Enerpac Tool Group Corp. (EPAC) Q4 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation's Fourth Quarter Earnings Conference Call. If you would like to view the presentation online, please refer to your meeting invitation for details. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, October 1, 2013. It is now my pleasure to turn the conference over to Karen Bauer, Communications and Investor Relations Leader. Please go ahead, Ms. Bauer.

Good morning, and welcome to Actuant's Fourth Quarter Fiscal 2013 Earnings Conference Call. On the call with me today are Bob Arzbaecher, Actuant's Chief Executive Officer; Mark Goldstein, Chief Operating Officer; and Andy Lampereur, Chief Financial Officer. I would like to point out that our earnings release and the slide presentation supplementing today's call are available in the Investors section of our website. Before we start, let me offer the following cautionary note. 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. [Operator Instructions] And with that, I'll turn the call over to Bob.

Thank you, Karen, and thanks to all for joining us on our fourth quarter earnings call. It's been a busy and exciting quarter here at Actuant. To start with, our sales and earnings results for the quarter were in line with our guidance, excluding the transaction costs for Viking. This was achieved in a stagnant global economy. Our full cash flow was outstanding, exceeding $200 million for the year. We closed on the Viking SeaTech acquisition about a month ago, deploying approximately $235 million in the attractive offshore oil and gas market. We also opportunistically repurchased 28 million of Actuant's stock for the quarter, or about 1% of our outstanding shares. We are on track for the sale process of our Electrical segment, which we started in June. We expect to complete that divestiture sometime in our second fiscal quarter. And finally, the board named Mark Goldstein as the new CEO in an orderly succession process effective on my retirement in January of 2014. I will stay on the board as Chairman. With that overview, I'll turn it over to Andy to go through the fourth quarter financial results. Andy?

Thank you, Bob, and good morning, everyone. Fourth quarter came in pretty much as expected after peeling out a favorable tax adjustment and the impact of the Viking SeaTech acquisition. I'll cover each of these items in a minute but first wanted to summarize the results at a high level. We generated sales of $327 million, which included about $1 million of sales from Viking, with total sales in the upper end of our guidance range. In total, sales were up about 2% year-on-year. Fourth quarter operating profit margins, as well as EBITDA margins, were up over last year. Current year profit was impacted by about $3.5 million of Viking transaction costs. Excluding these, fourth quarter operating profit margin was 17.2%, the best of the year and 170-basis-point improvement over last year. Our diluted GAAP EPS from continuing operations was $0.60 a share. However, as you can see here on Slide 5, this $0.60 a share included both a nonrecurring $0.14 share income tax pickup and a $0.04 a share drag from Viking transaction cost. Excluding these 2 items, earnings per share for the fourth quarter was $0.50 a share, which was in the middle of our EPS guidance range. Compared to last year's $0.48 a share of earnings, this represented 4% improvement. But it's worth noting that the effective tax rate last year was much lower, representing about a $0.05 a share headwind on a year-over-year basis. And lastly, cash flow in the quarter was outstanding and put an exclamation point on the strong cash generation here at Actuant. We generated a record $205 million of free cash flow. Turning now to Slide 6. I'll provide a little bit more color on the results, starting with the sales line. Fourth quarter sales were approximately 2% above last year in total, with 1% of this coming from currency and less than 1% from acquisitions. On a core basis, we were up slightly, but it rounded to less than 1%. While soft on an absolute basis, we continue to see slightly improving core sales trends. 2 of our 3 segments were flat year-over-year, with Industrial being up 1%. The biggest sequential mover, though, was Engineered Solutions, which went from minus 10% core on a year-over-year basis in the third quarter to flat in the fourth quarter. Our consolidated operating profit margins in the fourth quarter were up 70 basis points year-over-year on a GAAP basis, as you can see here on Slide 7. As I mentioned earlier, margins were negatively impacted by the Viking transaction cost in the quarter. Excluding these, operating profit margins were up 170 basis points to 17.2%. This improvement reflects the benefits from previous cost-reduction actions, as well as lower year-over-year incentive compensation expense. On an EBITDA basis, fourth quarter margins were 20.3%, excluding the Viking transaction cost, which illustrates the higher absolute margin profile of Actuant on a go-forward basis without the Electrical segment. Now I'll provide a little bit of color on results by segment, starting first with Industrial on Slide 8. The Industrial segment had a good quarter, with modest sales growth and nice margin expansion. Core sales were up 1% above the segment's strong prior year fourth quarter. Sales mix in this segment was tilted more to Integrated Solutions, or IS, volume, but we still generated strong margin expansion due to supply chain savings and improved manufacturing efficiencies. From a geographic standpoint, Asia-Pacific, outside of China and India, had good customer demand. The Americas was a bit weaker than the prior year, while Europe was up on the strength of Integrated Solutions project activity. Shifting to the Energy segment on Slide 9. Market conditions remained positive. Asia-Pac sales continued to be robust, Europe and the Middle East were solid, while North America was negative. Overall, core sales were flat on a year-over-year basis. In total, Hydratight sales were up in low single-digits in the fourth quarter, but Cortland was down modestly on lower sales in non-Energy markets. On the profitability front, Energy operating profit margins were strong at about 20%, which was down just 30 basis points from a year ago. Fourth quarter results did include Viking for 3 business days, but the sales and profit impact of this was negligible. The Viking acquisition costs that I called out earlier are included in corporate expenses and not here in this segment. We're excited about the Viking SeaTech acquisition, and Mark will provide more color on this business later on today's call. On Slide 10, I'll cover Engineered Solutions, which was the most improved of our 3 continuing segments. As we had predicted, Engineered Solutions continued to show sales growth progress on a sequential basis since the second quarter, when we saw the most impact from OEM inventory destocking. Fourth quarter sales were flat on a year-over-year basis compared to a 10% core sales decline in the third quarter. We saw double-digit improvement in European heavy-duty truck sales. We saw some growth in the ag market as well as a result of new seeder product line launches and less worse core sales declines in automotive in North American off-highway equipment markets. For the segment in total, we started the year with a first quarter core sales decline of 17%, and we ended the year with fourth quarter being flat on a core basis. This reflected moderating customer destocking in the first half, easier comps, improved truck demand outside of North America, as well as new product introductions. On the margin front, Engineered Solutions operating profit margins were up 100 basis points year-over-year and benefited from cost-reduction actions we took earlier this year. Switching gears now to cash flow and capitalization. It was a very active fourth quarter. We generated great cash flow, deployed $28 million in additional stock buybacks. We amended and extended our bank credit facility and we completed the Viking acquisition. The $87 million of free cash flow generated in the quarter helped us to report a record $205 million free cash flow year. Our full year free cash flow conversion to net income, excluding the noncash charge for the Electrical segment and the tax item for the year, was over 125%. And that represented the 13th consecutive year of free cash flow conversion of at least 100%. We used $28 million of our fourth quarter free cash flow to fund the buyback of about 840,000 additional shares of Actuant stock, and we bought them at an average price of around $33.50 a share. We used an additional $235 million of capital to fund the Viking SeaTech acquisition in the last week of the quarter. Despite this combined $263 million of capital deployment in the quarter, our net debt to EBITDA leverage at quarter end was 1.3x, which is below our target of 1.5 to 2.5x net debt to EBITDA zone. Our availability to fund growth on a go-forward basis remains strong, with over $100 million of balance sheet cash, just shy of $500 million of existing revolver availability, a run rate of $200 million on an annual free cash flow basis and the future proceeds from the divestiture of the Electrical segment. Despite acquisitions and buyback in 2013, our balance sheet at year end and our liquidity has never been in better shape and will provide plenty of fuel for future growth. On that note, I will turn the call back over to Bob.

Thanks, Andy. I want to briefly cover 2 topics before passing the baton to Mark. The first is to recap fiscal 2013. As you see here on Slide 13, 2013 was really a tale of 2 halves. In the first half, our business felt the impact of OEM inventory destocking on several off-highway equipment markets. We saw a recession in Europe and declining emerging market demand. But as we predicted, our earnings inflected in the second half, with core sales improving to flat by the end of the fourth quarter and margins and EPS up 50 basis points and 9%, respectively, in the second half of the year. For the year, we generated great cash flow and deployed it on share repurchases and acquisitions. So despite the economic challenges we faced, we believe we are exiting fiscal 2013 in a solid position to capitalize and to fund growth initiatives. My second topic is our leadership announcement. I'm excited about transitioning CEO responsibilities to Mark and embarking on a new phase of my life. I have immensely enjoyed the tenure of Actuant CEO. Both professionally and personally, we've grown considerably since the spinoff in 2000. And even though I'm a relatively young guy, I started as CEO at the age of 39, and 14 years at the helm is enough for me. I've increasingly been involved in several not-for-profit and educational organizations here in Milwaukee and want to devote significantly more time and energy to these causes. Mark has been COO since 2007. The transition has been in the works for some time now and was very well planned by the Board of Directors. I am sure many of you have noticed Mark spending more time on the road with investors and increased involvement in earnings calls, which is all part of his development as my successor. You will hear more from Mark about his goals and plans for Actuant moving forward at our Investor Day next week. With that, I'll turn the call over to Mark to walk through the Viking acquisition and our 2014 guidance. Mark?

Thanks, Bob. Let me first say that I am humbled and honored to be given the opportunity to lead the Actuant organization and know that I have big shoes to fill. Since 2001, I've had the pleasure of working alongside Bob, Andy and the rest of our talented team. This, along with a well-planned transition, will enable me to hit the ground running. Now, let's turn to Slide 15 and talk a bit about Viking SeaTech. Viking is a business that we first looked at back in 2008 at approximately the same time we acquired Cortland. We had a valuation gap back then, but the beauty of private equity is that assets do come back around. We stayed in contact with Viking's private equity ownership group and its management team over the years. And when the opportunity came up again, there were 2 key items in our favor. One was a strong relationship with the sellers, which gave us the opportunity to privately negotiate a deal. The second was the ability to go back and evaluate Viking's performance versus its original plans. As an example, back in 2008, Viking had ambitions to enter the Australian market. If you fast-forward to now, they are the clear market leader in Australian mooring. This gave us confidence in their ability to execute. To briefly summarize Viking, they design, pre-lay, maintain, inspect and rent mooring systems for offshore vessels in the oil and gas space. Our Jeyco business, acquired in 2012, was our initial entry into the mooring solutions business. Given the increasingly complex seabed environment, the expertise and know-how associated with their offerings is absolutely critical. Their primary markets are the U.K., Norway, and Australia, with an emerging presence in Indonesia and West Africa. Approximately 60% of their revenue is rental-based. And finally, they have a very strong and capable management team that brings additional oil and gas experience to our organization. In fact, Viking has already added to our acquisition funnel with its own list of tuck-in opportunities. Now turning to Slide 16 and our updated 2014 guidance. As you saw in the press release this morning, we are now expecting sales for fiscal 2014 to be in the range of $1.41 billion to $1.45 billion with EPS of $2 to $2.10 a share, up from our prior $1.95 to $2.05 guidance. At the midpoint, this represents year-over-year EPS growth of about 11%. So what remains the same from previous guidance? First, our guidance assumes the current low global GDP growth environment will continue. Europe and China have stabilized and will most likely be flat, with modest growth in North America and Brazil. Overall, we have maintained our 3% to 5% core growth expectations, which adds the benefit of our Growth + Innovation activities to the underlying slow market growth. We still expect solid margin expansion due to the benefit of volume and permanent cost-reduction actions. These are being partially offset by variable compensation, which was essentially 0 in fiscal 2013, along with continued targeted investments in Growth + Innovation. Finally, we have kept our full year assumption for foreign exchange. So what's changed in our guidance? Obviously, the addition of Viking. We have assumed 2014 sales of around $100 million and EBITDA margins in the upper 20s. We have incorporated the benefit of the fourth quarter share repurchases as well as stock option exercises in our share count for EPS purposes. We also increased interest expense, given the Viking acquisition. In addition, our depreciation, amortization and capital expenditures will all increase with the Viking acquisition. We expect annual depreciation of roughly $40 million, amortization expense of $27 million to $28 million and capital expenditures in the $35 million to $40 million range. And lastly, we expect our annual effective income tax rate to be in the 18% range, with the first and third quarter rates closer to 10% and the second and fourth quarter rates closer to 25%. Dropping down one layer deeper in core growth, our expectations by segment are outlined here on Slide 17. Engineered Solutions should lead Actuant's growth, with 6% to 8% for the year. There are a number of factors contributing to this higher-than-average performance, including the lack of a destocking impact that we experienced in 2013; new product launches, especially in the agriculture and truck product lines; and easier comparisons, in particular, Europe auto and truck. The European truck market has improved, and we expect the benefit of a minor prebuy in the first half of our fiscal year to reverse itself in the second half. For Energy, we are currently anticipating low-single-digit core growth for the year, excluding Viking, which doesn't enter into the core growth calculation for another year. We see good maintenance and umbilical rope activity levels, partially offset by the anniversary of Gorgon, and continued headwinds in the North American nuclear market and Cortland's non-Energy markets. And finally, for the Industrial segment, we are expecting 3% to 5% core growth. We believe this is comprised of a low global GDP plus a couple of points associated with our vertical market initiatives and other new products. As a reminder, we'll have some difficult comparisons in our Integrated Solutions business as a result of the strong growth in 2013 associated with sizable projects, including Venice MOSE, the Vegas High Roller and Novarka Chernobyl. Just to round up the guidance discussion, as you can see on Slide 18, we are projecting our first quarter fiscal '14 sales to be in the $325 million to $335 million range and EPS in the $0.43 to $0.46 range. This assumes about 1% core sales growth and EPS growth of roughly 5% to 10%. We expect fiscal 2014 sales and EPS growth to increase as the year progresses. That's it for our prepared remarks. Operator, please open up the line for questions.

[Operator Instructions] And our first question is from the line of Allison Poliniak from Wells Fargo.

First, I guess, congratulations, Bob, on your announcement, exciting news. So just want to turn to Energy. You obviously noted some weakness in the U.S. But it sounds, Mark, from your comments, as we go into next year, the U.S. service side sounds like it's improving, but the nuclear is still weak. Is that the way to look at it?

I think that's correct.

Yes, it is, Allison. If you remember last year, we had very strong nuclear sales and we've been anniversarying them this year, and it's been a challenge for us. And we see that continuing into the first quarter.

Okay. And then acquisitions, you did Viking. Is there any updates in terms of the acquisition environment that's notable in terms of any sort of easing with multiples in certain areas? Are we still sort of status quo with the challenging environment there?

Yes. I would say that we've got a very full funnel of activity going on right now, really in 2 areas. The first, sort of the larger deals that we're looking at that typically garner a little bit more competition and maybe an auction-type situation. And the other is really how we built through tuck-ins, where we've got individual businesses that we're talking with succession issues. And so for those, the multiples are not as high. They're more reasonable in a fairway. On the larger acquisitions, there is some pressure to move up on multiples. But we're using a very -- we're managing the process in a very disciplined manner, as we always have.

We've seen a few deals actually not get completed recently, which has been a phenomena we haven't seen over the last 2 or 3 years. So the auction processes get pulled. And usually, that's due to missing the numbers or not being able to show a credible way to bridge to the forecast. And I think what that signals to me -- it's not anywhere near all the deals or anything like that, I'm not trying to say that. But I think what it's signaling is you're starting to get that equilibrium between buyer and seller momentum in acquisitions. And I think it's kind of moving in the favor of the buyer. Just the economic outlook is difficult for people to try to demonstrate strong growth and, therefore, a higher multiple.

Our next question is from the line of Ann Duignan from JPMorgan. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Can you talk maybe -- you mentioned this quarter that you are seeing some evidence of a prebuy in Europe relative to the -- ahead of the emission standard changes. Can you talk about what's your expectation, how much upside in the first half and how much do you get back in the second half? Can you quantify or give us a range of what you think might be going on?

Yes. I think we're thinking 10,000 to 15,000 units prebuy in kind of the fall this year, all the way up to Christmas. Obviously, that's our first half. And then a similar amount going the other way in our second half. Ann P. Duignan - JP Morgan Chase & Co, Research Division: And which markets are you talking about? Are you talking medium and heavy duty or just...

One's heavy duty. That's where the most of our cab tilt is. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Okay. So that's on a market of 100,000?

Yes, correct.

I think the market sales of heavy duty is like 225,000 or something like that, right?

In Europe. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Well, that's why I'm asking whether it's pure heavy duty or whether it's like the bigger definition that they count in Europe. So you're talking on the 220,000?

Yes.

Yes, it's relatively small.

It's pretty consistent with what you're hearing DAF and Volvo and WABCO and other folks saying. I think we're all kind of in the same ballpark. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Although some of them are saying that it's not a prebuy, so just curious around that. And then on the agriculture side, you noted that, that business is strong on the back of new products. Could you talk a little bit about the fundamentals in that business? Just beyond the new products, what are you seeing out there globally?

Well, I think the most recent data on the U.S. harvest looks okay. The -- had some warmer weather in August, but a lot of the drought conditions that existed the year earlier seemed to have dissipated. Farm economics look quite good. Again, our side is more of the implement than the actual tractors, so we don't track necessarily just tractors. We -- we're following more of the implement demand. So I think we're expecting reasonable results growth in 2014. Anything to add, guys?

I'd say the back half of this fiscal year, our core sales in ag in our existing product line is probably down mid-single-digits, and it does bounce around a bit. But we're seeing -- the growth that we're seeing right now is really coming from the new introductions that we've got, particularly the ag seeder line on that. So we expect that to continue to benefit us for the next year. There are several different OEMs that we'd be bringing up on that line.

And remember, in this particular business, certainly with the Weasler acquisition, about 40% of that business is aftermarket as well, so it's not just OEM.

Our next question is from the line of Jeffrey Hammond from KeyBanc Capital Markets.

So we saw another good PMI number. I think that's -- things seem to be inflecting up in terms of the data points and you're seeing better data out of Europe. And we kind of saw this inflection to less negative in the second half of your fiscal '13. As you talk to your customers, are you getting any signs, green shoots that we are starting to come upon any kind of reacceleration?

Yes, I would say no. I would say -- I mean, there's green shoots. We're still expecting, as our guidance said, small, low single-digit growth. But the PMI numbers that have been out over the last 30 days, we did not -- we are not hearing that from our customers and we are not incorporating that into our guidance. Our guidance is a longer view than the current last-30-day data. And so if that -- if the PMI proves to be as powerful as you're seeing and it's not a head fake, a couple of months worth, then we'll see that come through our numbers. But it is not on the models of customers or distributors at this point.

Okay. Then just a follow-up, can you talk about the seasonality of SeaTech, how should we think about this $100 million of revenue? And is it right to think about kind of the low-double-digit op margin drop-through for the acquired revenue?

Yes, a couple of good questions there. Seasonality-wise, their fourth quarter -- fourth calendar quarter, essentially our fiscal first quarter, is probably the strongest for them followed by the summer. Similar to Hydratight, their winter is the weakest quarter. So you've got that same seasonality. From a margin standpoint, you should think about this business as roughly a 10-ish or so, 8% to 12%, depending on a quarter percent margin business as you go forward. In the first year or 2 here, the way the accounting is working on this transaction, there are some -- there's an earnout provision out here for the management team, as well as a -- retention agreements that are going to be flushed through the P&L in the first 18 to 24 months after the deal, so weighing it down a little bit on the front end. But the EBITDA margins continue at a very strong pace here. So this is a good margin, very good margin business.

Our next question is from the line of Ajay Kejriwal from FBR Capital Markets. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: So maybe if I can start with 1Q, the core growth. And I know we are talking small numbers, 1%. But based on your comments, it sounded like Engineered Solutions, you expect things to pick up. What would be expectations for Energy and Industrial to kind of get to that 1% kind of number for 1Q?

Yes. So we are excited about what we saw in Q4 from Engineered Solutions. We thought there'd be an inflection, there was. And so it's great to see it at 0% core growth. So we expect those trends to continue as we go into Q1. And for Industrial, again, that's been around the 1% level. We see that continuing. Energy is going to be the tough comp here for the first quarter. We've talked a little bit about the service and nuclear year-over-year challenges that we have with that business. That will last through the end of the first quarter. So that will be our toughest comp, Ajay, as we go into fiscal '14. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: That's helpful. And then maybe on tax rate, you had good color on the quarterly expectation next year. What's causing that swing, 10%, first half, 25% in the second? Is this the acquisitions? And then is 18% kind of how we should be thinking longer term here?

Yes. 18%, to answer your question in reverse order, 18% is what we think we can keep the tax rate for a while here. I know last year we made a move down and people asked, "Can you be there?" We certainly have been and we continue to be. The lumpiness that you see in the tax rate has to do with some of the tax planning actions that we've taken. We can pull certain levers at some points in time to realize some benefit on some of our structures. The third quarter is probably historically our lumpiest from a rate standpoint because that's when statute of limitations run out essentially, is when we file our tax returns, which are always in the third quarter. So there's usually true-ups relating to our tax reserves at that point in time. So it's just not as easy as it was a decade ago to have perfectly smooth tax rates quarter-to-quarter, year-to-year. It is more difficult.

And just to clarify, Ajay, you said 10% in the first half. We said 10% in the first and third quarter, and then 25% in the second and fourth quarter.

Our next question is from the line of Matt McConnell from Citi Research.

Just to follow up on the Viking question with the margins and earnout for the next year. How much is Viking contributing to the $0.05 increase to guidance for next year?

It's the majority of it. It would be the majority of it.

Is there any change to operating assumptions outside of Viking? Or is the $0.05 increase mainly just what Viking is contributing next year?

Yes, it's Viking and, essentially, the share buyback. I mean, there's a range out there.

Takes into account puts and takes, we always have some of that. But it's -- the majority of it is Viking.

Okay. And then switching gear to Engineered Solutions, how has the margin profile changed since the acquisitions of Weasler and Turotest? Because segment demand has been pretty soft over the past few years, so it's tough to get a sense of maybe how the underlying margin potential last changed since those deals. So what should we be expecting now that it looks like end markets are starting to recover?

Yes. Both of the deals that you call out actually improved the overall margin profile of the segments. Weasler runs close to a 20% EBITDA margin on this relative to the overall segment, on this. Turotest and CrossControl are some of the more recent acquisitions. Both of them, shortly after we bought them, caught some headwind from a volume standpoint, so the margin is a little bit lower than historically where they've been. They are coming up right now. The biggest impact of margins clearly within the segment, though, is just the volume. I mean, we are largely operating in single plants by product line. And when the volume spikes or drops within this segment, you really feel it. Automotive is a great example. The off-highway in North America are seeing that right now. So you look longer term with this segment, where we're at, I mean, we think this can be an upper-teens range, 16%, 17%, 18% EBITDA margins. We certainly have been there in the past. And there's no reason we can't get back just with normal volume coming through. And you'll see it improve as we move forward here.

Yes. My guess is the restructuring we've done over the last few years, particularly in this current slowdown, where we've done some consolidation in North America and in Europe in the low-cost countries, we've probably added 100 to 200 basis points to our potential EBITDA margins. We used to say 15% was the best this business could get to. And as Andy said, 16% to 18% seems like more of our target when the volume is there.

Our next question is from the line of Charlie Brady from BMO Capital Markets.

This is Andrew Dunham on for Charlie Brady. I was wondering, how much was Enerpac down in Europe this quarter?

Enerpac was actually up this quarter. We had some very nice Integrated Solutions volume coming through. So that actually lifted up the overall segment from a revenue standpoint in Europe year-over-year.

Okay. And how much did lower incentive compensation benefit the Industrial margin?

Overall, for the quarter, year-over-year, company-wide, it was probably $0.025 to $0.03 benefit, I'd say, somewhere between $0.01 -- a $0.005 and $0.01 maybe. So that would equate to about $0.75 million, something like that from a raw dollar standpoint within Industrial.

Our next question is from the line of Scott Graham from Jefferies.

I just wanted to ask a little bit more detail, if you guys wouldn't mind, I guess, Mark, particularly since you provided it, on the core sales guidance for the Industrial and Engineered Solutions businesses. If you can maybe just give us a little more. Those are pretty healthy numbers. And maybe you can take us down that path a little bit.

Sure. Let me start with Industrial, okay? So we're talking 3% to 5% core for fiscal '14. A couple of things, we feel that we're going to be in this low GDP environment that we talked about earlier. We've focused a lot on Growth + Innovation in Industrial. And when you look at the vertical market piece, we talked about the mining piece, new product development and commercialization, new market entries into Africa, in Indonesia. That's going to drive a lot of the incremental volume on the Industrial side. We've got strong comps in IS, especially on the 2 major jobs that we talked about earlier, the Las Vegas wheel and Novarka Chernobyl. And so that's part of the funnel that the teams are building right now. But those are some big numbers that we had this year that we're going to comp up against. So that's on the Industrial piece. The Energy piece, just, again, we're 1% to 3% there. Good maintenance and umbilical activity going on for fiscal '14, offset by Gorgon. We talked about that being at its peak this past fiscal year. And we talked a little bit about the nuclear maintenance business in North America that we have some headwinds against. But continued strength in the Energy markets around Southeast Asia, Caspian Sea, Brazil as we move forward. So that gives you just a little bit more color around those 2 segments.

Would you mind just maybe finishing the trifecta with the Engineered Solutions as well?

On ES, which is -- obviously, that's a 6% to 8% increase that we're looking at, we're not going to have the same destocking challenges that we had this year with Europe and North America. We've got some great new product launches. We talked a little bit about the ag seeder earlier and have added some additional truck customers over in China, in high-growth markets, so we're excited about that. And we've got some easier European auto comps as well as we look at year-over-year. So that's what's really fueling the 6% to 8% growth in Engineered Solutions.

Very good. Just last question, again, for you, Mark. So you and I had talked about Growth + Innovation kicking in about 1% of sales with the goal ultimately being incrementally plus 3%. Would you say that, that's much more tilted toward the Industrial segment at this point?

I'd say we're going to be spending a fair amount of time on that around the investor meeting. I think it's -- we've got a good distribution of opportunities across the businesses. But certainly, Industrial has been the first out of the chute with the mining vertical and some of the new products that they're focused on. And so I think between Industrial and Energy and ES, we've got a lot of activities going on. But I would say we're equally focused across all businesses, all segments, looking at margins of the new products, the new services being above line average. So we'd see a step-up there as the introduction occurs. You're right on the 200 to 300 basis points that we want to add over the period. We're about in the -- as we talked about, about 100 basis points are in the fiscal '14 numbers.

[Operator Instructions] Our next question is from the line of Andy Noorigian from Vertical Research.

Just a quick follow-up on the ES margins. Quite a bit of improvement sequentially on organic growth, but the margins were flat. I was wondering if there's anything else that was in there that maybe held back the mix a little bit and how you would expect those margins to move from here with organic growth picking up.

We did have some restructuring come through here. I mean, it wasn't that big that we called it out during it, but we're really getting close to being up and running in the new facility in Turkey. We moved some lines in there during the quarter. We also moved closer to moving some other production into some lower-cost countries as well. Revenue-wise, sequentially, we were down $10 million from the third quarter. From the third quarter to the fourth quarter, one thing that always happens, and I shouldn't say always, but most of the time happens in Europe is a summer shutdown in some of our truck and auto plants over there. And we certainly felt that in the quarter. I have a high degree of confidence that you will see margins improve in Engineered Solutions. As we move into fiscal '14, they'll continue to grow. Definitely, trucks are at least going to be a very good driver of that as we move forward, as well as the ag, the pickup in ag with ag with some of these new product launches within our power transmission business.

And what should give you some comfort on this is we saw the same thing in '08, '09. This business feels the recessions. It's the most cyclical segment we have. We've used these recessions as really an opportunity to lower the cost structure and the business comes back stronger. And if you remember back then, Andy was giving the gold stars to these guys for that margins. And we're looking to do that again this '14.

Great. Good color. And then just kind of a bigger-picture question. Maybe this jumps the gun on next week a little bit. But I was wondering how you thought about M&A and with the portfolio you have now, particularly with regard to balance. Like if you were to see kind of bigger deals coming across in Energy or Industrial, is that something you would consider? Or is it more that you like the balance you have and you're going to try to maintain that going forward?

Andy, I think what we've said and the way we're looking at it is we're really focusing more of our M&A activity on Energy and Industrial businesses. And so that will continue to be our focus as we move forward. That doesn't mean to say that we're not going to be looking at acquisitions across all segments and all businesses, because we are. But we've got a pretty substantial funnel of opportunities in Energy and Industrial. And if you take a look, we really are trying to link these acquisitions with those 4 macro drivers that we identified earlier around infrastructure, energy, food and farm productivity and sustainability and renewables. And those are the areas that we're focused on when we look at growth, especially in the M&A context.

There are no further questions from the phone lines at this time.

Well, great. Just to wrap up, I appreciate your joining on the call today. Just a note that our first quarter call will be held on December 19, so you can mark your calendars for that. And as we've talked about today, our Investor Day is coming up next week, Monday, in New York City. Looking forward to seeing everybody that's registered to attend that. We'll be around all day to take any follow-up questions you have. Thanks.

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