 16. The macroeconomic factors affecting the business remain largely unchanged from the fourth quarter. The recent volatility in commodity prices has created a sense of caution in most businesses, but the activity remains strong. Tool sales continued to grow, and distributors are reporting good retail performance. Service activities also remain positive during the quarter, and we continue to see an expanded number of projects in majority of our markets. The recent fluctuation in oil prices have created a renewed level of conservative maintenance, which has been the mode of operation for many quarters. Off-highway mobile equipment remains positive with good growth dynamics in agriculture and construction equipment. Our major OEM customers have reflected a lower projected growth rate 2019, but still at a positive level. And finally, we believe on-highway truck sales in China have reached a normalized run rate, and as predicted, European truck markets have slowed sequentially.

So turning over to Slide 17. The projections for the 2019 core sales growth remain unchanged from the fourth quarter guidance provided in September. The consolidated core sales growth is projected to be between 3% and 5%. And Industrial Tools & Service core sales growth should be in the range of 3% and 5%, and Engineered Components & Systems will grow at a rate of 2% to 5%. This is very consistent with our first quarter results and further validates projections for 2019.

Moving on to Slide 18. Our 2019 full year guidance is as follows. We expect the sales to be in the range of $1,150,000,000 to $1,190,000,000, which reflects the strengthening of the U.S. dollar and the sale of the Cortland Fibron business. Full year EPS remains unchanged from $1.09 to $1.20. Our second quarter sales are expected to be in $268 million to $278 million. And we expect our second quarter EPS to be in the $0.15 to $0.20 range. And finally, cash flow remains unchanged, $80 million to $85 million. As a note, all guidance does exclude the impact of future acquisitions and/or divestitures.

Now operator, that concludes our prepared remarks for today. We can open it up for questions.

(Operator Instructions) Our first question comes from Mig Dobre with RW Baird.

It's Joe Grabowski on for Mig this morning. First question, in IT&S, you called out the double-digit growth in tools in Americas and Southeast Asia, and you called out the $2 million less Heavy Lifting Technology sales. Were there other drags that kind of took the double-digit tools growth down to the 5% growth through the segment?

No. The -- just remember you're looking at the composite number when you look at the segment. So while service -- and HLT being down, service being up, those combined with tools still being up but a lesser number gets you to that overall 5%. But other than HLT, no other significant drag on core sales for the quarter.

Got it. Okay. And then my follow-up question is on the tariffs slide. Just a little -- needing a little clarification. How does the $10 million that you're calling out now compare to the $3 million to $4 million that you called out last quarter? How does the $10 million compare to the bar chart on the slide? And is the $10 million and then the $20 million pricing, is that in your EBITDA guidance for the year?

So to the last question, yes, the pricing and the tariffs are in the EBITDA guidance for the year. The $10 million in tariffs that we expect to be paid during the year are inclusive of the $3 million to $4 million, that is the result of the 10% increase that was implemented in September. And so the $10 million is intended to be an all-in impact from tariffs, including all tariffs that being 203, 301, all tariffs in the fiscal year, some of which we saw a little bit of the impact in the fourth quarter of last year.

Right. And on the -- I mean, that's helpful. And on the bar chart, it seems like the bars add up to more than $10 million?

Don't think so. If you exclude the 25%, look to the -- there is 2 axes, the left is the tariffs, the right is pricing. And if you exclude the 25%, I think it adds up.

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

Just want to go through some of the portfolio changes here. Can you talk about proceeds from Fibron, if you can? And any impact you see on the margins as a result of pulling that out? And then just size for us the Cortland and Precision-Hayes business as they stand now? And what you think is likely timing for those divestitures?

Okay. So the Cortland Fibron business, which fell in that category 1 that we talked about a year ago. It's taken some time to find an adequate owner for that particular company. It's one of the better plants that we owned. It was very, very well laid out, good equipment, good people, good technology, but in a rough industry.

As you can see from our full year guide, the total amount of dollars that has been pulled out of the top line, you can easily see that, that was associated with Cortland Fibron. On the downside or good side, is that there is no fundamental impact to our EPS or full year EBITDA. It's very, very small, in fact -- it's in fact some negative on the operating profit line. So it actually helps us in the long run to eliminate, which was part of the reason why it was on our list. So the proceeds on that along with the proceeds for the other businesses add into our all already very strong liquidity and cash balance, which gives us even increased flexibility for some of our acquisition targets. Timing on the other 2, certainly, we're working those hard. Fab, our General Counsel, is right in the middle of both those particular deals, and we should be able to give you more guidance on that at our -- on our second quarter earnings call. Don't want to be predictive on it at this point because you never know what can unfold, but we hope it moves sooner than later.

In terms of relative top line for both of them, both PHI and Cortland U.S. will be in that, call it, $45 million to $50 million top line number.

Okay. And then just on IT&S, I think the core was 4 and you said tools was double digits in Americas. Can you just unpack the core growth? And what were kind of the headwinds that you saw in the quarter?

Sure. If you walk around the world, on generalized industrial tool sales, it was still a very, very good quarter for us. There were areas in Southern Europe that had some sporadic buying habits, where dealers were being a little more conservative on the restock. And I think that, that was one of the areas that we watch closely as the quarter unfolded. But and largely, whether it's U.S., Latin America, Asia Pacific market, were all very -- still very strong quarters in terms of top line growth in sales performance. A lot of that has always been our self-help strategy, so that as we launch new products and have a much more tight commercial team that you're going to take any potential market slowdown in a better fashion. So we think we've got a very good headwind -- or a tailwind still with us on the tool side of the business. On the service side, this was a good quarter for us. It was the first quarter I've seen in a long time where every single region reported growth and which was really important. So not only did we see growth in the Middle East market, which has always been a very good business for us, but North Sea, high single digits on the U.S. market. So we've definitely seen the bottom on our service entities and I think what's helped that team even more is as we've merged it in with the Enerpac business, we're getting exposed to more breadth of potential service operations, and they're quite honestly more feet on the ground. And so I think that's helped us. So I was very pleased with our Tools and Service sales for quarter 1.

Our next question comes from Ann Duignan with JPMorgan.

Maybe first on the China on-highway truck side. You said that you feel like the market has stabilized, what exactly do you mean by that? I mean, how many trucks do you think are going to get produced this year and how many next year just for perspective, so again a sense of what you mean by stabilized?

Yes, so if you look back at time on the China truck sales, the peak of the market on heavy -- I'm talking heavy-duty trucks, now, it got up close to 1 million units a year. In fact, I think the total peak was just short of 900,000 vehicles. And, obviously, as we came into '18 and then into '19 -- our fiscal '19, the first quarter, where we saw a pretty heavy reduction was our first quarter of last year. So that's why the comparable is pretty ugly this quarter for the team. But as you look forward, and we have pretty good visibility to what the demand are from those primary OEMs that it's leveling out at an industry run rate just out at that 600,000 units a year, which is a very healthy rate. And if you compare that to prior peaks, that's still well above prior peak. And so no forecast is perfect. But I do think that we'll start leveling out in a normal run rate of our China component sales.

And I'm sorry, what was the bill rate or the sales rate for your fiscal '18, so the 600,000 will compare with what?

Fiscal '18 dropped through that 700,000 number and then leveled out at where we're sitting now, which is between that 550,000 and 600,000 heavy-duty trucks retailed in China. That's never a perfect -- it's not like AEM reporting an ag equipment or construction machinery. We have pretty good visibility to it and some generalized reporting we get in China. So I feel that level out is going to be something that's sustainable going forward.

Okay. And my follow-up question would be one more in the balance sheet. And now that you've gotten your leverage ratio where you want it to be within the range of where you would like to be. What does a large strategic acquisition do to your leverage ratio? And why would we ever go above 2.5x again?

So given where we sit today in terms of liquidity and our ability to digest a large strategic acquisition, we feel like the current liquidity gives us between our cash on hand, the existing balance sheet and access to debt markets. It gives us enough flexibility to be able to digest something more significant. In terms of leverage, we -- a large acquisition, depending on how large is large, could take us out of our comfort level of 2.5 could allow us to creep above that. However, for the types of acquisitions that we're talking about in our tools space, we'd be replacing some of the revenue we're divesting here with high-quality, more consistent, less cyclical EBITDA, which would allow us to quickly bring that leverage back in line. So...

So you'd be comfortable going above the 2.5 in this environment?

Well, going above the 2.5 for a transformational acquisition, large, strategic, that's squarely in line with our strategy, we would be comfortable.

Yes. And I think if you think about our margin profile and the cyclicality in the tools market, and if you break those tools markets into the industries served, some of the higher cyclicality lies in the more automotive range. But in the industrial side, you get less cyclicality. And what we try to build is a very broad industry serves network, so that it would take every single one of our vertical markets to take a deep dive to where that business would have significant top line downturn. So from my perspective, our strategy of building out a high-quality tool company is right in line with that. To the extent that we can find, those types of acquisitions, the strategic value of them, certainly, is worth the risk of taking them in.

So just to reiterate, you got to define what large is. We got about $200 million of available cash and a lot of availability with our -- within our existing leverage before we tip above 2.5. So the -- I guess, our main theme here is, we believe we have the flexibility to do exactly what Randy has been describing from a strategy perspective.

Our next question comes from Charley Brady with SunTrust Robinson Humphrey.

This is actually Patrick Wu standing in for Charley. My call dropped earlier, so I apologize if this has been answered. But just, as you guys come through your portfolio for further optimization, and obviously, you guys called up Cortland and Precision-Hayes. What are the margin implications for your EC&S business for the longer term, excluding those 2 businesses, obviously, without M&A implications as well on top of that?

Well, they actually improved. Very simple question, it's a simple answer, it's -- margins improved.

Can we talk about -- maybe, can we add some more meat to the bone in terms of magnitude and how you guys think about that?

Do you say your question is how do we view the margin, either impact or decremental effect, if there was one, is that your question?

Yes.

Okay. So probably, if you go back to the original strategy we laid out for this business, in the end game, EBITDA targets we laid in there. And is why part of my discussion in our last Investor Day was describing the content of our portfolio in the extent that we intended to take out underperforming businesses and replace it with performing businesses. And as I've said, that is a capital allocation decision. Because to take these businesses out and reposition them with other companies and, to some extent, it takes impairment charges and it takes some strength on our part to take it forward. The steps that we've gone through to improve those companies to improve the value so that when we do monetize them, we get good value for those transactions. So it has always been part of my strategy is paring back certain components of our portfolio to improve margin contribution, reallocate those funds, those resources, not only funding resources but people resources, to our best-performing segments, and in particularly, our tool company. The tool company is an extremely high-quality business. And we intend to continue to invest in that area. So the monetization of these assets improves margin content. It gives us additional funds, and it provides management and overall organizational focus on what matters and how to make us a much better quality business.

So the one thing I'd say about portfolio, if you keep in mind, the resegmenting that we did. PHI has been operating much closer to that break-even point since the issues last year. The Cortland business, however, if you split out Fibron and Cortland U.S., the U.S. business, because of its diversification, is a little bit stronger, and over time, it would have contributed to our migration to a 20% segment. But the strategy that we laid out was without Cortland. And to Randy's point, the actions that we're taking will take underperforming EBITDA and help us to get to that 20%. Just wanted to acknowledge that Cortland was and is a contributor.

Okay. That's fair enough, and thanks for calling out the impact on the tariffs. And just, I guess, as you guys look through and think through this [stray] uncertainty and potential further escalations on the tariffs front, are you -- as you talk to your customers, are you seeing that impact demand pull-through at all or even slightly? Or has demand been fairly robust to [the sales]?

I think as far as the OEM customers that are out there, what we've seen from our major OEMs is they have reflected a lower growth rate associated with their 2019 plan. Still a positive growth rate, but just not on the same level that they were in '18. The pushback we've heard from OEMs is that they would rather see it in the form of a surcharge rather than straight up pricing. And so if it does occur, I think some of our negotiations and as many of the other suppliers to those OEMs may result in surcharge on invoicing that can be removed should those tariffs get retracted at some point in time. So that's been the major thing. But nobody has said to me that pricing has been decremental to actual retail demand. That has not occurred. Clearly, in the tool side, the retail demand has been robust, but as pricing creeps up, it can have that effect. But we have not seen that yet.

In terms of pricing, to date, we've gone out with pricing for known cost increases. When we start talking about surcharge, we're looking to the 25% expected in March. All of our pricing actions have been supporting margin preservation, given known cost headwinds, including a 10% tariff.

Our next question comes from Allison Poliniak with Wells Fargo.

So a lot of heavy lifting has been done already on portfolio realignment. Can you walk us through -- I mean, are we done here? Or are there some things that you're still looking at? Just kind of where you're in that process?

Allison, in my commentary, I made special note of the fact that we had targeted and we're pretty open about, we had about $100 million worth of revenue that's clearly was bucketed into Category 2. But what I've said is that, that number is going to grow, that there is no doubt in my mind, as we look harder and deeper in our company and how it aligns with our tools strategy, that number is likely to grow. So we have an objective to improve the quality of this company and to create a world-class tool provider in multiple industries, and that's the game plan. So to that extent, we undoubtedly are not done.

Great. And then just on the in demand environment, you said it's very strong still. Obviously, there's certainly concerns that we get a slowdown. You did talk about -- talk -- I think it was Europe, right, the cost of restocking. Has that continued into the quarter? Are there any pockets there where you've seen changes in customer buying patterns near term?

Around the world, as I mentioned, to answer Jeff's question, it's been quite good. The U.S., Latin America, Asia has been very, very good in terms of both tool and service demand. We did see some sporadic ordering characteristics in portions of Europe, particularly -- started in Southern Europe, would have been Italy, Spain, kind of filtered it a bit into Germany, but then it rebounded. And I don't know if that was a question, the distributors were being a little more conservative of the restock or were their actual end-users looking harder at what they were buying. The thing about industrial tools, this is more or less a discretionary buy by most of our maintenance managers that are buying this type of tool, whether it's aerospace or on-highway equipment or off-highway equipment that they're working on. They're going to do it based on the need versus a budget that constrains them. And so I think that -- it's an area we need to watch because as we progress through this fiscal year, Southern Europe can be a good lead indicator as to whether or not the market is going to stay strong through the balance of the year.

(Operator Instructions) Our next question comes from Justin Bergner with Gabelli and Corporation.

My first question just relates to sales guidance. Is there any sort of tweak down to the sales guidance for core sales growth trends or is the entire amount related to the one divestiture, not the others in progress and to FX? Because I noticed the range got a little bit wider, it's now $40 million versus $30 million?

Yes. As I tried to clarify when I was providing guide, is that the top line has been adjusted 100% because of the FX impact and the absence of a business that closed yesterday. And so that's an important 2 elements. We had to reflect those in our guide. But from the extent, the 3% to 5% growth rate, no change in my mind at all. And so from a core sales standpoint, we're rock-solid where we're going on that. And I think part of it, maybe some people got that a little bit wrong when they looked at our releases today. But clearly, we see good dynamics going forward. And as we divest or acquire, then that top line will change. I think the most important thing to look at our guide is the absence of the Cortland Fibron business, our EPS didn't change. And secondly, that the -- there is a currency impact, but the impact to EPS was also minimal. So from that extent, I think, our guide was rock-solid versus our fourth quarter projection.

Okay. So are you sort of absorbing some currency impact in keeping your guidance unchanged because parts of the sales and margin profile working better or is it, as you said that when you actually look at it on a earnings basis, there's very little impact from the incremental currency headwind?

This is Rick. Keep in mind, the top line is really being impacted by translation of our results and the significance of our European operations. So that's the change in our top line guide. What's happening on the flip side of that is, on the opposite of the translation impact, we conduct business in these regions and there's a positive transactional impact from the dollar movement, that's a gain for us. And so what's happening when you get down to the operating profit, translation is being offset fully by gains from operations during the quarter.

Okay. Got it. And then lastly, as you think about potentially doing larger acquisitions on top of bolt-ons in the current environment, how do you adjust your methodology in thinking about returns or assumptions as you potentially evaluate larger deals?

Well, I think that the first thing that I try to do is look at the strategic value of the company we're looking at. Does it fill on the bolt-on side, the small ones we've been doing. Does it supplement our R&D efforts and accelerate the number of new tool products we can launch within the company, and those have worked really well. And coming in at or above Enerpac line average margins, which has been sort of thing we've been looking for. The bigger ones, there is no real change in our theory on returns on ROIC, returns that we expect, but we also know that there are strategic additions from a tool perspective that are out there that we should be thinking about. So from me, it's got to make sense from a financial standpoint, but it also has to support our overall objective of growing out our tool platforms and fundamentally growing this company into a more meaningful tool, global tool supplier.

Our next question comes from Seth Weber with RBC Capital Markets.

You kind of touched on this a little bit, but I just wanted to flip back to it. Rick, you mentioned -- I think you mentioned that you pulled forward some working capital. You spent more than typical in the quarter, just a pull forward to get ahead of some of the tariffs. So I'm just trying to kind of tie that together with why you think that, that's not what your customers are doing with your business as well. I mean, like how do you know that's not happening on -- from your customers buying your product, if you're doing it on tier suppliers?

I guess, 2 things. We did see some pull forward on our end ahead of the tariffs, probably more so, we saw more of the impact of Chinese New Year, which we normally see. But given the level of new platforms and growth, we expect this year from [NPD] that was probably and was a little bit heavier than historical patterns. And so we did see some pull forward ahead of tariffs, but not significant from a supply perspective. And in terms of our own customers, our current, just looking at demand, looking at backlog is we don't have again there are any evidence or see anything out there that's suggesting, we're getting a meaningful pull forward ahead of tariffs activity. With the tariffs being delayed till March, we still haven't seen anything, any unusual noise in our backlog or anything like that for us to expect that we're going to have an impact. The other thing impacting our working capital is receivables. We didn't talk much about that. But that's primarily timing around some China activity that corrects itself in the back half of the year. So the -- but that's the other working capital piece in the quarter.

Okay. That's helpful. And then just another question on pricing. I think what I heard you say for the quarter, all of the net pricing was in the EC&S business, not in Industrial Tools. So -- but going forward of the, I think, $10 million or so, $9 million or $10 million net that you expect to see for the year, is that more split or is that still biased towards one segment versus the other?

So let me clarify. We saw $4 million in pricing during the quarter. When I said net pricing for EC&S, the $2 million went straight through to operating profit because it was well ahead of their cost, which -- the majority of which is still sitting on inventory. Tools did see pricing and did realize pricing. The majority of that actually offset actual tariffs. And so for the year, which is true for both segments, we anticipate that 1% to 2% overall price realization for both businesses.

Okay. And that's pretty evenly balanced then between the 2?

Yes. Yes. In the quarter and for the year, it's about 50-50.

Okay. And the right way to think about it is like a $9 million, I think, you said $20 million pricing, $10 million or $11 million of tariff impact. Is that, that's the right way to think about it?

$20 million pricing, $10 million tariffs, $11 million if we get to 25.

Operator, are there any more questions? Okay. Not sure if we still have our operator on. But in the absence of any other questions, again I'd like to wish everybody a very safe and happy holidays. And we really appreciate everybody's continued interest in our company. And we'll talk to you again in March.

Good day, sir. This is your operator. Mr. Weber's line was connected, but we did lose his audio.

Okay.

Okay. So ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation. And we ask that you please disconnect your lines.