Karen Bauer - Communications & IR Leader Randy Baker - CEO Rick Dillon - CFO.

Alison Poliank - Wells Fargo Ann Duignan - JPMorgan Jeff Hammond - KeyBanc Capital Markets Scott Graham - BMO Capital Markets Charley Brady - SunTrust Robinson Humphrey Mig Dobre - Baird Justin Bergner - Gabelli & Company Seth Weber - RBC Capital Markets.

Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation’s Third Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we'll conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, June 21, 2017.

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

Great. Good morning and welcome to Actuant’s third quarter earnings conference call. On the call with me today are Randy Baker, Actuant’s CEO; and Rick Dillon, CFO. Our earnings release and the slide presentation for today's call are available in the Investors section of our website. Before we start, a word of caution.

During this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Investors are cautioned that forward-looking statements are inherently uncertain and that there are a number of factors that could cause actual results to differ materially from these statements.

These factors are outlined in our SEC filings. 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'll turn the call over to Randy..

Thanks Karen. And good morning, everyone. Thanks for joining our third quarter conference call. As you read in today's press release and our prior release, we had disappointing EPS in the quarter of only $0.32 a share. This was driven by the impact of our energy business, which had two primary areas. I am going to cover both of them.

First of all, the Hydratight business saw increasing delays in project scope and start dates. Secondly, the scope of these reductions has been a new dynamic, not only have companies reduce the amount of work, but they’ve also reduced the amount of rental and service we're doing on these job sites.

Third, we see a replacement in nondestructive testing and replacing service intervals and the dynamics of all three of these factors have created a very difficult environment for our Hydratight team.

But what I want to stress is that the Hydratight business remains profitable and is a core element of our company and we see it as a clear growth engine going into the future on the mid to downstream elements of the energy and maintenance activities.

The other element that drove our earnings down in the quarter is the compounded losses of our upstream exploration and offshore well development businesses. These losses have accelerated during the year and have continued. So that brings me into next phase, what are we going to do about it.

The actions within the energy section have broken into three basic areas. First of all, we are exploring options to limit our exposure to the oil and gas exploration and well development area. I can't give you a lot of details into that, but I will tell you that Rick and I will provide additional updates as we progress through the quarter.

Number two is we're executing restructuring actions in the energy segment. We expect savings between $3 million and $4 million with a cost associated with those actions of about $2 million.

The timing has started now in our fourth quarter and will continue into Q1 of 2018, but rest assured, we are going to take every action early as possible to get the full cost benefit for the future earnings. And then finally, we're executing an upgrade to our service processes in the Hydratight business.

We have to have tighter control of our fleet management and the rental products and how we accurately forecast our revenue and service jobs. Now moving on to the positive areas. The industrial business had a great quarter. Core sales were up 6%.

I was very, very pleased with the performance of the team and we've had product growth in all regions and all product segments. Operating profit grew by 7% with 40 basis points of margin expansion and an operating leverage of positive 32%.

Now this is below our typical operating leverage of targeting above 40% to 50%, but it was driven down by one single item, which was the consolidation of our Dallas operations, which is progressing slower than expected. Moving over to the Engineered Solutions business, this is their best performance they’ve delivered in many years.

Core sales growth was up 8% and just like in the industrial businesses was broadly distributed across multiple regions and product lines. This is a good example of how our commercial effectiveness actions are starting to bear fruit in both the industrial and the Engineered Solutions business.

The operating profit was up an impressive 71% with a margin expansion of 290 basis points and the operating leverage in the quarter was a positive 44%, which is on the core business excluding the sample Sanlo divestiture of last year. We had good cash flow in the quarter, but it was impacted by lower profits.

The conversion rate was above 100% and our debt-to-EBITDA ratio declined to 2.8. So, in summary, I'm disappointed with the results in the quarter, but I am happy with the short-term actions that we're executing to improve the energy business and to reshape our portfolio going forward.

I'm also very pleased with the performance of our industrial and engineered solutions team, which are focusing on selling, capturing customers and growing our business. This is a great example of how we intend to operate going forward and growing our core sales and our organic growth.

I am going to turn the call over to Rick now to go through the details on the financials, but I am going to come back later with a strategy update, market dynamics and the updated guidance. Over to you Rick..

Thanks Randy. If we could turn to Slide 4, you can do a recap of our performance for the quarter. Fiscal 2017 third-quarter sales were in the middle of our guidance range down 3% on a year-over-year basis. Core sales were flat excluding a 2% impact of a stronger U.S. dollar and 1% impact of net divestitures.

Adjusted operating profit declined 13% to $28 million as a result of significantly lower energy segment sales. Excluding the one-time impact of a tax benefit of about $4 million, our effective tax rate was a negative 4% compared to about flat in the prior periods.

This rate was below our low single-digit protection for the quarter as fixed dollar credits were bigger on a percentage basis given the lower earnings. We still expect the effective tax rate for the full-year to be flat to low single-digit.

Bottom line, our adjusted EPS for the third quarter of fiscal 2017 was $0.32 compared to $0.40 per share last year. If we can turn to Slide 5, our core sales rate of change improved to flat from down 3% last quarter.

Industrial sales were in line with our latest outlook, while Engineered Solutions exceeded our expectations with better demand across a variety of markets including China truck, agriculture and off-highway equipment. As Randy discussed, the downside came from energy. I'll provide some additional details on that in a few moments.

Slide 6 summarizes the quarterly adjusted operating profit margin, where you can see the margins were down about 100 basis points year-over-year. This is largely due to the energy segment, volume declines and growth weighted towards the Engineered Solutions segment.

So, let's walk through performance by segment starting with the industrial segment on Slide 7. Core sales for industrial increased by 6% from prior year with a more normalized balance of sales versus the overweighting towards heavy lifting technologies we saw in Q2.

We experienced nice sequential improvement in the industrial tools, core growth trend going from mid-single digits in the second quarter to mid-to-high single digits in Q3. This growth was again broad based across all regions, customers and end markets.

Distributor do appear to be selling through product to end users and not just restocking as evidenced by our currency order patterns. As Randy will touch on later, we believe our commercial effectiveness actions are helping to deliver performance above the market rate of improvement.

We delivered low single-digit sales growth within the Concrete Tensioning product category, which was generally offset by slightly lower year-over-year sales for heavy lifting technologies, which was sequentially down from Q2.

From a profitability standpoint, industrial margins were up 40 basis points year-over-year, while incremental margins improved with higher IT sales we unfortunately incurred about $1 million of inefficiencies from a delayed facility consolidation associated with our previously announced restructuring plan.

Excluding the unplanned costs, we would have seen closer to 50% incremental margins in the segment. Keep in mind, those incremental margins do incorporate continued investment and growth actions, including people and new products. As we have stated, these are measured and specific and are beginning to pay dividends.

Now let's turn to our energy segment results on Slide 8. Although we expected year-over-year sales to decline, the magnitude of the challenging market conditions were far more severe than we anticipated. Our Hydratight business incurred -- encountered increased levels of maintenance push-outs and scope reductions by its customers.

We saw those across all served markets and regions, but was most notable in the Middle East and Asia Pacific. It was not just refinery based, but included production and downstream activities beyond just oil and gas. We believe the prolonged downturn in energy prices have caused customers to turn to even more stringent cash conservation action.

While CapEx budgets were the first place to see severe cuts and those activities are now permeating the MRO parts of their businesses. Excluding the impact of the one-time projects from fiscal 2016, sequentially Hydratight core sales decline worsened from about mid-single digits in Q2 to low double digits in Q3.

Unfortunately, we don't see a catalyst for improvement in Q4. After several quarters of sequentially stable revenues from Viking, we saw a decline in this quarter. The decremental margins on this rental business remain quite high.

Cortland was up modestly in the quarter, continuing the trend of growth in nonenergy markets, offsetting the small decline in its energy profit line. Profit margins were down considerably on the lower Hydratight sales volume and the decline in Viking rental revenue, both of which carry high variable margins.

In Hydratight, the decrementals are high due to underutilized service technician and rental tools. As Randy noted, we are focusing on improving utilization in job planning and forecasting while rightsizing the business for the current environment.

You'll see more details around this restructuring and related payback in the fourth quarter; however, we anticipate incurring charges of about $2 million with expected savings about $3 million to $4 million for a full year run rate.

Engineered Solutions, turning to Engineered Solutions on Slide 9, as Randy noted, we are very pleased with sequential improvement in core sales, which were up 8%. We anticipated as the year went along that destocking efforts by customers in the off-highway markets would abate and production levels would increase.

The broad-based increase was seen across a variety of off-highway end markets including agriculture, construction, forestry and mining among others. China truck production remained very strong and Europe maintained solid build levels.

Profit margins in the Engineered Solution improved 290 basis points on higher volumes and the benefit of prior restructuring and lean revitalization actions. Turning now to our liquidity, as you can see on Slide 10, we generated $30 million of free cash flow in the quarter on solid working capital management.

We used the cash to reduce debt and the corresponding net debt-to-EBITDA ratio decline from 2.9 to 2.8 as Randy mentioned. With cash on hand and $600 million of revolver availability, we believe we have plenty of liquidity for capital deployment and our operating needs going forward. That's it for my prepared remarks.

I'll now turn the call back over to Randy..

Thanks Rick. Turning over to Slide 11, as you all know we started a lean manufacturing strategy initiative last year and many of you have questions about that. So, I am going to provide just a quick update on those strategies and then our commercial effectiveness.

As you well know, we started by auditing all of our factories, all 32 locations around the world. We then looked at the training requirements and the skill levels of our employees and then we set transformation targets. As of right now, we have trained over 190 employees worldwide and we've launched multiple sites in lean manufacturing transformation.

In fact, we've got several that are near completion. We have a lot of great progress towards those end games of improving the quality, the cost and the delivery and safety metrics of each site.

Now as we progress into 2018, we think we can wrap up the remaining sites around the world during the year and then bring Actuant to a fully lean manufacturing company. The next phase of that project is really going to look now at supply chain operations and how can we improve how we purchase, how we manage material and how we schedule.

Secondly, we're launching a service effectiveness project, which will impact how we manage rental fleets and our labor utilization in all 24 Hydratight sites globally.

So, turning now over to Slide 12, talking extensively in the past about our commercial effectiveness processes, we've done a lot to change how we cover territories, we've increased sales people and we set out clear targets for our sales people worldwide.

Secondly, we've initiated a much higher upgrade on our engineering capability, so that as we enter into 2018, we have a much higher flow of new product development and new product launches. In fact, in the fourth quarter, you'll see evidence of that as we launch some new products.

Overall, I am very pleased with the results by all of the businesses you see on this slide from Enerpac down to Maximatecc, each one of those companies have shown incremental improvements of keeping customers and capturing new platforms, which is evidenced in our core sales growth and by business, we've seen ranges from as low as 5% growth during the year to well over 20%.

So, I really want to make sure our teams worldwide understand that this is working and we're going to continue to push it. Turning over to Slide 13, quick look at the industrial macroeconomics around the world. Obviously, the oil supply continues to be a major problem for everyone.

There is a distinct oversupply and even with the cuts that OPEC has done, we haven't significantly impacted the end market inventories and resulting price. This has an enormous impact as Rick mentioned on our maintenance activities and particularly offshore well development and exploration, which in some cases has come to a halt.

Moving on then to off-highway equipment, we see good economics and that our agriculture, construction and mining are all looking at better industry demand and clearly on the inventory side, distributors have reduced and are now better suited for the market size.

Moving on to the general industrial market, our distributor optimism is improving and we see very good indication that there is real retail demand pulling through product and they are reordering within a quarter, which is a great indicator that there's good dynamics out there.

And then finally on the on-highway market, China truck continues to be very good, although we think that that will begin to moderate as we enter into 2018 and we've also seen registrations in Europe begin to slow a little bit in the truck market. So that leaves us over to Slide 14, which is where we set our core sales guidance for the full year.

As you can see in the industrial segment, we believe that the growth will maintain in the same range between 5% and 7%. We think the actions we have in place in our own commercial effectiveness and the effect in the market will continue into the fourth quarter.

On the Engineered Solutions business, we continue to see good growth and order demand and the outlook on the market is between 10% and 12% increase.

I will want to note that our sequential quarters Q3 is typically our most -- our highest and strongest quarter and therefore the numbers you see on the Engineered Solutions business are based on fairly low comps from last year.

And then lastly if you look at the Energy segment, we're seeing between 21% and 23% reduction in demand in our fourth quarter, which is down from where we originally had guided, which was upper single digits in growth. So that's a major turn in where we see the full market. So that leaves me on to Slide 15 and the guidance for the full-year.

So, on core sales decline of 2% to 3%, that means, we needed to narrow our sales guidance from what was in Q3 to $1.80 billion to $1.90 billion and correspondingly lowering the EPS to $0.82 to $0.87 per share. Our third quarter in sales should be between $260 million and $270 million with diluted EPS between $0.18 and $0.23 per share.

And as always, these guidances exclude divestitures and acquisitions and restructuring charges in the quarter. Free cash flow is projected to be between $65 million and $70 million, which is also based on a plus 100% conversion rate. So, in summary, we had a disappointing quarter.

There's no doubt in our mind that the actions that we're taking on the energy business will help to make it a better business going forward and to reshape the portfolio to a more profitable segment.

We see great performance from our industrial segment and our Engineered Solutions business and we have clear evidence our strategy work is working and we are getting the organic growth we set out in our strategic plan. So, with that, I will turn it back over to the operator to take questions..

Thank you. [Operator instructions] And our first question comes from the line of Alison Poliank with Wells Fargo. Please proceed with your question..

Hi guys. Good morning..

Good morning..

Good morning..

Turning to the industrial, talking about the operating efficiencies and the facility consolidation, what happened there and are we expecting those to persist into Q4 as well..

These are two facilities in the Dallas area, where we were bringing them together to streamline the manufacturing process. In fact, we had some great OpEx strategy there to take multiple steps of process down to a single machine.

So, we have a supplier that's on the delivery and it is costing us a lot of problem because we've had to keep the old machinery operational. So, we're working with that supplier to correct the problems and to get the machinery up and running, but we're also doing a lot of self-help to recover that internally. So, it was damaging.

It would have meant that we would add a plus 50% operating leverage and to quantify that is about $1 million hit..

Got it.

And then turning to capital deployment, looking at lower level of free cash flow here, potentially having to courtesy with some cash and unwinding some net energy businesses, how should we think about capital deployment in the near term for you guys?.

Well obviously, one of my primary jobs is making good capital deployment decisions and we know that there are things we must do with these businesses to invest in them, but clearly our number one priority is to have our capital deployment focused on strategic acquisitions also looking at share buybacks when we can and then also when we need to, we will deploy capital to improve businesses.

And that hasn’t really changed a lot, but clearly, we're making some tough decisions and we'll do that smartly and Rick do you want to add some color there?.

Sure Alison. There may be to get all this done, including the restructuring, there will be some short-term capital allocation to that process. On a long-term basis to Randy's point, it doesn’t change our strategy and it doesn't have a significant impact at all on our leverage. In fact, may be accretive to the leverage.

So, when you think about it going forward, the same strategy for capital deployment, maybe some short-term capital use to effect the changes we're talking about..

Great. Thank you..

Our next question comes from Ann Duignan with JPMorgan. Please proceed with your question..

Hi. Good morning, guys..

Good morning, Ann..

Just on the back of a lot of capital allocation question, can you talk about given the magnitude of the revision and then the discussion of all the different elements that went into the revision, is there any risk Randy that your businesses are not too complex to forecasting? Can you talk a little bit more about you mentioned in Hydratight fixing the sales process or the forecasting process, should investors be concerned that these businesses are just unforecastable because they are so diverse?.

I think that the stability in our industrial business, we have a very forecastable segment. Our Engineered Solutions business is probably even more so because of the long-term relationships with our suppliers and our customers.

So, we can forecast that fairly tightly and you hit the issue on the head, which is how do you forecast maintenance activities.

So, we're tightening up those processes that says that we look at what we have in booked business and contractual obligations within a quarter and within a month for the Hydratight business, so that we really have tightened that up a great deal.

And the problem we have seen, we've actually seen customers that have stopped mobilization the day the project was supposed to start and which creates an enormous problem for us. So, we've had to take a lot of that out of our forecasting so that until we put boots on the ground, we're not counting on the revenue..

And given the lack of visibility then, isn’t it likely that whatever the run rate in Q4 is that that's total value you can hope for going into next year.

It's going to be hard to forecast a recovery in contractual work at current prices?.

That's probably one of the most difficult things that we can do is forecast and we don't want to start forecasting '18 yet, but I think that what we will see is a release of pent-up demand. As I mentioned in the preliminary of the call, there's a lot of nondestructive testing occurring on these major sites around the world. That doesn't fix problems.

That just identifies the magnitude of the problem and in some point, that maintenance has to occur. At that point in time, we think that we're actually going to see a bit of a backlog of work as it comes through.

Now the question is when that's going to happen and we just don't want to put a stake in the ground yet until we see the dynamics in the energy markets have some improvement..

And Randy, then given your background in mining, I think you know that customers can't push out for a long time.

I just want to follow-up just real briefly because I know I don't want to take too much time, but can you just give us some examples of projects that were pushed out or moved by region and by placing the stream upstream, midstream, downstream yet just so that we can visualize….

Yes, so I'll give you a little detail, the two primary affected regions have been North America and the Middle East. Now the Middle East has been the most volatile and that's where we've seen actual scopes being reduced dramatically. So, I'll just try to give you some color for each one.

So, in the Mideast, the planning and execution is clearly in play there where they're just trying to constrain all monthly maintenance expenses and they're stopping projects before we can even get started.

We actually had an instance in the Middle East, in this quarter, we had equipment loaded ready to go to the job site and the phone call came that we're deferring for another quarter to do the work. The other area that's interesting two or three, where we used to see longer rental periods for our rental equipment and tools.

Now we're seeing down to a week of planning versus we'll take it for a month. So that also was created dynamic that the team is working on. That's affected almost every region. So, it's a question of volatility and the highest volatility has been in the Mideast..

And I know you were inside Arabia, is that fair thing?.

Yes, Saudi and throughout Caspian and North Africa, were actually one of the strengths of Hydratight is that we are so diverse around the world and then we also have multiple things that we offer not just pulling wrenches but we rent equipment, we sell it and we certify systems.

The one thing we don't have in our portfolio yet is non-destructive testing, which is something we have relied on..

Okay. I am sorry for taking so much time. Appreciate it..

No problem. Thanks..

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

Hey good morning, guys..

Good morning..

Good morning..

Hey so can you just talk about the strategic alternatives with the mooring business, how you're thinking about timing and then on the flipside, just maybe just talk about what you're seeing in the acquisition pipeline?.

Well, as I said in my preliminary comments, I can't give you a lot of insight into that yet, but I will tell you that as we progress through this quarter, I may be able to give you very specific updates.

I know it's tough, but we all have to be patient because we have a lot of people that are affected by these decisions and out of respect for the businesses and the processes we're going through, we just can't provide a whole lot more than that..

Okay. And acquisition pipeline..

Acquisition pipeline is good and I know that a lot of people would say that on the energy sector, you wouldn't want to do any acquisitions. Well, we still believe the Hydratight business is a valuable and profitable section.

In fact, if you look at the trough earnings in the earnings we delivered in this current quarter, they're still quite respectable. And we know that when the businesses are performing well, they have absolutely world-class earnings.

So, we still believe that Hydratight is an investment criteria, not only for other service and regions, but on addition of tools and processes that would help us be a more diverse provider.

So that's got actually a pretty robust pipeline of potential acquisitions and then on the industrial tool side, we are clearly moving forward with items in the industrial side, but specifically to help expand the Enerpac product ranges..

Okay. Great.

And then just on working capital, it seems like you had down sales and working capital to use, how much of that do we get back? Are there some opportunities maybe Rick that you see to tighten up the working capital side, thanks?.

Sure. Lot of the working capital use is driven by our receivables in the quarter and we do see those coming down in fact just subsequent to the quarter end, a lot of that timing, we see some significant payment. We continue to manage our inventory strongly.

It actually is a decline in the quarter and so we believe we've had strong primary working capital for the quarter. I think going forward, you'll see more of the inventory for certain segments come out and you'll see better performance receivable wise.

I think the thing to point out, where our businesses are growing, you're going to have some inventory investment and so you look at places like ES Engineered Solutions and industrial, you may see us putting inventory in the fields so that we have that inventory available.

But overall, we thought we did a good job of working capital management, all things considered in the quarter and expect that to continue..

Thanks guys..

Thanks Jeff..

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

Hi. Good morning. I wanted to ask two questions about energy and then one about the tax rate. On the energy side Hydratight, it looks to me like the guidance that you're giving for the fourth quarter down in the low 20s on what is a really easy comparison and you're saying it's going to get worse sequentially year-over-year sequentially.

Why would that be? Is it that in the sort of the second half of the quarter things just took another step down and in Hydratight and in mooring, I don't know how much more stepdown there is left in mooring, but can you give us the cadence of how -- why that guidance is what it is?.

Yes, so on the Hydratight side, we clearly have a gap in project availability to complete in the quarter. So, we've scrubbed that backwards and forwards of what projects are going to start and what projects will generate revenue in the quarter and it is significantly lower than what we had last year even with the easy comp, which is concerning.

That said, Hydratight will be profitable in our fourth quarter and as far as the Viking business, those revenues have declined further and as those revenues decline, there is also incremental margin issues because of the nature of our rental business, the magnitude of losses actually pick up a bit. So, both of those contribute to that.

Now in the Cortland business, that business is still moving quite well..

Okay. So, if we were to look at this reset this year in total and notwithstanding the availability of project business because that comes and goes gets pushed out, I get that, but it looks to me like the energy business is going to have sent percent essentially a 25% decline in sales this year.

So, would you be able to tell us essentially how big the Hydratight business is of the total now and more specifically and more importantly, what is the downstream versus the mainstream of those businesses now?.

Yes, so Hydratight is two thirds of the segment. So, you can do the math pretty quickly of how large the business is from there and it's obviously all of the profit and so the energy segment that into downstream, midstream and upstream and then CapEx versus OpEx, OpEx is about 20% of our total profiling Hydratight sometimes less.

I'm sorry CapEx is 20% of the profile, OpEx being about 80% of the profile. Where we think that the bulk of our businesses become is in midstream, which is the conversion and very far downstream. So, it's in the more stable revenue realm of the energy maintenance and operations business.

Does that answer your question?.

Yes. I'm sorry. I put myself of mute. I apologize.

So are you saying the midstream and downstream, they have historically been kind of about equal? Is there one now that's -- are they still about equal the midstream and downstream within Hydratight?.

Roughly speaking there is not just refineries. You got a very broad array of things we do worldwide.

We work in refineries, we work in transfer terminals, we do port facilities, every place from -- in the oil transfer and conversion and then obviously we do wind power, we do basic power-gen, we even do nuclear and mostly the nuclear is maintenance and decommissioning activities and refueling of reactor.

So, we have a very broad base of service work we do and so that's one of the reasons why Hydratight has a better profit profile than some of its competitors because it is well diversified not only from a service content, but from what we can rent and how we sell tools and then also our certification processes..

Got you. Thank you. So, here's my tax question and directionally will do because I know how hard you guys had time of estimating this, but it seems like the businesses which were driving the higher tax rate are obviously a much lower portion of the earnings now.

So assuming those businesses come off the bottom next year, should the tax rate for the total company kind of jump back up to that sort to 10% to 15% territory? Is that part of your planning? Do you know that yet?.

Part to your first statement, I don't know that the businesses you're referring to actually drove the lower or negative tax rate. In fact, it's probably the opposite in terms of pressure on the rate.

So, in terms of our forecasting of where we'll be, A, it's too early, but obviously given the low point we're ending 2017 on we probably won't ship that 15% mark, which we put out there as our standard run rate, but too early for us to give you a number, but you'll see us land in that low single digits for the year..

For this year?.

For this year, I am sorry 2017..

And then for next year, we should assume that that number should go up, would you agree?.

Not necessarily. So too early to call it, but it won't be 15%. I do know..

All right. Very good. That's all I could ask, thank you..

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

Hi guys and Karen, good morning..

Good morning..

Randy, I wonder if you can just on the energy business, on Viking specifically, I know you can't talk exactly what you're doing there, that's what you said in the release, but can you quantify to some degree how much, how much of that business is losing, how much of a headwind to the margin is the Viking business because at some point, as that business goes away, which is sounds like that the path you're looking at, that's obviously going to be incremental positive to margins on the segment.

So, I am just trying to gauge the magnitude of margin upside if Viking were to suddenly not be part of Actuant anymore?.

Well Charlie, that's the big question right of what will be the outcome. All I can tell you the losses are large. That's about is all I can characterize at this point.

All I can say is just have to be patient and we'll give you some updates within the quarter as things progress, but we wouldn't be looking at this if it didn't have a significant positive impact..

Yes, no that's understood and just on your commentary around looking at what you're doing there strategically, I wanted -- some of that commentary outside of the specific mention of the mooring business, are you also looking at the Cortland business as well or is that just completely separate because in one of your comments previous to a question, I think you said the Cortland business was doing okay.

So, I am trying to square all that up..

Cortland business does not lose money. It's an EBITDA positive business today. There is elements or necessarily product lines maybe we would deemphasize the future and as you've seen, the team there has done a great job of growing nonoil and gas components of that company.

In fact, the oil and gas only represents less than 50% of the total revenue base now. We got to have to continue that push and does that mean at some point in the future there are certain product lines we're going to deemphasize.

That's the strategic nature of what we're discussing here, but I don't want to get any further into that because we're still looking at how to fundamentally improve the total portfolio in energy and how do we maximize our earnings performance going forward..

That's really helpful. And just as a follow-up as we look into the Enerpac business, structurally that business has changed with the heavy lifting a lot bigger than it was five, six, seven years ago. If you look historically at the EBITDA margin profile of that business, that was I think low to maybe mid-30 EBITDA margins.

We're kind of mid 20s now on adjusted, structurally can that business get back to a low to mid-30 EBITDA margin or has it changed such that that's probably not going to happen?.

Yes, and what you're saying is a diluting effect by the heavy lifting technologies business, which is actually typical to most heavy equipment companies in terms of margins and then the Precision-Hayes business has also lower margin to the Enerpac brands.

But what we think for modeling, you should always consider that the industrial business should have mid, in the mid around 20 some percent in EBITDA margins, which is a fantastic business. That's one of the reasons why in our strategy we're focusing on that so heavily in getting organic growth because of the incremental flow through is so good.

And I see a lot of progress from the team in our industrial business. I think the thing to think about us in the future is we're not a heavy lifting and high force hydraulics company. We're a very broad-based industrial tool company..

But just to follow-up on that point, you're at mid-20s today and that's with the -- and you're doing a restructuring foundation in Dallas at two -- couple of plants there and you've got obviously the volume issues and where it was previously, so there is potentially upside there.

I am just trying to understand, we're not -- you're not saying that 25%, 26% EBITDA margin is kind of the top end, are you?.

No, no. There's things that will improve particularly as we grow. Our IT sales that has -- the industrial tool sale has a great margin affect.

We're always going to be in the mid to upper 20s and there are times when we will push into the 30s when we have incremental sales in a quarter and a year that are growing and we're targeting businesses for acquisition that have a similar profile.

So, I don't want to -- I don't want to leave you with the impression that we're going to degrade the quality of earnings from the industrial business because that's far from the truth.

And as you well know, we have some manufacturing things we're working on that you mentioned to improve even further from what we're doing even on the industrial tool side. So, I'm very confident we can maintain the performance of that business..

Great. Thanks a lot. Appreciate it..

Our next question comes from the line of Mig Dobre with Baird. Please proceed with your question..

Yes. Good morning, everyone. I apologize if you covered this during the call.

I was a bit late, but I'm trying to make sure that I understand within the fourth quarter guidance, implied guidance that was provided, how we should think about energy segment margin?.

Rick do you want to..

Q4 margins and energy you're asking about?.

I am..

Okay. So, you should think given the full year guidance that will be negative but it will be down from Q3..

Okay. Then I'm trying to relate that's based on earlier comment that you provided vis-à-vis Hydratight, it looks like in the fourth quarter, that's where the incremental step down is occurring. Hydratight is profitable in the third quarter.

Will it be profitable in the fourth quarter?.

Yes..

Then based on your cost savings, I think I've heard something $3 million to $4 million, if the fourth quarter is the run rate that we're going into fiscal '18 with and we're working with $3 million to $4 million worth of cost savings, that's a little over 1% of segment sales in targeted savings.

I guess my question is should we sort of embrace ourselves for this segment potentially losing money again next year and why shouldn't we be looking at more significant restructuring action frankly given the lack of visibility into a potential upturn?.

Well, clearly that's why we're talking very broadly about the energy business and some of the strategic review that we're working through. Our objective is to make sure that we position the business the best possible profit profile going into 2018..

And consistent with that review what we've told you so far, the restructuring efforts that we've identified into Randy's comment that are currently being executed, as we continue that strategic review, there may be other actions that are taken..

Well not to be pushing back too much on this, but we've gone through three years of deterioration in this business and the downward move in margin in fiscal '17 was significant to the tune of 1,000 basis points and at this point it seems to me like it's fair to say that we need to have all hands-on debt with regards to rightsizing the cost structure.

I guess I'm just wondering what prevents you from taking more drastic action today?.

Well, there's elements that -- I just want to make sure everybody understands that there are elements within the Hydratight business we're looking at from a cost perspective to make sure that we have our labor utilization correct because that's the big cost in any service-related company, is how well do you utilize the service, rent tools that are in your fleet.

That's the thing we're looking at. The third thing is obviously we have to look at location. We have 24 locations around the world. We need to be thinking about them very granularly on same-store growth and same-store profitability year-over-year so we can identify areas that are simply not performing. That's in process right now.

In fact, it's not that we started it yesterday. We've been working it hard this entire third quarter. So, I would say that the first pass of between $3 million and $4 million that is the first pass of this. One thing I want to stress though is that Hydratight is a good business and it is profitable.

We don't want to do with damage it going forward and if you lose key service skills in training that we spent a lot of money to get, then you really cut your ability to serve end markets and then you put yourself in a further spiral down the revenue loss stream and you simply hand market share to competitor.

So, it's a very fine line that we're walking, but I just want to stress Hydratight is under clear guidelines and pressure to drive maximum revenue bases, capture rates and to control expenses.

On the Viking side, we saw an additional step down in our fourth quarter forecast, which you've seen and that comes back to the more or less the broader discussion we're having about the energy segment..

Okay. Thanks for taking my question..

No problem. Thanks..

[Operator instructions] Our next question comes from the line of Justin Bergner with Gabelli & Co. Please proceed with your question..

Good morning, Randy and the rest of the team..

Good morning..

My first question just relates to the restructuring actions in energy, are those actions all on the Hydratight side for now while you do the strategic review of the non-Hydratight businesses?.

We look at the entire segments in its entirety. So, there are pieces of each one of the businesses that we're looking at..

Okay.

And should I assume that as one looks at Viking and it's a rental heavy business that theirs is sort of underlying physical assets that have some minimum value in the market depending upon what you decide to do with that business?.

Yes, there certainly are underlying assets that have some market value and if it's ongoing operations, they definitely have more value to them..

Okay. The other question I want to ask relates to the comments you made about the trucking market slowing down a bit in China and Europe.

I was trying to get a sense as to whether or not those comments were meant to reflects year-on-year comparisons or sequential comparisons as well?.

It's more or less a sequential view because if you watch the registrations in the European truck market, we've seen kind of small movements positive followed by a sequential movement down.

There is no doubt that this is going into the third and fourth year of strong truck sales in Europe and I don't think anybody that's in the truck market would argue that that should temper as we're going forward just if it follows the past cycles that we've seen.

Now the Chinese truck market is a different dynamic altogether because what's occurred there is the load restrictions have increased the total quantities of trucks required within China, which created a nice blip in demand.

Now we don't know exactly when they're going to hit the steady state of truck volume required to move the freight in that country. Economically they are improving. So, there's obviously more freight moving around, which helps that story. The thing that I think we're more confident about China is that the total truck market has grown.

So, serving that truck market on an ongoing basis is going to be a larger market in general, but I think just for a conservative standpoint we know that at some point the truck build up in total fleet is going to start tempering and we think that'll occur as we enter into '18..

Okay.

And you just remind us on-highway truck relative to Engineered Solutions, sales you know what percentage of the segment is it today?.

It's about a third of the segment sales and it's about 75% of that is Europe. 25% is China on a trailing 12-month kind of look..

Okay. Thank you for taking my questions..

You're welcome..

Our last question is coming from the line of Seth Weber with RBC Capital Markets. Please proceed with your question..

Hey good morning, everybody..

Good morning..

I just wanted to -- most of my questions have been asked, but I wanted to go back to something that I think Randy said with respect to the energy business where Randy I think you said you still expect some release of pent-up demand that's out there and what I'm trying to calibrate is as you're thinking about your restructuring, is this relatively small restructuring that you're talking to today? Does that assume that that pent-up demand gets released in 2018?.

Yeah, it's too early to call '18, but typically when you see a lot of nondestructive testing occurring, it is for going maintenance activities. It's not the question that you can stop -- not do the maintenance all. It's just changing the date in which it's going to occur.

So, we know that there is a lot of maintenance either offshore platforms, onshore terminals, petrochem conversion sites that clearly need more work that they're not doing. If you think about the maintenance manager in these capital markets are given a very specific monthly budget not to exceed.

And so, they're going to work on the critical aspects of their site and they're going to defer anything that just clearly can be deferred. And the nondestructive testing allows them to do that, but all it does is push it into another interval.

I saw that in other industries and then once it starts then typically that's the first indicator that the business is starting to turn again is when you have a lot of maintenance activity..

Right.

So, I guess the question, I'm just trying to understand, so this $2 million that you're spending on the restructuring actions, I guess what I'm trying to think through is are we going to see a number of the -- if this pent-up demand just keeps kind of getting pushed out, it sounds like there's potential for just incremental actions as we get into the year, is that the right way to think about it or….

Well, you have to, unfortunately you have to balance your revenue streams, available jobs with your -- not only your rental fleet of assets, but also in respect to the number of service people that are on the ground.

But as I said in the prior question, we have to be extremely cautious because we have a very rigorous training program and joint integrity to bring people to level of that type of service quality. We don't want to lose that. So, it's a very fine balancing line that we need to walk, so that we don't damage our business going forward..

Sure. Okay.

And then just maybe a follow-up on the industrial segment, can you talk about what you're seeing just from a competitive pricing perspective in that segment?.

At this point, the pricing has been consistent. There's not a lot of pricing pressure in the marketplace. We obviously have restructured price increases, some of which have taken place in the third quarter, but there I would expect there would be some price realization given the direction of movement in the market.

Clearly this is the type of industry that's getting -- it's on an improvement path at this point..

Okay.

So, the price increases that you put in place in the third quarter are sticking and they're being accepted?.

Yes..

Okay. Terrific. Thank you so much..

And we have no further questions on the audio lines at this time..

So just in closing on Slide 16, you see a heads-up kind of save the date for the upcoming Annual Investor Day scheduled for October 5. We'll hold that in New York City. The format largely similar to what we've had in our Investor Days in the past with kind of the simultaneous segment section. So unfortunately, this won't be webcast.

So, I get that question often, but because we have these simultaneous sessions going on, it precludes the webcasting. The invite and registration information will come out in early August. So, look for that.

Thanks everyone for joining the call and we'll be around today and going forward to answer follow-up questions for also your planning purposes, our yearend call is scheduled for Wednesday, September 27. Thanks much bye, bye..

Ladies and gentlemen, this does conclude the conference call for today and we thank you for your participation and ask that you please disconnect your lines..