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Edited Transcript of ATU earnings conference call or presentation 21-Mar-19 3:00pm GMT

Q2 2019 Actuant Corp Earnings Call

BUTLER Mar 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Actuant Corp earnings conference call or presentation Thursday, March 21, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barbara G. Bolens

Actuant Corporation - VP of Corporate Strategy, IR & Communications

* Randal Wayne Baker

Actuant Corporation - President, CEO & Director

* Ricky T. Dillon

Actuant Corporation - Executive VP & CFO

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Conference Call Participants

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* Abdulrahman S. Tambal

JP Morgan Chase & Co, Research Division - Analyst

* Allison Ann Marie Poliniak-Cusic

Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst

* Charles Damien Brady

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Deane Michael Dray

RBC Capital Markets, LLC, Research Division - Analyst

* Jeffrey David Hammond

KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst

* Justin Laurence Bergner

G. Research, LLC - VP

* Mircea Dobre

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst

* Robert Scott Graham

BMO Capital Markets Equity Research - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation's Second Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, Thursday, March 21, 2019. 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.

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Barbara G. Bolens, Actuant Corporation - VP of Corporate Strategy, IR & Communications [2]

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Thank you, operator. Good morning, and thank you for joining us for Actuant Second Quarter 2019 Earnings Conference Call. On the call today to present the company 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 Investor 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 press release. We would also like to remind you that we are making statements in today's call and presentation that are not historic facts and are considered forward-looking statements. We are making those statements pursuant to the safe harbor provisions of federal securities law. Please see our SEC filings for 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 you follow our one question, one follow-up practice in order to keep today's call to an hour, and also allow us to address questions from as many participants as possible. Thank you in advance for your cooperation. As a reminder, during the call and as in first quarter, we may refer to our Industrial Tools & Service segment as IT&S or tools, and our Engineered Components & System segment as EC&S or components. Now I'll turn the call over to Randy.

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Randal Wayne Baker, Actuant Corporation - President, CEO & Director [3]

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Thanks, Barb, and good morning, everybody. Let's start today on Slide 3. As you read in today's press release, Actuant delivered a solid quarter, and I'm very pleased with the performance of the businesses, not only did our sales and marketing teams drive incremental sales but our operations were able to overcome significant weather-related delays and achieve our quarter. With that in mind, I'd like to provide a special thanks to our factory operations team and the management for their commitment to their customers and maintaining a high level of on-time delivery.

As we progress through 2019, we are maintaining our focus on long-range strategy. Our core sales growth initiatives continued to yield results in both segments. During the quarter, we launched more new products and significantly improved our service sales. As a result, the Industrial Tools & Services core sales growth increased by 12% in the quarter, far exceeding our expectations.

On the Engineered Solutions side, we continue to capture new product platforms, increasing our Product Vitality Index. These elements are critical to achieving our strategy of outperforming the prevailing market condition. In our effort to improve our structural costs, we have taken action to fully align the Enerpac and Hydratight businesses. This process will improve our operations while enhancing our ability to invest in new product development and better serve the customers. Rick will provide more details into the efficiency program, including costs and ongoing benefit.

As you noted from our announcements during the quarter, we have made major progress in our portfolio management strategy. Our sequential approach of realigning businesses, improving profitability and focusing capital allocation towards our most profitable companies is reaching its final stage. We completed the sale of Precision-Hayes and announced the intention to divest the Engineered Components & Systems segment. This action will unlock significant value for our shareholders while focusing our management and capital resources.

Now turning over to Slide 4. Our second quarter results exceeded our expectations in all our primary categories. Core sales grew by 7%, led by outstanding performance from our Industrial Tools & Services segment. Tool sales grew broadly across multiple regions and markets, and we experienced significant improvement in our service operations. The Engineered Components & Systems segment held ground year-over-year with stable demand from both on- and off-highway sales and good price realization.

From an earnings perspective, we improved operating profit by 36% year-over-year, while increasing EPS 46%. This was a direct result of our effort to improve operation, contain costs and focus on organic growth. On the balance sheet front, we continued to maintain our debt leverage well within the desired range and position the business for future investments. So overall, I'm very pleased with the results of the quarter and the advancement of our strategy.

Moving over to Slide 5. As noted earlier, our portfolio management strategy is advancing into the next stage and reshaping Actuant. As we enter 2019, we restructured Actuant into 2 operating segments comprised of industrial tools and component systems. By doing so, we have been able to separate the 2 companies and bring focus in terms of management and capital resources. The new Industrial Tools & Services segment is a highly profitable growth-oriented company comprised of 2 outstanding brands. Enerpac is a world leader in heavy industrial tools with one of the most complete dealer networks in the market, and Hydratight is well known for high-quality complex service, but also is a major supplier of industrial tools. The combination has created a great business for future growth and maintaining high quality of earnings.

Engineered Components & Systems has become a much stronger operating company, focused on serving the world's major OEMs. Our quality, our costs and delivery have improved dramatically over the past 2 years, which has qualified Actuant as a preferred supplier. Additionally, our investments in engineering has enabled the improved product vitality and sustained growth. However, given the profit profile of Engineered solutions and components, it simply cannot compete for Actuant's capital allocation priority and would be better served in new ownerships. As a pure play tool company, Actuant will have the opportunity to create significant shareholder value through superior earnings, growth and cash generation.

Moving over to Slide 6. The framework of our capital allocation priorities remain unchanged. We will continue our discipline toward investing in ourselves first, maintaining a strong balance sheet while looking for strategic acquisitions, which support our tool company strategy. And finally, we'll always look for opportunistic share repurchases to return value to shareholders. Our priorities have not changed, and Rick and I are very committed to these principles and the creation of long-term shareholder value. 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 market outlook and guidance. Rick, over to you.

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [4]

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Thanks, Randy, and good morning, everyone. Starting on Slide 7 with our onetime items. In the quarter, we recorded $6.9 million of charges related to an additional impairment of $3.5 million on the Cortland U.S. business and $2.6 million in deal costs related to all of our corporate development activities. We also incurred $2 million of additional tax expense related to the revaluation of certain tax credits as a result of law changes during the -- as a result of tax reform.

If we turn to Slide 8 onto our adjusted second quarter results, fiscal 2019 second quarter sales actually increased 3% adjusting for the impact of divestitures in the quarter. Core sales increased a healthy 7%, and this was offset by a 4% headwind from the impact of the stronger dollar. Adjusted operating profit improved year-over-year for the sixth consecutive quarter, up 240 basis points with strong flow-through on incremental sales. Our adjusted effective income tax rate was approximately 26% for the quarter, in line with our expectations. Our full year effective tax rate is still expected to be approximately 20%. Our third quarter rate is expected to be in the mid-teens, with the fourth quarter rate in the mid-20s, similar to our second quarter here. Adjusted EPS for the second quarter was $0.19 compared to $0.13 last year and near the top end of our guidance range.

If we turn to Slide 9, core sales performance surpassed our 3% to 5% guidance range, and we delivered our sixth consecutive quarter of solid core sales growth. As Randy mentioned in his opening comments, our team executed extremely well to achieve these results despite significant weather challenges we experienced in the middle of the quarter, which led to slowdowns and shutdowns of some facilities as well as within our supply chain. The IT&S segment sales continued to be strong with core sales up 12%. We saw strong growth in North America and the Middle East. The EC&S had flat core sales resulting from the growth of new platform launches and price realization, offset by softer demand in some of our end markets. I'll provide more color on core sales when we discuss the individual segment results here in a moment.

Let's turn to Slide 10 for a summary of our top line performance. So a 7% core sales growth, driven by $17 million improvement from volume and price. This was offset by currency headwinds, which reduced sales by approximately $9 million as well as the impact of divestitures, which was $11 million. If we take a look at both adjusted operating profit and adjusted EBITDA on Slide 11, as we noted, a 240 basis point margin improvement year-over-year. A few items to note here. As we experienced in the first quarter, the elimination of the custom heavy lifting offering which cost $2 million of cost overruns in Q2 of 2018 continues to drive profit improvement year-over-year, while sales of heavy lifting products are lower than Q2, the standard product line remains profitable. We saw solid profit flow-through on incremental sales volume in line with our targets, price realization from actions taken in fiscal 2018 and earlier this fiscal year also contributed to the margin improvement. Last quarter, we provided a detailed review of pricing versus tariffs. Tariffs in the quarter were approximately $2 million and in line with our expectations. We continue to expect that our pricing actions will be sufficient to cover commodity and other inflationary increases, including tariffs. As we discussed in Q1, should the 301 Tariffs be increased to 25%, it would require further actions likely in the form of surcharges. Our objective is to prevent margin erosion due to inflationary cost pressures. SAE expenses increased in the quarter over prior year due to a number of factors, including a few extraordinary medical claims, increased equity and cash compensation costs, bad debt recoveries in the second quarter of the prior year that did not occur this year, new product launches and timing on certain consulting costs. We expect that the rate of spend versus prior year will moderate in the back half of the year. As we move through the EC&S divestiture process, we need to ensure that we maintain an efficient cost structure and one that is aligned with our business objectives. As a result, we have initiated a restructuring program focused on the continued integration of the Enerpac and Hydratight businesses as well as driving efficiencies within our overall corporate structure. We expect to achieve full year run rate savings in the range of $12 million to $15 million with onetime costs in the range of $15 million to $20 million. We anticipate completing these actions within the 18 to 24 months, and we will continue the process of assessing our corporate structure as we move closer to the divestiture of the EC&S business.

Now let's turn to Slide 12, and we'll move through the segments in detail, starting with ITS. Core ITS sales increased by 12% year-over-year, and this is one of the strongest second quarters for the combined segment we have had in our history. Core tools sales were up mid- to high single digits and service up in the low 20s. Growth was driven by double-digit tool demand across North America and exceptionally strong service demand across all regions led by the Middle East. European core tools were in line with prior year. Service growth was attributable to additional scoping on a few key projects and early wrap-up of a large project originally scheduled to be completed in the back half of the year.

Our HLT product category was down as we moved away from the special project business and the losses in lower margins associated with them in the prior year, which is one of the primary drivers of our profit improvement year-over-year. Incrementals for the segment were in line with our targeted range of 35% to 45%.

Turning to EC&S on Slide 13. Core sales were flat in the quarter, the stronger dollar reduced sales by 2%, and the divestiture of Cortland Fibron and Precision-Hayes reduced year-over-year sales by $16 million, resulting in an overall 11% reduction. New platform wins and pricing actions drove top line improvements in the quarter and were partially offset by slightly lower sales volume for our on- and off-highway business, yet overall market conditions remained stable. Our open cable volumes were down during the quarter, and we saw flattish sales demands across all of our other markets.

As we expected, China truck sales volumes are stabilizing, where we saw sales improve over both last year and over the first quarter. Profit margin in the segment increased 360 basis points year-over-year, primarily as a result of improved pricing and operational efficiencies, including lower overtime warranty and freight costs compared to the second quarter as well as the impact of divestitures.

Turning now to liquidity on Slide 14. We used $31 million in cash during the quarter, in line with expectations and normal seasonality for our business. Accounts receivable were up significantly year-over-year, attributable to later quarter shipments as a result of the weather conditions, CapEx increased approximately $4 million year-over-year and we also saw higher cash taxes and deferred revenue really attributable to timing.

We ended the quarter with $170 million in cash on hand. During the quarter, we paid down our term loan by $40 million consistent with our capital allocation priorities. Leverage measured by net debt to pro forma EBITDA was steady sequentially but showed substantial improvement from Q2 2018. We current -- we are currently at 2.1x, down from 3x at the end of the second quarter in the prior year. We remain right in the middle of our preferred range of 1.5x to 2.5x. With that, Randy, I'll turn the call back over to you.

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Randal Wayne Baker, Actuant Corporation - President, CEO & Director [5]

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Thanks, Rick. Now let's move on to the market outlook, and I'll move over to Slide 15. Macroeconomic factors remain largely unchanged from our first quarter. North America demand continues to show stable growth, while the European markets have experienced sequential slowing. As earlier stated, the Industrial tool sales continued to be strong globally and with the improved conditions in the energy markets, service revenue experienced increased demand. Off-highway mobile equipment manufacturers have forecasted continued growth for 2019, although at a lower rate, in turn creating a healthy environment for our component businesses in North America. And the on-Highway sales are stable, which is reflected in our future projections.

Then moving over to Slide 16. The projections for core -- 2019 core sales growth remain unchanged from our first quarter guidance. Industrial Tools & Services is expected to grow at a rate between 3% and 5% for the full year with the second half performance being mid-single digits. We are projecting Engineered Components & Systems growth in the second half in mid-single digits and we are maintaining the full year estimate of between 2% and 5%. On the consolidated basis, we're projecting growth of between 3% and 5% for the full year and mid-single digits in the second half.

Then moving over to Slide 17. We're maintaining our full year guidance, including the recent divestitures at a range of $1,150,000,000 to $1,190,000,000. Full year EPS remains unchanged at between $1.09 and $1.20 and the effective tax rate for 2019 is about 20% or double the 10% rate incurred in 2018. Our third quarter sales are projected to be between $295 million and $305 million with EPS of 40% to 45%, $0.05 per share and an effective tax rate in the mid-teens. And finally, free cash flow remains unchanged between $80 million and $85 million. As always, all guidance excludes the impact of future acquisitions and/or divestitures. That concludes our prepared remarks for today. Operator, let's open her up for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Mig Dobre with Baird.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [2]

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If I may start with just a clarification on the guidance for the third quarter. Can you walk me through how you're getting to mid-single-digit core growth, I mean, at the midpoint, you're going to be down revenue wise about 5.5 year-over-year. So I'm trying to understand maybe FX versus divestitures. And then I've got a follow-up there.

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [3]

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Sure. When you look at the back half that 3 to 5 in the back half, a couple of things. If you remember our prior year, we had kind of an unusual back half in that we had a fourth quarter that was extremely high and a third quarter that was not our peak quarter, which it should be. And so when we're saying 3 to 5, it's more so driven on the comparisons. We've got a strong finish in Q2, much stronger than last year, some of that is timing associated on the tool side that will get us back to a normal flow for tools and service with Q3 being our highest quarter, Q4 kind of moderating back down. So from a market perspective, the 3 to 5 is really a rightsizing. You're not going to see the kind of core growth you saw in Q2. It will be somewhat normal in that 3 to 5 in Q3, but it caused Q4 to be down, and that's a reflection of timing, more than anything in the flow-through of our businesses.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [4]

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Okay, all right. But just to be specific here, when I'm talking about the third quarter, the midpoint is $300 million of your guidance. I'm trying to understand what is your expected FX impact in the third and how are -- how much are divestitures -- how much of a drag do we get from the divestitures?

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [5]

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So the 3 to 5 is core. And so the midpoint is 300. The divestiture impact is around $20 million and the FX is somewhere between $6 million to $8 million on the quarter. And that should net you out to the guide for the quarter.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [6]

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Perfect. And then a question on margin as well. If I'm looking sequentially at revenue versus EBITDA, it implies a pretty significant incremental margin on EBITDA in the third quarter. Can you maybe help us think through this dynamic here? Is it mix, is it savings, is it something else that's boosting the margin.

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Randal Wayne Baker, Actuant Corporation - President, CEO & Director [7]

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So Mig, if you always look at our incremental margins by segments, you'll get to the answer pretty quickly. On the tool side, as we've always said, we're going to drive this business between that 30% and 45% incremental margins, and that's where it's going to land. And on the ES side, obviously, that's a lower incremental margin business in the 20-ish range. So if you net them all out, and then you apply that to our third quarter margin advancement, that's the expectation we have of where we're going to land for the quarter. There should be good margin expansion in the third quarter and just as we've seen in the second quarter. So I don't see anything on the horizon that could damage that. But that's the objective. And we've now demonstrated that we're capable of delivering that on a regular basis. So Rick, do you have any other comments on that topic?

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [8]

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No, I think that's how I would look at it as well in terms of the incrementals. So...

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [9]

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All right. And then I'll squeeze one more. In terms of the restructuring program that you've announced, how should we think about this in terms of the potential -- relative to the potential dyssynergies that you're going to have once EC&S is gone?

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [10]

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Sure. So as we look at and we've talked about our corporate overall structure, SAE structure post an EC&S divestiture, there is 2 elements of that. The plan we've announced today is really around driving the efficiencies within the IT&S business. We're looking there, there's largely 2 elements to that. There's some operational efficiencies that will involve facilities. And then there's kind of regional structural operating efficiencies between the 2 segments, where there is an opportunity to streamline operations. And so -- and then on top of that, there's some, what I'll call, segment level, corporate level synergies that we can gain in the short term. So these are actions that, I guess, really to Randy's comment, that allow us to segment alone, expand the EBITDA margins beyond, gives us the benefit above and beyond that normalized incremental of 20, but also allows us to kind of rightsize our structure, so that on a consolidated basis going forward, we can come out of this as a incremental or a 20% EBITDA margin business. So that's how we look at that. What we've just announced is more so on the segment side with some corporate actions. It's a combination of people or headcount, I should say, and some facility movements. The majority of that will be executed in our fourth quarter. You should see savings start -- you'll see savings in fiscal -- our fiscal '20, and we'll get to runway probably mid-'20, where all of those actions will be substantially done with maybe some hangover facility actions. Obviously, as we move closer to the EC&S divestiture, we will take an even closer look at the remaining true corporate costs, and there will likely be some additional actions and structural changes that we have to make as a result of that. But that's depending on the nature of the transaction and how that shapes up here going forward.

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Operator [11]

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

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Charles Damien Brady, SunTrust Robinson Humphrey, Inc., Research Division - MD [12]

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I just had 1, on the divestiture. I don't know if I missed this or not, but are you looking at this as a single unit, are you going to piece it out because there are distinct businesses within that segment itself?

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Randal Wayne Baker, Actuant Corporation - President, CEO & Director [13]

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So Charlie, we've spent several years preparing for this moment, where we, as you've seen, taking out certain businesses that didn't have a relationship to our motion actuation control strategy, which has created a pretty consolidated group of companies, which serve a defined group of OEMs. So our objective is to sell it in 1 piece and that's exactly how we're marketing and how the process is proceeding. And that's also why Cortland Fibron was sold separately. That's why Precision-Hayes was sold separately. And why the remaining Cortland business is being marketed separately because it is distinctly different type of company and doesn't lend itself to synergies or customer types that would bring that together and a buyer would see as valuable. So it is -- we think that we've got to prepare properly, and we're pretty pleased with the process thus far.

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Charles Damien Brady, SunTrust Robinson Humphrey, Inc., Research Division - MD [14]

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Is there any indication on timing as when you think this might get done -- by end of fiscal year or beyond that?

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Randal Wayne Baker, Actuant Corporation - President, CEO & Director [15]

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Well, we kind of anticipate a lot of questions surrounding the divestiture, so I'll try to be as clear as I can. We can't give you timing, proceeds, values or things of that nature because obviously, we're right in the midst of the process as we speak. So as we hit certain milestones, we will be making public announcements to try to keep our investors and the analyst community up to speed of what's going on. But our objective is to be as clarity -- provide clarity when we can provide the clarity. But in terms of where we're at in the process, proceed, values, I just can't give you a lot of detail on that for obvious reasons.

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Charles Damien Brady, SunTrust Robinson Humphrey, Inc., Research Division - MD [16]

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No, understood. And I'm just wondering on the -- your commentary on the industrial tools segment, the services business is seeing a nice uptick there, part of that being on a project that was completed in 1H instead of second half. I'm wondering from a margin standpoint given that services business tends to have pretty decent margins, does that -- what's the impact on the second half margins, particularly Q3. Are we still looking for up year-over-year in the tools business or have we kind of pulled some of that forward into 2Q?

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [17]

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Rick, we're still up year-over-year in the tools business. With the service activities, there is no real margin impact, that when we say pull forward it's more so just the timing of when the work was going to be done. And so there's no margin pressure in the back half on service. And when you think about our service work, the thing to remember is that we're really focusing on what we call specialty -- true specialty service, we've talked now for several quarters of getting out of the commodity-type service work. So in our guide, it reflects that focus. And so the unusual pop that you see in Q2, there isn't an expectation that that'll continue at that level in the back half of the year because we're being far more deliberate about the service that -- service work that we will do. But in doing that, it will be much more profitable service work. And so definitely, growth on the tool side in the back for both service and tools, not the kind of growth you saw in the quarter. When we talked about pull ahead, it's more so timing of a specific large project that we had phasing out into Q2 and -- I'm sorry, into Q3 and Q4. And then also, as happens on some of our other projects, we had some scope benefits to some work we were actually working on in the field.

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Randal Wayne Baker, Actuant Corporation - President, CEO & Director [18]

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I just want to add 1 comment to that. Charlie, the composition of our tool and service company is that a very, very large percentage of our company's profit footprint and revenue footprint is focused on either product sales at extremely high margins and/or rental, which is also at a very high margin. The combination of those 2 comprise 85% of our revenue stream. And we provide that detail in a lot of our analyst and meetings we do throughout the year. And that's what makes our tools and services company so structurally profitable is when you have 85% of your revenue comprising a very large percentage of your profitability, it's -- makes a very winnable scenario. So service is a great additive thing as we're on job sites around the world, we're able to rent our equipment, we're able to sell our equipment, but we focus on high margin and sometimes very complex service where the margin sits, so it's never going to be a big portion.

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Charles Damien Brady, SunTrust Robinson Humphrey, Inc., Research Division - MD [19]

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Appreciate the color already. Just one more for me. You mentioned some supply chain slowness that you experienced in the quarter, can you just elaborate a little bit on that and where you are?

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [20]

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That was -- in the quarter, that was more so weather-related during the polar vortex. We had our -- some of our facilities shut down. We had delays. We had -- some days they were actually not moving. And so we think we made our way through that in the quarter. We talked about a huge finish in February to kind of get back on track and get back to on-time delivery. But things are running smoothly now. It was just a mid-quarter slowdown, it did cost us, did have an impact in the quarter, but we were able to recover from a volume and a profitability perspective.

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Operator [21]

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Our next question comes from the line of Allison Poliniak from Wells Fargo.

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Allison Ann Marie Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [22]

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Just going to that service. Rick, you had talked about that project finishing a bit sooner. If you could quantify what the impact is, you guys were just talking about profit side, but what about at the revenue side, can you maybe help us understand sort of the normalization, I guess, in the back half of the year?

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [23]

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I think without getting -- because we didn't guide where we serve as separate. I think all we're trying to say there is, it's a -- the revenue you saw in Q2 relative to our guide for the year, there was no real incremental revenue relative to this project. It was just the timing of the completion of the work. And so I know that's about as granular as I can get relative to the project. But it's not an indication of market, it's not an indication of lost work. It's just -- it's a large project that we won a year ago now, that we had paced out, where they were able to get all of the work and the required activities done sooner than we had anticipated. So it was in our forecast, the majority of it just finished in Q2 versus what would have been the majority in Q3, and a little bit in Q4.

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Allison Ann Marie Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [24]

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So I guess asking another way, sorry, it wasn't a huge incremental to the upside in this segment in the quarter relative to your estimates and there were other components to that?

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Randal Wayne Baker, Actuant Corporation - President, CEO & Director [25]

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Well, the upside...

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Allison Ann Marie Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [26]

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In comparison to the sectors.

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [27]

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Yes, it was, and it did have a big impact on core growth relative to our expectations for the quarter. Does not have an impact on core growth relative to our expectations for the year, and so that's what we're saying.

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Allison Ann Marie Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [28]

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Perfect. And then just moving to sort of the acquisition environment, your leverage is in a decent range, any color on sort of the size of things that you're looking at, multiples that you're seeing out there?

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Randal Wayne Baker, Actuant Corporation - President, CEO & Director [29]

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Well, we've got a very active pipeline of companies that we're investigating and working with. I don't want to provide any clarity that gets people believing that we're looking at a third leg of the stool. It will be acquisitions related to tool companies that support our strategy to become a larger, more meaningful tool provider. Multiples, I don't want to publicly state what our desired multiple range is, certainly want to get the best value we can, but I don't want to throw numbers out there that establishes and may damage our ability to negotiate particular deals. So I really think that we have a good pipeline. Our tools company is working hard to identify those businesses. I'm personally involved in several. And we will continue to work it. And certainly, as we move forward as a pure-play tool company, you're going to hear a lot more about that. And you'll find that our capital allocation priorities are going to be extraordinarily disciplined, and we will not make acquisitions unless they are the right fit for this company.

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Operator [30]

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

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [31]

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So I know there's some noise with this service timing issue, but I'm just kind of looking at the tools guidance of plus 8 in the first half, mid-single digits in the back. It seems like your worst case, you're doing 5% and maybe better. So I just -- it just seems like there's a mismatch between the -- what you're saying for the second half and what you already did in the first half versus the full year guide, just help me there?

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Randal Wayne Baker, Actuant Corporation - President, CEO & Director [32]

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Well there is always a combination effect between the service volume that we got in the first half of the year. Rick's drilled into that one pretty hard. But when you do a 12% core sales growth for your tools and services business in a quarter, it does create an expectation that that's going to keep flowing into quarter 3 and quarter 4. And we expected that commentary to come out as pretty hard of why is the back half only mid-single digits. The reality is, is that the tool side has been right in line with our expectations of 3 to 5. In fact, it's dead center on that number. The lumpy nature of our service revenue to the extent that we can get some larger projects in the back half, there could be benefit, but I never want to guide based on what we think we can close and complete. We want to guide on what we know we can do and create an environment where we still are -- we're still making our credibility march forward, Jeff, and we want to make sure we don't provide guidance that's so optimistic that we have a chance that we're going to miss it. So I think that the 3 to 5 and the mid-single digits for the second half is a realistic number and we are standing by it.

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [33]

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So Jeff, the other thing to keep in mind and we talked about service, that will come down in the back half, that's part of the not being able to sequentially see the growth. The other thing is, we have really strong comps for tools in the back half relative to what we saw in '18. So we are in the mid-teens in the fourth quarter of '18. So it -- mathematically, it looks like we should see more growth. We like that 3 to 5, hopefully, there is upside, but feel like we've given a fair estimate.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [34]

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Okay. And then just last one. You talked about kind of the higher SG&A number and some -- I think, some medical claims and kind of one-timers in there. Is there a way to parse out what you think was kind of onetime or abnormal versus kind of the trend?

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [35]

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I think we're $7 million up in SAE. I think normal inflation, let's call probably about $4 million, $5 million of that onetime-ish versus just normal SAE growth.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [36]

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Okay. So there's like a couple of million of kind of one-timers, that the way to think about it?

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [37]

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A couple of million -- there's more than a couple of million of one-timers. There's about, call it, $2 million to $3 million of just normal growth in equity comp and salaries and inflation and stuff like that. And then the rest of that increase would be either one-timers in the current year or one-timers that occurred in the prior year that didn't happen this year.

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Operator [38]

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

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Justin Laurence Bergner, G. Research, LLC - VP [39]

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First question regards the, I guess, mix affect in industrial tools. Was there any mix effect there? And I guess, the second question would be outside of this timing of the service business, what parts of industrial tools were tracking better than your expectations?

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Randal Wayne Baker, Actuant Corporation - President, CEO & Director [40]

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On the mix side, there are certain lines within our tool platforms that are very profitable. But as we talked, we've got margins that are all north of 50% across the line on our tools. So it's -- it's a question do we sell more on a bolting platform. I didn't see a great deal of mix impact. I think the mix impact year-over-year was relative to the HLT product lines, which had dragged down our margins significantly last year and we talked through that and it was quite painful last year. I'm hoping at some point we can stop talking about last year's event. But from the standpoint of this year, the mix was pretty regular across the line. As far as regionally impacts, North America is still very active. European operations is active but to a lesser extent. Latin America is still quite active and we see a little lower activity in Asia. But generally speaking, it's all fallen within that 3% to 5% growth rate that we had forecasted. And so we feel like we called that market pretty tightly and the margins we're very pleased with.

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Justin Laurence Bergner, G. Research, LLC - VP [41]

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Okay. Great. And then just in terms of the contributions, you said the contribution margins were certainly in line with your expectations, but your operating profit and EBITDA effect from volume and pricing was $11 million and the sales effect was $17 million. So I'm just wondering how to reconcile though what appears to be stronger contribution margins with your comment that it was sort of in line with where you expected them.

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [42]

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So, I guess, can you repeat the question again, I'm sorry.

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Justin Laurence Bergner, G. Research, LLC - VP [43]

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Sure, just in your sales and EBIT bridges, the effect of volume and pricing on profit was plus $11 million, and the effect of volume and pricing on sales was $17 million, that $11 million over $17 million seems to be higher contribution margin than what you would expect within your business. And I was just curious if there was some way to help reconcile that?

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [44]

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So I think the -- there's a couple of things happening. We have pricing -- you got about $12 million of volume and then you have pricing of $5 million. We flow that through -- a portion of the pricing goes away with the tariff of $2 million. So when you look at in terms of margin expansion, the -- I think the only thing that you're missing there is the impact of the divestitures giving us an incremental boost. So from a volume perspective, although to Randy's point, heavy lift was down, we replaced the majority of that with standard product. So you only had about $1 million to $2 million of heavy lift decreased but improved -- significantly improved profitability because you got rid of the $2 million of losses. So I think what you're seeing flow through there is a little bit of mix within the volume and tariffs in terms of impact on operating profit.

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Operator [45]

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(Operator Instructions) Our next question come from the line of Deane Dray with RBC Capital Markets.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [46]

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I wanted to follow up on the restructuring action questions. Just to make sure I was clear that these are not focused on the areas of what we would consider to be stranded costs post the divestiture. And assuming that's the case, can you size for us what the stranded costs might be and how you might be attacking those and what time frame?

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [47]

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We -- you cut out -- I am sorry, can you repeat your question, we missed the majority of it.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [48]

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Sure. Just asking for the -- on the restructuring actions, not including -- not addressing stranded costs post-divestiture and maybe just take this opportunity to size for us what you think the stranded costs might be and how you might be attacking those, any way you can provide color or size of that would be helpful.

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Randal Wayne Baker, Actuant Corporation - President, CEO & Director [49]

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Sure. What we've said and this is before this restructuring announcement. We have about $25 million in corporate costs. And the objective post-transaction is to come out of that 20% EBITDA margin business. And so when you look at our SAE and you look at the $25 million in corporate costs, it's the adjustments that we will have to make to get to that 20% consolidated EBITDA. Now that being said, when you look at the $25 million in costs, there are certain costs that will naturally scale down as the result of a divestiture. And so those costs will come out of the base. And then there will be others that we have to actually take actions to scale appropriately for the size of the business that we are. So without -- we have and without providing here is the stranded costs, et cetera, in part because we won't know until the transaction is -- we get closer to the transaction, we know that there will be a need to adjust our structure without that business to get us to the desired EBITDA margin of 20%. So part of those actions -- part of that effort is covered by this restructuring announcement. And then as I noted earlier, as we get closer, there will likely be other actions that allow us to get there.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [50]

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Got it. But part of it sounds as though you're going to solve for the structure to get you to 20% margins?

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [51]

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Well, we're going solve for an efficient structure at a minimum that's going to get me to 20% margin.

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Operator [52]

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

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Abdulrahman S. Tambal, JP Morgan Chase & Co, Research Division - Analyst [53]

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This is Abdul Tambal on behalf of Ann. Most of mine have been answered, but can you just give us an update on your growth strategy following the ECS divestiture? What regions would you focus your growth opportunities on primarily?

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Randal Wayne Baker, Actuant Corporation - President, CEO & Director [54]

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What we've said, our organic growth strategies have always been framed around a couple of key elements, number one, is trying to continue our R&D investments and getting new product launches. We want a minimum of our tools and services company to have 10% of its ongoing revenue attributed from new products. And that's measured on a 3-year rolling average. And we're not quite there yet. We're making good ground. We've launched a lot of new product this year. We launched a lot of new product last year. We're just below our objective on the 10% line. And we made a lot of progress over the last couple of years of building. I consider now building a great engineering group with a lot of talent and some real creative people that look at tools on an everyday basis, and -- so that's piece one. Secondly, for organic growth, we're going to be the best sales company out there, and we've proven now. We've added more boots on the ground for the past 3 years than we've ever had. We cover our dealers better, we respond better and we're commercially better than we've ever been. And that's how we capture above market condition. The third piece of that is obviously regional. Now we've made a lot of progress on our Asia Pacific market. We've grown dramatically over the past couple of years. We'd still like to be stronger and a bigger footprint of dealers and companies that we own and operate within Asia Pacific market. So those are the 3 main elements of our organic growth plans. Then beyond that, it's how we operate from a manufacturing side. We want to be extremely efficient, driving best-in-class, lean manufacturing on quality costs and delivery metrics, which we are doing quite well at now. And then the third piece is that we always want to be driving a component of M&A. So if you look back at our original strategy of growth, we said, we're going to have a CAGR rate of 10%. Half of it coming from organic and half of it coming from M&A activity, give us very, very high marks on the organic side of that. Now that we've proven that we can in fact buy and run companies, we're starting to shift gears into the portfolio, which is part of the issue of splitting the company and focusing on the tool side of it. So -- and that kind of gives you the top-level view on growth. But I think our CAGR rate of 10% is still going to be in our gun sites. We will reissue our long-range strategy for the company later this year once we get completed with a few things. And at that point, we will refresh who we are and what we are as a stand-alone tool company.

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Operator [55]

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

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [56]

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So I was just hoping you could -- this is just more of a housekeeping more than anything for you, Rick. Precision-Hayes, could you just give us what the revenues were at divestiture in annual?

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [57]

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For -- well, hold on. Precision-Hayes, overall revenue on average is about $50 million. Average revenue, $50 million for that business.

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [58]

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Just making sure, okay. And then maybe you can unbundle a couple of things for us on sales. Were there any prebuys in industrial tools ahead of pricing?

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [59]

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No, we did not see any prebuys. If you recall, our pricing for tools went into effect -- the last one went into effect at the beginning of the first quarter. And so we've seen no real impact for pricing on our end or from a purchase perspective as well.

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [60]

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Understood. And understanding that HLT gave you $2 million of EBIT impact, what did that cost you in sales in the quarter?

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Randal Wayne Baker, Actuant Corporation - President, CEO & Director [61]

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I think net down, we're down somewhere between $1 million and $2 million.

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [62]

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Okay, and is that a number that continues or is that sort of isolated to this quarter?

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [63]

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Well, it will go down because if you recall at the end of the second quarter we indicated that we weren't taking any more special projects. The special project revenue was actually down closer to, call it, $4 million. We replaced that volume with standard product revenue for the net down. That delta as special project revenue year-over-year continues to drop off and standard continues to grow, and won't be as significant. So it is somewhat of a higher impact in Q2 than you'll see the rest of the year.

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [64]

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So you're saying that that's really actually a $4 million number this quarter.

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [65]

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Don't understand...

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [66]

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Gross, grossed up.

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [67]

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No.

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [68]

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On the special projects, no?

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [69]

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Well, heavy lift technology in the quarter is down about $2 million.

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [70]

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Okay. Understood.

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Randal Wayne Baker, Actuant Corporation - President, CEO & Director [71]

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If you remember, Scott, is that on the special projects, that was comprising between $12 million and $15 million a year and almost every year we incurred either expenses or extraordinarily low margins as we attempted to do those projects. And we're just simply not doing them. We will accept projects where we are adapting our known hydraulic lifting technology and we're able to do it profitably. And we still do a few of them, but we've done them profitably and we've been very selective. So overall, that business on an annualized basis, will be off about $12 million from its peak, once we hit the full run rate of not doing specialized tool builds. And -- but I think -- I'd much rather own a business at $35 million, $40 million on a very respectable profit than one that we do some really fun projects, but we lose money at it.

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [72]

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Understood. Last question, would you be able to split the pricing by segment on the sales side?

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [73]

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I don't think. No, we won't. We don't have that. I mean, I think when you look at it from our tariff discussion, it's about 50-50 ITS, ECS.

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Operator [74]

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We have another question from the line of Justin Bergner with G. Research.

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Justin Laurence Bergner, G. Research, LLC - VP [75]

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Just on the restructuring action, is the $12 million to $15 million a cash cost and is some of that cash cost being absorbed in your $80 million to $85 million free cash flow guide? And then, I guess, just the final part of the question would be, are there reasons why this restructuring actions didn't begin sooner, and is beginning now or there are just organizational reasons why it makes sense now versus sooner than now?

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [76]

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I guess, the first part, yes, a portion of that is cash, not all of it, some of it is related to facilities. As I noted, the majority of this restructuring will happen later in the fourth quarter. So there shouldn't be a significant impact and that is -- and it isn't factored into our $80 million to $85 million cash flow for the year. In terms of timing of the restructuring, if you recall, and Randy can chime in here, but if you recall, when we announced the merger of the segments, we said we were going to focus on the opportunity first and we did not do that for cost savings purposes. This was a go-to-market seeking opportunity to improve both businesses by leveraging our presence on both sides of the aisle and reaping some of the benefits of owning Enerpac brand and Hydratight brand, and combining those tool products and service across the aisle. That was the initial focus. We have done that, you're seeing that, we're in full launch, and so now there's an opportunity to look at the infrastructure. Because one of the things we said we weren't going to do was destroy these 2 businesses trying to do all of that at once. So now we have the opportunity to look closely at the infrastructure and do that with a clear strategic view of where we're going to play in the market, where we're going to actually go after service, what some of our opportunities are with both businesses combined. So the timing is really driven by strategy execution.

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Randal Wayne Baker, Actuant Corporation - President, CEO & Director [77]

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Rick covered it very, very well.

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Justin Laurence Bergner, G. Research, LLC - VP [78]

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No, that's a great answer. You came across a little muted. So the restructuring cash cost this year is not in the $80 million to $85 million, right?

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Ricky T. Dillon, Actuant Corporation - Executive VP & CFO [79]

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No. And there won't be significant restructuring cash costs this year due to the timing of the restructuring.

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Operator [80]

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We have no further questions queued up over the phone lines at this time. I'll turn the call back over to you.

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Barbara G. Bolens, Actuant Corporation - VP of Corporate Strategy, IR & Communications [81]

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Thank you, everybody, for your participation today. We'll be around today if you have questions. And otherwise, we'll look forward to speaking with you again in June.

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Operator [82]

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