Karen Bauer - IR Randy Baker - CEO Andy Lampereur - CFO.

Jeff Hammond - KeyBanc Capital Markets Matt McConnell - RBC Capital Markets Mig Dobre - Robert W. Baird Ann Duignan - JPMorgan Robert Wertheimer - Barclays Charley Brady - SunTrust Robinson Humphrey Scott Graham - BMO Capital Markets Justin Bergner - Gabelli & Company Stanley Elliott - Stifel.

Presentation:.

Ladies and gentlemen, thank you for standing by. Welcome to Actuant Corporation's Third Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct the question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Wednesday, June 22, 2016.

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

Great. Thanks, and good morning everyone. Welcome to Actuant's third quarter earnings conference call. On the call with me today are Randy Baker, Actuant's CEO; and Andy Lampereur, CFO. Our earnings release and the slide presentation for today's call are available in the Investors section of our Web site.

Before we start, a word of caution; during this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

Investors are cautioned that forward-looking statements are inherently uncertain and that there are number of factors that could cause actual results to differ materially from these statements. These factors are outlined in our SEC filings.

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

Good morning everyone, and thank you for joining our third quarter conference call. Beginning on slide three today, I will provide highlights in the quarter and key accomplishments, and if you've read in today’s press release, we delivered sales and earnings above our guidance range.

Our sales teams did a great job of supporting our customers and improving our capture rates in a very challenging market. Core sales were in line with expectation. Energy maintenance and truck sales grew, but were offset by difficult conditions at upstream oil and gas, agriculture, and general industrial.

The acquisitions in the industrial tool and energy maintenance area contributed about 2% to our top line growth, but were neutral to EPS due to acquisition costs. The MENAC business is a great fit within Hydratight because of the expanded service offering and seamless integration.

Larzep provides the catalyst for our Industrial segment's expansion in Europe and products to serve the second-tier market. Both acquisitions are very strategic, supported to our strategic plans and we expect them to be accretive in future quarters.

Cash flow came in quite a bit stronger than expected with good reductions in working capital, notably inventory. Our restructuring actions have been hard work, but we are on track to achieving the targets. I'm very pleased with the performance of our teams in this very difficult market.

With that, I'll turn the call over to Andy to walk through the details on the quarter, and then I'll come back with an overview of the markets, updated guidance, and some of our initial observations..

Thanks, Randy, and good morning everyone. I am going to start today's financial review on slide four, with an update on our restructuring activities.

We incurred about $3.5 million of restructuring costs in the quarter as we continued to execute in several restructuring projects involving facility consolidations, business simplification actions, and personnel reductions.

This is in line with the amount for each of the last three quarters, and I suspect we'll see a similar amount over the next three quarters in roughly the same range.

We are happy with the progress we made in these projects and expect to realize the previously communicated $12 million of annual savings once all the identified $25 million restructuring program projects are completed in the middle of fiscal 2017.

Given the continued tepid market demand, we are evaluating additional cost reduction opportunities above and beyond the $25 million program as long as the paybacks are attractive. Stay tuned, we will provide quarterly updates on these projects going forward.

Consistent with best practice, restructuring costs in the third quarter are not included in our guidance, or the results I will be discussing today in order to provide a better picture of base earnings.

As you can see here on slide five, we reported sales of $305 million in the third quarter of fiscal '16, which is 5% below the prior year third quarter. GAAP earnings per share for the quarter were $0.36 a share, compared to $0.63 a year ago. Excluding the $0.04 a share restructuring charge this quarter, our third quarter EPS was $0.40 a share.

The $305 million of third quarter sales was slightly above our $290 million to $300 million sales guidance on account of the $7 million of combined sales from the two recent tuck-in acquisitions.

The two deals, however, didn't add anything to consolidated operating profit or EPS in the quarter on account of purchase accounting and transaction-related costs, but they will be additive going forward. Finally, our $0.40 a share adjusted EPS was slightly better than the $0.34 to $0.39 guidance range for the quarter.

I am going to dissect these results in greater detail starting now on page six with sales. Our consolidated sales in the quarter were down 5%, which included a 1% headwind from currency and a 2% tailwind from the [indiscernible] acquisitions.

Excluding currency and acquisitions, our year-over-year consolidated core sales declined 6%, reflecting weak demand in all three of our business segments.

The weakness was present throughout the quarter and was evident in all geographic regions with the Americas continuing to be [technical difficulty] in the second quarter to minus 6% in the third quarter. I will provide more color on sales by segment as I go through segment level results in a few minutes.

Turning now to operating profit on slide seven, we saw a sequential improvement in consolidated operating profit margins as well as in each of the three segments from the seasonally low second quarter, but on a year-over-year basis reduction as forecasted.

Our third quarter operating profit margins were 10.4%, excluding our restructuring cost compared to 6.8% in the second quarter and about 13% a year ago. Consolidated margins were adversely impacted by unfavorable sales mix, pricing pressure in the Energy segment, and under-absorbed fixed overhead on account of lower sales and production.

Similar to recent quarters, many of our OEM customers are working down their inventory by reducing purchases from us well beyond the underlying end market declines and demand.

And on the mixed front, we continue to see higher core sales declines in our more profitable product lines including industrial tools, offshore rig mooring, and Ag products, which has an unfavorable impact on our margins. Now, I will spend a few minutes on each of the three segments starting with the Industrial segment on slide eight.

The Industrial segment recorded third quarter sales 8% below last year. Core sales were down 9%, while acquisitions added 2% benefit and currencies were a 1% headwind. The 9% core sales decline was a sequential improvement from the 14% reduction in the third quarter, but mostly attributable to comps in less so to changes in end market demand.

Enerpac’s distributors continued to report challenging conditions in most verticals, including mining, energy, and general industrial. And all of geographic regions are reporting weak demand with consistent softness throughout the quarter.

Now, the combination of lower sales volume, the unfavorable impact in inventory reductions, and absorption as well as mix weighed on a year-over-year profit margin comparisons. Our summary third quarter takeaway for this segment is that demand is still very weak but appears to have stabilized at a low level.

Now I'll move on to slide nine to discuss Energy segment results. Energy posted a 2% year-over-year sales growth benefiting from strong service demand and sales from the Middle East FourQuest business acquisition. Excluding the 3% headwind and the 5% benefit from the acquisitions, year-over-year third quarter core sales were flat.

We were pretty happy with that flat core sales compared to an 8% decline in the second quarter, but we saw sharply different trends in our maintenance versus our CapEx businesses.

Hydratight had another excellent quarter with double-digit growth on account to robust service work tied to oil and gas production and a large subsea connector job in Asia-Pacific.

In contrast, our CapEx-oriented businesses being Cortland and Viking posted sizeable double-digit declines as oil and gas exploration, drilling, and upstream project demand and pricing continued to worsen.

Energy segment profit margins rebounded nicely from the seasonally low second quarter, but were noticeably lower than the third quarter of last year on account of unfavorable product line mix and more aggressive price competition in the CapEx-oriented businesses.

Adjusted operating profit margins declined about 60 basis points for energy year-over-year to 12.3% in the third quarter, but it was a nice rebound from the second quarter seasonal lows of about 6%.

As we look ahead, we see continued weak volume out of Viking and Cortland for the next few quarters tied to low oil and gas CapEx, and continued lumpiness in the service arena with Hydratight. I'll wrap up my segment level discussions with engineered solutions on slide ten.

Segment sales there were down 8% year-over-year in the third quarter; a weakening trend from the second quarter on account of Ag market. Core sales were also down 8%, but no meaningful impact from acquisitions or currency.

We discussed the decline in trend in Ag in our last quarterly call and demand for market such an on highway truck and auto went strong enough to take up the slack. Demand in other off-highway market such as construction, forestry, and material handling was still weak.

We expect these markets to continue to pose a headwind for the remainder of this year as several OEMs are taking extended summer plan shutdowns to further pier back inventories in their own plants as well as add other dealers.

Not surprisingly than our profit margins in the segment were pressured with these low production levels and the result in weak overhead absorption. Unfavorable mix was also contributing factor to the 270 basis point decline in year-over-year adjusted operating profit margins. So that's it from my segment level deep dive.

I'm now going to shift to the balance sheet and end the cash flow with a few comments. We had a great cash flow quarter as we typically do in the back half of the fiscal year. Our third quarter free cash flow was about $49 million and included very good working capital management as we also reduced our inventory, given the weakness in the end markets.

From a capital deployment standpoint, it was an active quarter with about $5 million spent on buybacks and $65 million on acquisitions. Quarter end leverage was in line with expectations at 2.7 times trailing net debt to EBITDA, which should decline in the next quarter given our expectations for another strong cash flow quarter.

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

Thanks, Andy. I think we've seen the quarter market issues, let's take a closer look into the macros affecting Q4 and beyond. Beginning on slide 12, oil prices have improved, but are still well below the trigger point of $65-a-barrel.

Price improvements will be contingent upon a constrain level of production and maintaining a balance in supply and demand. Current projections indicate a supply/demand convergence in the second half of 2017, and should yield a price of plus $65-a-barrel.

As a result, CapEx projects are at an all-time low, OpEx on a fix to sale basis in high cost regions. However, there are parts of the world where the marginal costs production is conducive to investment maintenance at the current price levels such as the Middle East. And there is no coincidence that our investments in these regions are a priority.

Off-highway mobile equipment continues to be very weak particularly in agriculture. All major suppliers are projecting a 15% to 20% reduction in both cash crop and hand forge products. Distributors are reporting excess inventory of new unused equipments, which will require one full planting season to reach the appropriate level.

As a result, our customers have reduced the component supply orders to match to model your production plants. The general industrial market has not improved on a year-over-year basis. The industrial distributors are reporting continued weakness in retail order demand.

The impact of weak oil, construction, and general manufacturing markets continue to constrain the levels of sales improvement throughout the world. In the vehicle market, Europe and China on-road truck remains supported by good registration, and in aged fleet in need of replacement. Regionally, the U.S.

remains most challenged, and emerging markets are sluggish. Europe is generally soft, but certainly less worse. Slide 13 provides details into the fourth quarter and the current trends in the business, and unfortunately we see more negative than positive dynamics. General industrial order activity as seen in Enerpac distribution channel is sluggish.

Upstream activity in oil and gas is experiencing heavy pricing and demand pressures, and our customers are on a fix to sale mode for the foreseeable future. Lastly, off-highway equipment, and most importantly agriculture demand has weakened further. All these factor pulling us towards lower demand.

Turning to slide 14; as you can see the market conditions have dictated a modest revision to our tour sales assumption and lowering our guidance range to $1.20 to $1.25 for the fiscal year, our cash flow projections remain solid at approximately $105 million and will represent the 16th consecutive year of free cash flow conversion of net earnings in excess of 100%.

Clearly, lowering the guidance, especially after a solid third quarter performance is not how I wanted to start my tenure, but I must be realistic about the expectations both internally and externally and then drive the organization to achieve them.

This does not change our commitment to our strategic vision of $300 million in EBITDA, which is the most common question I get from investors. So I want to share some of my initial observation. Turning to slide 15, these are the components of EBITDA growth vision in my earlier insight into their status, starting with simplification and cost actions.

The entire team is committed to the program. I want to reiterate, we are not limited by the $25 million initial target. We will continue to identify and execute any activities that will improve the long-term cost position of Actuant. Lastly, we are accelerating lean manufacturing efforts which will yield significant savings to the company.

I feel good about our ability to achieve the acquisition component of the vision. Two deals have been completed this year, and we have approximately 30% of that value in play. Our strong cash flow and pipeline of deals support our ability to make strategic additions to the portfolio.

Finally, core growth and market recovery; macro conditions are not currently in our favor. Our pathway to growth will be through opening new regions, market participation, new product launches and commercial effectiveness.

While these are not immediate, especially in the OEM market, they are within our control and I intend to drive them throughout the organization. I'll provide more specifics and insight and my vision for Actuant and strategies at the upcoming Investor Meeting in October.

I appreciate your patience while I continue to run the organization, visit locations, and meet customers over the coming months. That concludes prepared remarks for today. Operator, let's open it up for questions..

Thank you. [Operator Instructions] And the first question is from the line of Jeff Hammond with KeyBanc Capital Markets. Please go ahead..

Hey, good morning guys..

Good morning, Jeff..

Good morning, Jeff..

So, two questions on the energy business; one, Hydratight, clearly some resilient quarters here, just looking out to '17 at kind of quoting project activity particularly against some of these larger projects, how are you feeling about kind of good or bad lumpiness on that business? And then just kind of on the other two, how close do you think we are in the bottoming process for Cortland and Viking?.

Well, let me cover the first question. The pipeline is always our key area we watch on any service-related business.

There are lumpy projects, and you know that we are working through those, but what I can tell you right now is that we are working extremely hard to attack any available service job in the world, and that's part of the commercial effectiveness thing that I have mentioned is that we have to have a very high hit ratio to maintain the levels of sales and replace the larger projects in front of us.

I don't want to give you any guidance on '17 yet, because we still have our fourth quarter to make, but I can tell you we're going to work hard and go after it.

And as far as calling the bottom on Viking, it's a long way off, and you can tell that most of the improvement in oil is still so far below our trigger point of getting some of these submersibles back in the water, starting exploration.

Andy and I have a few visits in the end of the month in the U.K., and some of our top customers will have better view on that, but I don't see a short-term fix..

Okay, and then just Randy to follow-up on your comments about the $300 million EBITDA target, it sounds like simplification kind of on-track acquisitions, making some headway in the markets as maybe the big wildcard to maybe being able to hit that or not.

Is that something, is that, one, a fair assessment, and two, is that something you will kind of readdress at the October meeting?.

And that is a very fair assessment of where we are at. Two components of the growth plan I think are well within our grasp. The market is going to give us what it is going to give us, and that's why if you look at the themes of what we are driving this company to be is we want to be more commercially effective.

We want to open up markets that we haven't touched before, and we want to open up regions that we haven't touched before. And on top of that, we have products that are coming to market. We can control those things, but we can't control the market. So the magnitude of those growths are dependent on us. So, I think you've hit the correct assessment..

Great, thanks guys..

The next question is from the line of Matt McConnell with RBC Capital Markets. Please go ahead..

Thank you, good morning..

Good morning..

Good morning..

Just a follow-up on the Viking comment a long way off from a bottom there, what are the breakeven levels, and I know it's not really contributing much to operating profit now, but do you have room to take breakeven levels down further as those face another decline next year?.

Yes, we have been reducing the breakeven in the business throughout the year as we've been cutting back and whatnot. During the quarter it did lose money, but were not going to publicly state what the breakeven revenue is, because we know our competitors would love to have that information.

We expected certainly the revenues in this business will continue to come down over the next two and three quarters here. We are not at the bottom. We are certainly on our way down to where we expect this thing to end up, but we're there yet.

So it will be losing money certainly in the next three, four quarters on this, we will not be at a breakeven point..

Okay. Okay, thanks. And Randy, I wonder if I could ask, in your assessment what do you think Actuant has to do to reinvigorate industrial organic revenue growth? And you've talked a lot about sales effectiveness and commercial effectiveness.

And could you give a couple of examples of what you are doing, or what you think you should be doing in the Industrial segment specifically?.

Well, there is one good example that we discussed. It's relatively small, but there is a market that sits below where we typically play, which is our second-tier product line. The Larzep acquisition does open that up partially for us in Europe, and we also have addressed that a bit in North America. That's one good example.

I think you'll see us taking a harder look at the Asia-Pacific region, because we are not significant of a player in that region as we could be, and I think there is growth opportunity there.

And I think that there's other areas in other segments of industrial tool usage as to where we can be a better and bigger player, particularly in aerospace and some of the other peripheral industries. So we've got a whole list of things. I have been pretty selfish about how we started going through strategic plans.

We started with the Industrial segment. It is finished and in deployment. In October, we are going to lay it all out for you. And by then, you are going to see some of the bottom line activity and how it's affected things. So, if you can just be patient till October, then you'll see the whole plan..

Okay, thank you very much..

The next question is from the line of Mig Dobre with Robert W. Baird. Please go ahead..

Yes, good morning everyone. Thanks for taking my question. Maybe if we can look a little bit at the fourth quarter guidance here, I am trying to understand what some of the moving pieces are.

I understand the revenue side, but I'm wondering segment level, how have your margin expectations changed versus your initial plan? Where does most of the hit come from?.

Yes, clearly the volume, I mean, for the year is lower than what we expected and that's having impact on an absorption standpoint, especially I would say in industrial and in engineered solutions. Engineered solution is also going through the de-stocking, so we're feeling it there. Mix has not been our friend this year.

We were not expecting Enerpac to be coming off the way it has and as you know, that is our most profitable business. So, that's impacting our overall margins as well. So, no doubt the margin where we are at right now for margins is disappointing relative to our prior guidance.

We're trying to do what we can from a cost down standpoint, restructuring standpoint, but candidly we haven't been able to rip the cost out as fast and as deep as the revenues have been coming off..

So, just to clarify, you are saying that versus your last guidance from last quarter, it's in industrial and engineered that margins have changed the most?.

I interpreted your question to be relative to plan as opposed to in the last quarter. So, my comments were relative to what our expectations for the year were..

Okay, well, but then, relative to your guidance, because that is what I really kind of meant, sorry for not articulating, versus the last guidance where have sort of the margin change has been the largest?.

Relative to our last guidance 90 days ago, it's going to be where the volume is again, which is industrial is a little bit softer and energy is softer.

Engineered solutions is down because of absorption, so it's really -- it's across the line, and again the mix is not helping out when you are looking today versus where we are at 90 days ago, both Enerpac and our Ag business are pretty good margin businesses, and our expectations for revenues are down. So that's hurting margin mix as well..

I appreciate that.

And then my follow-up, can you remind us the discrete projects in the Middle East that you had that benefited energy for fiscal 2016, maybe size that so that at least we have a sense for what the potential headwind could be into '17?.

It was in terms of Hydratight and the first half of the year it was about $15 million-$20 million impact..

And the back half, anything?.

No, it was a different staff job..

Okay, thank you..

The next question is from the line of Ann Duignan with JPMorgan. Please go ahead..

Hi, good morning guys..

Good morning, Ann..

Good morning, Ann..

Good morning.

Just a clarification on the acquisitions, I think the industrial acquisition was probably in the quarter for the full quarter, but the energy acquisition, how many months was that in the quarter, just so we know how to forecast?.

Two months, so it close I think in the 30th of March. Yes..

Okay, great. Thank you for that. And then on slide 15, you talked about the tailwinds having out to 2018.

Could you talk about the fact that steel prices are up 60% plus year-to-date and when that might have a negative impact on gross margins for Actuant? Could it be at fiscal 2017 event, fiscal 2018, nor you hedged? Just some commentary on the input cost side please..

It's a fair question. We are not buyers of raw steels, so we do not see movements up and down. We are buying machine component essentially. Thus we typically have bands that we put around our suppliers in terms of, if we have increases and decreases and the underlying commodity we had discussions with them.

So, in our view there is some more time as to past before we're going to get plenty discussions on price increases here on steel but honestly it has not been much of a discussion at all within our business. We are not seeing ramp in their significant impact on it -- no impact at all in the quarter..

Okay.

And I'm assuming that those are kind of the inflation, deflation clauses such as you have in your supply agreements but eventually will come up for renegotiation if steel prices stay as they are today?.

Yes..

Yes..

Okay. Thank you. And then little bit more color on your customers, I think you said it was agriculture only OEMs shutting down for extended periods in the summer.

Will that flow into your fiscal Q1 '17? Should we bear that in mind?.

I'll answer, and Andy can add some color too. There are lots that have their standard shutdown, as they do model your production change over, some of them have extended those shutdown. So if you make your way through Ag construction, on-road, off-road truck, you will see that all of them have shutdown schedules.

Some of them have length of them based on their model of your requirement. And particular in Ag where there is a bit of an overstock of those models, your start-ups have been delayed..

Okay. And its Ag only, it's not truck off-road construction..

I would say it's primarily – I mean, it's Ag certainly, but it's much broader than that not as much on highway. I mean, there are normal shutdowns on on-highway in the fourth quarter but no big changes there.

It's construction equipments, material handling, it's other types of forge retail products as well that we're seeing, and it's pretty broad spread or widespread across off-highway. So we say truck is on-highway not much impact there..

Okay.

And that does sounds like that could flow into fiscal 1 '17 then?.

Couldn't rule it out, I mean right now we are not -- we have not been given any kind of scheduling based on that. It's still kind of business as usual, but that can change obviously..

Okay. I appreciate the color. I'll get back in line. Thanks..

The next question is from the line of Robert Wertheimer with Barclays. Please go ahead..

Hi, thank you. Just a couple of quick questions on price and you guys have been very transparent, I know it's not always easy; on Hydratight are you able to go after business and get jobs without losing price deals, competitive advantages in some of these global projects you're bidding on.

And just on a curiosity on Viking, is there a short of flow on price for people or your competitors can't move equipment all that well so you can least think about maintaining net of volume off-road?.

Yes, on the service level, the unique part of our businesses we do have four levels of diversification. We rent product, we sell product, we do certification on joints and now with the forklift acquisition we do servicing and cleaning of systems. And then we do full in service.

So, there is a lot of things that we can touch and the level of certification that we provide is a differentiator. So it does insulate us a bit from pricing.

I'll tell you that the oil industry is difficult right now and so we got to look at all industries, nuclear we have general -- power generation that we go after all over the world and we are doing transfer sites for oil load-outs. So there is a lot of places we touch this type of service.

So our hope is that our level of differentiation and the market spreads we have will help us maintain a reasonable level of pricing but it's certainly is out there. The question relative to Viking, it is about just trying to keep any equipment in the water as you can and I think that's generally in the case of all the major competitors.

It's important for anybody that has the assets try to utilize them because they you can cash flow the businesses, but there is not a lot of pricing discipline in the market right now..

Without question out of the three businesses, Viking is the most -- we're seeing the most adherent behavior from competitors from a pricing standpoint. We're looking for any kind of dollars to have cash flow come into their businesses because there are kidders largely are fixed – fixed cost non-cash depreciation.

So they are much more desperate I would say in that area..

Thank you..

[Operator Instructions] The next question is from the line of Charley Brady with SunTrust Robinson Humphrey. Please go ahead..

Hi, thanks. Good morning guys and Karen..

Good morning..

Good morning, Charley..

Just a quick -- I want to go back to the – your commentary on energy about your expectation in Q4 being a bit lower than you expected.

Is that a function of just the Viking, Cortland business, is it bit softer because I read it as the Hydratight business, maybe expectations there have come in a little bit relative toward the work couple of months ago..

Yes, it's a great question Charley. We are expecting a sequential -- big lump if you will from Q3 to Q4 with Hydratight and that's the biggest movement for the revenues when we look in Q3 to Q4.

Hydratight was up low double digits this past quarter on a core basis and when we're looking at what our schedule is over the next 90 days, here it's not as robust as we've seen.

And this isn't something that we're freaking out about because even if we look at the trend over the last eight quarters, I mean we've had real nice plus quarters and offs, and even minus 10 thrown in there, then we rebound again right after that.

So, it's lumpiness that we talked about and we've got lump coming out as you're in the fourth quarter and fourth quarter last year was pretty good. We've got little bit more difficult comp this time around third quarter of last year was not good so we had an easy comp on it. So that's part of what you're seeing. We do expect beyond Hydratight.

We do expect continued softness in Cortland and Viking and probably up further softening in particular in Viking in the fourth quarter as more and more of the job have won down and we're getting into a real low activity base..

And then Q1 and Q2 of the upcoming year, we're also going to have a great tough comp for Hydratight right because of the Middle East job?.

We will, yes..

And my follow-up here on the -- commentary on the additional restructuring that potential you're looking at, at what point do you get to what you're really cutting in to discuss that maybe if the market does come back its going to be harder to snuff that back up to capture that upside demand.

Can you just talk about what some of your rationalization, is it more headcount-related or is it all of that?.

Well, we are being very cautious on that issue and we're at to a market change. So it is something I personally get involved with the individual segments looking at their – not only their headcount but their operational expenses and then the manufacturing and industrial moves that we are making.

Some of the larger savings that we're going to see in the next couple of months are associated with some of the manufacturing moves that are in progress right now. Undoubtedly, we will continue to look at every aspect of the business to make sure that we're as lean as we can without damaging our long term ability to serve.

So we are watching it very, very closely..

Thank you..

Our next question is from the line of Scott Graham with BMO Capital Markets. Please go ahead..

Hi, good morning. One question on capital and one question on the markets. You know the company has historically run at a sort of 1, 1.5 net-debt-to-EBITDA level and we're currently running kind of 2.5 to 3, and I know you're saying it's going to come down in the fourth quarter.

But with the acquisitions, kind of, you're kind of two-thirds of the way there on what you're looking for overall to get to the 300 million.

Does that imply that really the next four quarters kind of need to be just running free cash flow without much share repurchasing, and without much acquisitions to kind of get net debt to EBITDA down to where the company has historically been?.

No, I don't think so. I mean, our publicly-stated comments are our debt target zone is 1.5 to 2.5 times net debt to EBITDA. So, we are on the higher end of that right now with this quarter and we expect to be essentially back on it -- next quarter on it.

Given the interest rate environment out there, given what we've had and buybacks that we've had historically, certainly not as surprised that we have been way up from a leverage standpoint. So you should not read into it that cash flow for the next year is going to be used to reduce debt, and we're putting M&A on hold.

I wouldn't expect to be spending more than our free cash flow on it in the next year, because we are very targeted on tuck-in acquisitions, but there were a couple of years when we had our leverage below our desired range of 1.5 here, and that was after we sold the electrical business, and that's why we bought back as much as we did from a stock standpoint to put a little bit more capital to work and to leverage up.

So, it wasn't quite as lazy of a balance sheet as it looked..

Got you. Thank you for that. The $300 million assessment, I think there was a question asked earlier about this, about the 50 million coming from the markets. I think the way things are trending right now, that number by the time of the Analyst Meeting rolls around will be almost double that.

It looks like your $25 million worsened that right now, not you, but the markets.

Is there enough opportunity on the cost side to offset that's a simplification that 30 million, can we get into doubling of that number to help offset the market issue?.

I think it's unrealistic that we could cut our way to cross 30. I think that the simplification activities at 25, certainly we are going to go after everything above that we can, but there is just simply not enough there to add another $20 million or $30 million worth of cost benefit to offset any market-related things.

As I've said, our focus is going to be on opening new regions, looking at new market participation which means different types of sales areas, whether it's aerospace and other places that we are in today, but not know when it should be.

Some new product launches that are coming out, and then just getting out and being new effectively -- more effective to the sales force, and getting that incremental growth there.

That's not going to be fix-all to close that huge gap, but I can tell you that we will get growth out of it and our objective is to outpace the market in terms of market growth versus organic growth from those activity. So it's not going to be easy.

That's something over the next couple of months as we get closer to October we are talking through these things, and seeing where we're going to land..

Thank you very much..

The next question is from the line of Justin Bergner with Gabelli & Company. Please go ahead..

Good morning everyone..

Good morning.

Good morning..

My first question comes back to the topic of Hydratight; we have seen a number of companies sort of indicate meaningful drop-off in process MRO spending in the last couple of months, and so I just wanted to gauge whether the Hydratight conditions are best described as lumpy, or are you seeing similar drop-off that some of these other companies are seeing, and if not, why do you think you are not seeing the same degree of drop-off?.

Well, there is one key factor that you have to look out, compared to some of the other competitors who are out there, is that we are geographically much wider spread. We also have a much heavier diversification of what we do.

Most of our competitors don't own tools and they don't manufacture tools, and in the case now that they don't have some of the cleaning operations and some of the pipe preparation operations that we now own. That enforce us a much broader scope of where we can make money and where we can make money.

So it's harder to compare us directly with those competitors. We are lumpy. I think that's the best way to describe it. Large projects usually start as a small job on a petrochem or a load out facility or a transfer point for oil terminals, and then they grow because mobilization fees getting on a platform or out into the field are typically higher.

So once you are on your side, you tend to grow with it. So that's how we believe commercial effectiveness and really being a great supplier can take some of that lumpiness out of it, but when we get big projects, there are also things when you work your way through it, because the comps become very difficult..

Okay.

I mean, if I was to ask specifically about certain competitor that reported trailing three month orders today and sort of big drop-off in process management; is it sort of erroneous to think that the conditions that particular company is seeing you know, broadly apply to the likes of Hydratight?.

Well, I think you have to look into the company's conscious to where their revenue is coming from. If it's particularly North America, they are probably feeling a pinch. Just get a marginal cost of production chart, and you will find that there are varying degrees of strategy on maintenance around the world.

If you are sitting in the Middle East, where your marginal cost reduction is still very much in the money, you have a more proactive approach to how you are working on your equipment in your terminals and your petrochem sites.

And if you are in an area where your marginal cost production is not so good, your cash constraints, and you are going to be on a fix to sale basis. So that sort of maintenance strategy is very common in any commodity-related business.

And so, you have to get into the details of where the revenue flows from and what are those customers look like in those markets to make an accurate comparison..

Thanks. I will hop back into the queue..

Thanks..

Our next question is from the line of Stanley Elliott with Stifel. Please go ahead. One moment, please go ahead. Mr. Elliott..

Hi, good morning. Thank you. Quick question on the MENAC acquisition, it was 5 million at a quarter, I believe in the press release you had said 25 million for calendar '15, was this or is this a seasonally stronger quarter, is this business ramping on the top line ahead of expectations, you know, any help you could provide on that would be great..

Yes. Sales in the quarter about 5.5 million, that's really two month worth. It wasn't a full quarter first half, and there is a time when you are ramping up these businesses for progress, and whatnot. So I won't read too much into that. There were some seasonality in here, but the business is growing..

So, just from -- so even with the strong start, I mean, is 25 a still good number from a full year perspective, or how do we think about that?.

Yes, when we bought the business we had indicated that it was going to be growing quite a bit, and its run rate clearly is well above $25 million, and the expectation was that we are going to have a very good 2016, which we are enjoying right now. So the pace and the size of this business is well above $25 million right now..

Okay.

And then as a follow-up, as you guys move into new regions, new markets, new products, how quickly can you ramp commercialization, organization to really into those markets and penetrate those in a meaningful way?.

Well, the key when you look at a market, obviously you need appropriate product mix, because there are regional-specific requirements for each type of product we sell. There maybe a content or may be a price point. There is lots of factors in play. One of the biggest ones is your distribution footprint.

So, one of the constraints to most companies particularly coming out of the U.S. is how do you stand up at distribution footprint to support the sales within those regions. That's what we are focusing. It's how can we get those points of sale aligned with the products we intend to sell..

Great, thank you very much..

We have a follow-up question from the line of Justin Bergner with Gabelli & Company. Please go ahead..

Thank you for taking my follow-up question. It relates to the industrial margins.

I guess, on a sequential basis, it seems like there was decent incrementals versus the second fiscal quarter, and I guess I was just curious given the comments made earlier, sort of where the incremental or sequential margin profile was coming up short relative to what the company might have hoped for, or forecasted three months ago?.

Sure. Justin, what you saw was our seasonality. Second quarter clearly always the weakest. So, last year, we are off about a 150 basis points, and the EBITDA margin Q1 to Q2 and then jumped up about 350 when we got into Q3. This year is similar, we are down 250 basis points in the first quarter, and jumped up a couple of hundred basis points here.

But year-over-year we definitely expect to be down in margins in industrial and the incrementals in that business are quite high. So if you are losing a million or two, or three of revenue relative to what you are expecting, $0.02 or $0.03 a share, just that alone, if that's sensitive..

Okay, that's helpful.

Is there any particular area in industrial, where the mix has worsened sort of over the last three months and sort of looking out over the next three months?.

Really it's pretty consistent across the different verticals..

Okay. Thank you very much..

You bet..

And there are no other questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks..

Great. Well, thanks everybody for joining the call today. Before we wrap up, I wanted to provide just some high-level details on our annual investor day. As you can see here on slide 17, that's going to be held in New York on October 6.

In addition to covering, Randy strategy and game plan as we just talked about here, we also have our executive leadership team on site for the small group meetings that we have done historically for kind of heavy dose of Q&A with them. So mark your calendar, watch for the invite and registration instructions in the next month or two.

Also note that our fourth quarter earnings call for your planning will take place on September 28. So, I will be around afternoon to answer any follow-up questions you guys have. Good bye..

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