Enerpac Tool Group Corp. (EPAC) Q4 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation's fourth quarter earnings conference call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, September 27, 2017. 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 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 Investor 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 these 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 to Randy.

Thanks, Karen, and good morning, everybody, and thanks for joining our fourth quarter conference call. Let's start this morning on Slide 3. As you read in today's press release, we delivered a solid quarter with sales at the top of the range while earnings were just below the midpoint. The disconnect between sales and earnings was a direct result of unfavorable mix and decrementals on the Energy business. Core sales were flat year-over-year, driven by mixed results from our three segments. Energy continues to experience very difficult market headwinds. And during the quarter, Hydratight sales were significantly below last year, affected by deferrals and maintenance spending in various parts of the world. As we discussed in our third quarter conference call, we have implemented restructuring, operational improvements and a significant move within the Energy portfolio. All of these actions will have a positive effect on the profitability of the Energy segment and will position the business for better business results in 2018. And moving on to a more positive theme, the Industrial segment experienced strong sales growth. Industrial tools sales were up double digits in the quarter. Sales growth was consistent throughout the world and was a direct result of our strategic focus on increasing sales coverage and providing better support to our distributors. And finally, our Engineered Solutions segment continued to perform extremely well. Sales grew by an impressive 20% in the quarter, while increasing operating profit by more than 400 basis points. This outstanding result was due to the actions taken to improve our sales coverage, customer support and manufacturing performance. During the quarter, we announced an agreement to divest of the Viking business, which is the first move to reshape our Energy segment portfolio. The objective is to minimize the Actuant's exposure to upstream oil and gas exploration and well development. While this action is painful in terms of impairment charges, it is positively accretive to earnings. Secondly, we announced leadership restructuring to streamline our management and significantly improve our cost structure. In particular, the new structure will facilitate more cooperation between Hydratight and Enerpac in the area of tool product development and back-office support functions. On the cash flow front, Actuant delivered its 17th consecutive year of free cash flow in excess of 100% of our earnings, and ended fiscal '17 with net-debt-to-EBITDA ratio in our desired range. As I've said in the past, the primary strength of Actuant is our ability to manage our balance sheet and our ability to generate consistent cash flow. Now I'll turn the call over to Rick. And he'll go through the details on the quarter. I'll come back later on with a strategy update and our '18 guidance. Rick?

Thanks, Randy, and good morning, everyone. Before we get into our operating results for the quarter, please turn to Slide 4, and we can review the charges excluded from our adjusted earnings per share. The GAAP results from the quarter include the impairment and divestiture charges associated with the agreement to divest Viking. As we previously announced, we signed an agreement in the fourth quarter to sell the Viking business for $12 million. The $117 million of divestiture and impairment charges from this transaction include the following: Approximately $30 million in cash charges related to the exit of certain lease obligations, this includes approximately $28 million resulting from a mid-2014 sale-leaseback transaction, as well as severance and other costs associated with completing the deal. Approximately $5 million of additional lease termination costs will be recognized in the first quarter after the deal closes. All in, the net cash outflow from the transaction is expected to be approximately $25 million in 2018. The remaining $85 million of impairment and divestiture charges in the quarter is comprised of noncash charges related to the write-down of the Viking assets to their net realizable value, including a $70 million accounting charge to recognize the cumulative translation adjustments from currency since the date of the acquisition. On the balance sheet, you will see both current assets held for sale and current liabilities held for sale. Let's turn to Slide 5 to walk through our adjusted results in more detail. Fiscal 2017 fourth quarter sales were slightly above our guidance range and flat on a year-over-year basis. A 1% currency benefit was offset by the 1% impact from the divestiture of Sanlo last year. Adjusted operating profit declined 26% to $20 million, primarily the result of significantly lower Energy segment sales. Excluding the impairment, divestiture and restructuring charges, our effective tax rate was approximately a negative 10% compared to about 6% last year and flattish expectations. The lower effective rate is really driven by lower pretax earnings and represents about $1 million tax difference from our guidance. This resulted in an effective rate of essentially zero for the year, consistent with the low end of our guide last quarter. Our adjusted EPS in the third quarter of fiscal 2017 was $0.19, within our range, but well below the prior year's $0.30. Turning to Slide 6. On a core sales rate of change, we were flat, consistent with the prior quarter. Total Industrial segment sales were in line with our latest outlook, while Engineered Solutions exceeded expectations, with better demand across a variety of markets, including truck -- China truck, ag and off-highway equipment. Energy was below our latest outlook on a continued weakening of customer maintenance spending. Slide 7 summarizes the quarterly adjusted operating margin trend, where you can see margins were down about 250 basis points year-over-year. This is largely due to the Energy segment operating losses and growth weighted towards the Engineered Solutions segment. So let's walk through our performance by segment, starting with the Industrial segment on Slide 8. Core sales for the Industrial segment increased by 5% from the prior year, similar to the third quarter. We continued the acceleration in the growth rate within Industrial tools, which was offset by a large decline in year-over-year sales in the lumpy Heavy Lifting business. The positive sequential trends in Industrial tools is encouraging and indicative of both our continued investment in internal growth strategies, along with improving end-market demand across all geographies. The core sales growth trend improved from high single digits in Q3 to low double digits in Q4, which we believe is several points above the market. However, going into 2018, we believe that we will see tougher comparisons as the year progresses. We experienced low single-digit sales declines in the concrete tensioning product category, partially driven by our operating inefficiencies and the impact of Hurricane Harvey, which limited our ability to ship from our Houston manufacturing location. Heavy Lifting Technology experienced a 20% plus sales decline on lumpy project demand, yet order rates were positive in the quarter. From a profitability standpoint, Industrial's margins were up 40 basis points year-over-year. We are seeing the expected incremental margins on the higher tool volumes. However, the facility consolidation inefficiencies in the concrete tensioning footprint continue. In addition, our investments in sales effectiveness and product innovation are paying dividends in the form of above market growth. Now let's turn to the Energy segment results on Slide 9. Challenging market conditions continued to negatively impact performance here. Excluding the effect of the large onetime projects from fiscal 2016, Hydratight's core sales continued to worsen from a mid single digit decline in Q2 to low double digits in Q3 and now about 20% in Q4. Customers across the various served markets and regions continued their trend of maintenance deferrals, pushouts and scope reductions. It was again most acute in the Middle East and Asia Pacific regions. Unfortunately, we still don't see a meaningful catalyst for improvement, but we do expect easier comparisons as we progress through 2018. Many of you have asked about the Hurricane Harvey impact in the Gulf region for Energy. There was basically a shutdown of activity in the region, during and immediately after the storm. While there may be modest demand improvements for repairs and other work, it appears it will be relatively muted as fortunately the infrastructure damage has been minor. Turning to the other Energy markets. The offshore upstream product lines, including Viking and portions of Cortland, continued to see year-over-year revenue declines in the 30% to 40% range, while Cortland's nonoil and gas products delivered mid-teens core sales improvement. The segment lost money in the quarter with margins down considerably on the lower Hydratight sales volume, underutilization of technicians and tools, and the decline in Viking rental revenue, all of which carry high variable margins. In addition, we did record an accounts receivable reserve of about $1 million related to a bankrupt nuclear customer. Overall, excluding the receivable charge, Hydratight and Cortland were about breakeven from an operating profit standpoint with losses from Viking in the quarter. We continued our Hydratight service excellence project with the goal of improving utilization and job planning and forecasting, while rightsizing the business for the current environment. As guided last quarter, we incurred about 2 million in restructuring related to these activities with an expected run rate savings of approximately $3 million. I will provide more details on restructuring activities as we walk through our guidance for 2018. Turning to Engineered Solutions on Slide 10. We saw outstanding performance from the top line standpoint, delivering 20% core sales growth. We continued to benefit from the end of destocking by customers across off-highway markets, including ag, construction, forestry and mining, among others. China truck production remained very strong and Europe maintained solid build levels. In addition, ES is starting to benefit from new platform wins and product launches. Randy will talk about a few of these later. Profit margins in Engineered Solutions improved 470 basis points year-over-year on higher volumes and the benefit of our prior restructuring and our continued focus on lean operations. Turning now to liquidity on Slide 11. We generated $32 million of free cash flow in the quarter on solid working capital management. This brought our full year free cash flow to $68 million. The year-over-year decline is reflective of the declining EBITDA levels, yet our free cash flow conversion remains strong, well in excess of 100%. We used that cash to reduce debt and the corresponding net-debt-to-EBITDA ratio declined from 2.8 to 2.7 times. We believe our capital position is solid, and we have plenty of liquidity to fund our operating and capital allocation requirements going forward. Randy, I'll turn it back over to you.

Thanks, Rick. Let's turn over to Slide 12. As we close out the year, let's take a look back at Actuant's performance. We achieved great traction in many of our businesses, most notably, industrial tool and across the entire Engineered Solutions portfolio. Our focus in 2017 was to significantly improve Actuant's ability to drive organic growth. We built a solid foundation for improving our sales performance and consistently increased revenue. However, we did not expect the dramatic decline in the Energy Business, resulting in significant sales reductions, which effectively negated the gains in the other two segments. I feel that we've made great progress in transforming the company in multiple fronts, including sales, marketing, engineering and manufacturing operations. Our portfolio actions in the Energy segment are the start of the second phase of our strategy to improve Actuant's performance. The combination of organic growth and proactive management of our portfolio will position Actuant for increased results. Turning over to Slide 13. Our team has done an outstanding job of focusing on cash flow in 2017. This marks the 17th consecutive year of conversion above 100% of net earnings. We have consistently managed our working capital, including inventory and receivables, all of which have positioned Actuant for great shape in 2018. Moving over to Slide 14. One of my most important jobs is setting the priorities for capital allocation. Our organic growth strategy in 2017 included investments in new product development and engineering talent. We are now starting to see the rewards of those investments as we enter 2018. Our Industrial tool product line includes multiple new products, including a completely new line of high tonnage cylinders designed for higher durability and features which will improve customer performance. We also launched a new series of low clearance cylinders, which allow customers to perform a wider variety of jobs. Heavy lifting cylinders with a wide variety of applications is a very important part of our product line, which is why we have launched a new line of telescopic cylinders. And on the Engineering Solutions front, we have benefited from multiple new product platform wins which have resulted in investments -- resulted from investments in engineering and seamless product launches. Overall, I'm very pleased with the fact that our investments are beginning to bear fruit and further enhance our organic growth strategy. Moving over to Slide 15. The macroeconomic factors are similar to the dynamics we've seen in prior quarters. Oil and gas remained stable with a modest increase over the past few weeks due to the weather-related outages. Our customers remain very cautious in the area of maintenance spending and will continue to extend intervals in an effort to contain costs. Off-highway mobile equipment continues to strengthen. The agriculture sector dynamics have improved in the areas of used equipment and stock-to-use ratios of commodities. All of the major manufacturers in the construction equipment market are reporting improved customer demand and rental fleet utilization. The general Industrial market continues to be robust and all of our major distributors are reporting good retail activity. And finally, the on-highway truck market remains stable, but we are projecting slower market conditions as we progress through 2018. Moving over to Slide 16. The Industrial core sales growth should continue through 2018, resulting in a 4% to 6% growth expectations. However, as we progress through the year, our comparisons will become tougher due to the positive trends experienced in 2017. Energy continues to be our most challenged market, and we expect a decline in 2018 core sales from negative 5% to flat at best. And finally, Engineered Solutions will have a modest 0% to 3% core sales growth, driven by off-highway dynamics which will offset the gradual decline in the heavy-duty truck sales. Moving on to Slide 17. Overall, 2018 core sales are expected to grow modestly from 0% to 2%, reflecting the impact of energy and the potential slowdown of truck sales. Sales will be in the range of $1.1 billion to $1.130 billion. We will have a higher effective tax rate from 5% to 10% for the year with improving exchange rate dynamics. As a result, our EPS projection for the full year is a $1.05 to $1.15 per share. Our first quarter sales will be in the range of $260 million to $270 million with EPS of $0.14 to $0.19 per share. In addition, please note that Viking is included in the Q1 guidance and represents about $0.03 per share negative impact. Mirage is included in the full year guidance and has a positive effect of about $0.01 per share. On the cash flow front, we are projecting another solid year in the range of $85 million to $95 million with conversion above 100% of net earnings. I'm going to turn the call back over to Rick now to walk through the details on the restructuring and to provide a full reconciliation of the EPS guidance. Rick, back to you.

Okay. Let's turn to Slide 18, so we can walk through restructuring. During the fourth quarter, we execute, what we're identifying here as, Phase 1 of our Energy segment restructuring. This is the service excellence and rightsizing of the business previously discussed. We expect annual savings of approximately $3 million that reflect the cash charges of approximately $2 million in 2018. The actions we are taking in the first quarter of this year to streamline our leadership and management structure will result in annual savings of $2 million to $3 million and restructuring charges of approximately $6 million to $7 million. These charges will include cash severance costs and approximately $3 million of noncash charges related to divesting of certain equity compensation. Lastly, our Energy segment facility and footprint rationalization on Phase 2 restructuring will result in annualized savings of $2 million to $3 million and charges of approximately $4 million to $5 million. Restructuring charges here will include cash charges associated with certain lease exit and facility closure activity. In total, we will incur restructuring charges of $10 million to $14 million with cash portions being approximately $8 million to $10 million. These actions will result in annualized savings of $6 million to $10 million. We have reflected approximately 5 million to 7 million of these savings in our 2018 guidance, given the timing of execution. Turning now to Slide 19. We can do a recap of the bridge of our 2017 adjusted EPS to our projected 2018 results. Foreign exchange will impact earnings by a positive $0.03 to $0.04 per share. Projected higher income tax rates will have a $0.02 to $0.06 a share impact. Restructuring savings of 5 million to 7 million will benefit EPS by $0.06 to $0.08 per share. And acquisitions net of divestitures will be a positive $0.12 to $0.14 per share. And this is the nine month impact with $0.01 of that related to Mirage accretion. On our internal growth actions and market improvements will increase our EPS performance by $0.06 to $0.08 per share, which is net of the planned increase in incentive compensation year-over-year. With that, I'll turn the call over to Karen to highlight a few points on our upcoming Investor Day and then we can take your questions.

Yes, I just wanted to remind everyone that our Investor Day is scheduled for next Thursday, where you'll hear Randy and the management team highlight progress on the vision and strategies that we outlined at our meeting last year. And again, we will have our simultaneous roundtable Q&A session. So if you have not yet registered, but wish to attend, please let me know as soon as possible as we are closing the registration. And note that because of this format of the Q&A roundtable session, it is not going to be webcast. So callers, shoot me an e-mail today if you want to register. With that, operator, please open the lines for Q&A.

[Operator Instructions] Our first question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Please proceed with your question.

This is James Picariello. So just digging right into the guide. Within Industrial, could you just provide more clarity on the first half versus the second half breakout? I mean I know you mentioned up mid-singles in the first half, and up low singles in the back half. But to get to that 4% to 6% range, it seems as though just to get Q2 you'd need to be up mid- to high, maybe in the front half and maybe up low- to mid-single-digits in the second half. So just want to get more clarity on that.

Yes, we would expect to see in our first two quarters of the year very similar dynamics to what we've experienced in 2017. The issue that we're dealing with is the performance that we've seen in the back half of this year starts to affect our comparables. And you'll see a numerical comparison issue. I don't believe the market's going to slow or affect us, it's just mainly the comparison. So we're reflecting that 4% to 6% range for a net result for the full year on our Industrial team. And where we're really focusing obviously is our Industrial tool growth, and then how can we really impact that in markets we're underserving at this point.

Okay. It seems as though you have pretty good momentum behind -- within Industrial tools, that's clear. But also within that, your second tier branding strategy. So just wondering, is there any difference in incrementals between Enerpac versus Larzep or Simplex? Just curious how you're thinking about that.

No. In terms of the margin, we watch pricing elasticity very closely of those two product lines. They have very similar margin profiles, and as a result, they share a lot of the same manufacturing and infrastructure. So the incrementals are almost identical. I won't tell you that we aren't looking at pricing on individual products to be more competitive and capture a little share, but that pricing elasticity model is something our marketing teams watch extremely close.

Okay. I'll let everybody else ask about Energy. Just one more for me. You've had recent management changes...

You've exceeded your rule.

You mentioned your management changes. You've had recent management change announcements. Your Energy President decided to leave and then it may -- seems as though you saw an opportunity to maybe rationalize the Industrial leadership. How are you thinking about filling those positions? And is it a likely external candidate? Any color there would be helpful.

Yes, we're actively pursuing to fill that role. That's an extremely important role for our company. We needed a dynamic individual that understands global service operations, how to grow service operations and how to grow not only the service, but the equipment that we sell through those global tool centers. We'll talk a little bit about that next week. Secondly, we're looking for somebody that has a deep experience in how to drive retail demand in distribution globally. And so I have that as my menu of what I want for a segment president of the consolidated business, and I want to make it real clear to everybody on the call that we're talking about back-office consolidation, how do we share, how we run the business external to what the customers see. These are distinctly different businesses and they deserve distinctly different approaches in the marketplace. And ramming them together for the sake of the savings would only damage those businesses. So for the -- our team that are listening and then also, our customers, we have no intention of making "one size fits all." And so that's proceeding. And I have hopes that we'll have someone in the chair shortly.

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

I will go to Energy with my questions. Maybe point of clarification, looking back historically as to what's been happening with Hydratight. I do recall in fiscal '16, you had some Middle East refinery business that helped you a great deal. And then we had difficult comps for a good chunk of '17. Now as we're looking into fiscal '18, you're talking about comps, but you're also talking about deterioration in the business. So I guess, I'm wondering here, how do you think about the cadence of Hydratight and Cortland sequentially through the year? And is there any way to sort of frame where demand is versus prior, call it, cyclical downturns?

Yes. It is a very complex question you just asked relative to Hydratight because there are multiple regions. And if you think about Hydratight, where we have a lot of volatility is in the Middle East markets. There -- they have been most difficult in terms of maintaining and hitting their forecast in terms of revenue and service jobs. The other parts of the world, whether it's North Sea or North American operations or Latin American, they have been tighter to what they've projected. And I think that those customers have provided much better maintenance schedules. So as we track through the year, we're going to see, essentially, as I said, from about negative 5% to at best zero for the Hydratight business. Cortland is driven similarly. But you have a different dynamic at play there because we have a large component of that business that's growing, which is nonoil and gas related, ropes and assemblies and medical. We're doubling down on that to make sure that we're really growing that as fast as we can. And so we're projecting a similar growth profile in Cortland. But I can tell you, we're not resting until we get those other two segments of Cortland growing. And I hope that we surpass the 60% mark this year of the total business. So just stay tuned on that, we'll give you more information as we flow through the year. But Energy is far from out of the woods.

Then, in thinking about your guidance and looking at your announced restructuring and savings, what's the right cadence for margins in this segment? Is it fair to assume that we're looking at above breakeven, maybe 2% to 3% margin in the back half of the year? How do you think about it?

I think that's pretty good color. It is -- those low single digits breakeven-ish back half of the year as the comps get a little bit easier is consistent with our expectation.

Then lastly, when you're looking at this segment, at this business, it's obviously going through a lot. You are restructuring it, but we're still barely above breakeven. What exactly is your hope or vision here? What sort of profitability or return do you think is acceptable for this segment? And it seemed to me like you hinted that Viking is step one and there's more to come or more to happen here. What does that mean?

Well, let me answer as directly as I can that we're exploring every opportunity we can to improve our exposure to upstream oil and gas and well development, well development meaning offshore well development. And it is a brutal industry. We still have a component of our company that is seismic-related and ROV-related. We're looking at every opportunity to eliminate that exposure. So the reality is that Hydratight is a great business. It's profitable. It runs well. We have a very great access in terms of our -- not only our service sales, but also our product sales. I think a roadway to success there also aligns in the product lines -- the product sales within Hydratight. Because the more products we sell in terms of tensioning and torque tools, the margins are much better and it helps the overall performance of that business. So you're going to see a lot of movement there on how we attack the market, similar to what we've done with Enerpac.

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

My first question is on Engineered Solutions. Revenues up 18%, but incrementals were just around 20% -- or 30% actually. I would have expected higher incrementals just given the restructuring, given everything that you've done there. Can you just talk about whether you had expected better performance in that business from a margin perspective or is there any mix problems, pricing problems, anything else we should be aware of?

Yes, the -- Ann, the Engineered Solutions business is really on a nice growth pattern. And the incrementals that I would expect out of that is from 25% to a little over 30% on average. That's from operating leverage on the upside. That's where we should be on that business. I think in the past quarters, we saw even higher because as we came off the bottom, certainly, as those plants got back on their feet and started running, we started getting more sales, it really accelerated. And any time you get a business that has a 400 basis points improvement in operating profit, that's hard to repeat. And so I have a lot of admiration for what our team has done with the Engineered Solutions business, not only have we cleaned up our factories and gotten our efficiency better, but we've just won a lot more business. And some of our primary customers are viewing us as a qualified and quality supplier now versus where they viewed us in the past. We also put a great sales team on the ground globally that is making a big difference there. So incrementals, just always think about for ES, we should be in the range of 25% to 30% upside leverage.

Yes, I appreciate that and that's fine. That will be in a normalized environment. But revenues are hardly back to normal yet. Are you implying that this business, mid-single margin is about as good as it can ever get?

No. I think that on an operating profit level, we have absolutely higher goals in terms of getting that business even more profitable. I'm not sure my IR person will let me share those with you. We can talk further at the Investor Day next week, and I can give you more insights of where we believe we can take that business in terms of profitability. But it's certain that we're not done yet. And there is still a lot more to do.

Yes. We have a lot of volume yet to come up off the bottom and the benefits of the lean, right? I think we're still in that zip code of mid-teens EBITDA as the goals for the segment.

Okay. We can talk more in detail, I guess, next week. But my follow-up then will be on the divestiture of Viking and the acquisition of Mirage. Randy, I don't really fully understand why you have to buy the Mirage assets. Isn't that still keeping you tied to offshore drilling? Can you just explain the rationale there a little bit more?

Yes. One of our primary strategies is growing out our tool product offering. Mirage is a tool company. They make field machining equipment that fit perfectly within our product ranges. It's high-quality product and it completes a existing product line within the Hydratight. And in my perspective, it certainly serves pieces of the oil and gas industry, but it's also used very, very broadly in all other industrial markets in remanufacturing situations. So when we looked at Mirage, it's a high-quality business, not particularly large, but it is a high-quality business, regionally focused. Then when we take it through a global footprint, we think we can really get some upside market growth and dominate that space in field machining. And that's using all types of heavy equipment, industrial applications and, certainly, oil and gas. But it was not an oil and gas play. It's a tool company.

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

Several of my questions have been answered. I just maybe want to go back and revisit two things, back to Engineered Solutions, where, Karen, you chimed in with the goal for the EBITDA margin in that business. Obviously, we've seen that this thing run at a 12% to 13% operating margin level back five, six years ago. I guess the question is, how do we get there? We've been at this mid-single-digit margin for quite some time. I know Ann previously asked a question around this, but I would like to know how we get back up there? And what's changed in that business today versus five or six years ago, where the margin is as low as it is? And if it's a cost thing, why weren't those costs taken out previously?

Well, the cost actions were taken in 2015 and '16. So if you look at the SAE expense of that business, it's essentially flat from '16 to '17. We got it to an SAE as a percentage of revenue which is a number that I think is sustainable and reasonable for the type of the business. The reason those companies were not performing is quite simple. First of all, if you ignore your customer and you walk away from them, they're not going to buy from you. And having run several larger heavy equipment companies in the world, I can tell you exactly what are those companies look for in terms of service from suppliers. It has to do with quality, cost and delivery. None of which we were hitting. So over the course of this last 1.5 years, we have dramatically improved that. And so if you look through the portfolio of companies in that business, there are double-digit growth profiles in almost all of them. We have margin improvement in almost all of them. And we have customer capture rates that have improved in all of them. And the thing that is really -- that I like is that the agriculture market still hasn't come to full speed yet, which means one of our best businesses is still not at full stride yet based on volume. So we expect to see that starting to uptick as well. So the only dynamic that we still have to keep our eye on is on-road truck, which we would expect to see a slowing market condition in both China and Europe, because you simply can't have 5 to 6 years of double-digit growth. We know in Europe, the registrations have slowed down, so. And that business is a very good business. Our truck Tier two supply is very good. Now you can imagine in Tier two and Tier one, supply has never been terribly profitable because of the dynamics of the industry. But to recap it, every one of those businesses have improved, in many cases, double digits in top line growth, in many cases, they have improved multiple basis points in terms of margin expansion. Some of it is volume-related, a lot of it is self-help.

Okay. So you're essentially saying that you're satisfied. I'm aware that you took out costs previously. My question was more around should we have taken a lot more out? It sounds to me like you're saying no to that.

Yes. No, I've always run businesses baselining on an SAE percentage of sales. And these particular businesses require a pipeline of projects and engineering to capture those platform wins for not this year, but two years into the future. We lost sight of that. And so if you're going to be on the next generation John Deere Round Baler, you better be working it now with those engineers to get to that 2020 platform launch. And so we have mapped every single platform of our major customers, when they're doing the engineering work, when those platforms will change over. And not only in heavy equipment, on-highway, off-highway and auto sector, we're looking at aerospace, we're looking at power sports. And we're serving a much broader variety of customers than we have done. Going back in time, many of those business did serve those customers and lost sight of it. So this transformation has gone well. And we're still not done yet. But I have a lot of admiration for this team in the Engineered Solutions business for turning these businesses around.

Then, I kind of want to ask as my follow-up, sort of the same question around Hydratight, where I never would have expected this business to have operated at a breakeven level. Other than revenue, which clearly is the biggest factor here, what else can we do to restore that business, even to a reasonable level of profitability? Should we be looking at just tuning this business more toward a product-only business and maybe not be involved in the services as much? While I know that those are high ROIC, it seems like the products that this business sells are much closer -- selling products, I should say, is much closer to what Actuant is about as opposed to having a field service organization there as well. How have you thought through where Hydratight's margin is versus where it should be?

Well, Hydratight, to remind everybody, and we'll talk a little bit of this next week in a lot more detail. But it has 24 field service centers globally. Those field service centers do multiple things. They rent equipment, they sell equipment, they provide technical service and they also provide training and they also provide essentially joint inspection and certification. Each one of those products have a different margin profile. I can tell you that I think in some regions, we focused a lot of our attention on pulling wrenches and not enough on selling product to multiple industries and multiple locations. And I think that's one of the margin issues we're dealing with. Having run large companies with a lot of field service operations that sell, they service and remanufacture, you have to break it down by the individual locations. So we are looking at every one of our 24 locations in terms of profitability and same-store sales growth. And those of you that follow those types of companies, you'll recognize that language. We are going to improve each one of those. And we're going to attack these product sales component of that really hard. Because that's, as you mentioned, that's where the highest margins are. And we have a lot of market share room that we can grow, not only from a rental aspect, but from a sale aspect to lots of different industries. So just save that question for next week if you're going to attend the Investor Day, you can get a lot more detail on that on the roundtables and our initial presentation.

Our next question comes from the line of Josh Pokrzywinski with Wolfe Research. Please proceed with your question.

Just on the Industrial mix, I think you guys cited in 2017, clearly, mix was a bit of a headwind with concrete tensioning and some of the larger integrated services work. Randy, you've talked a lot about tools being a bigger driver of the '18 strength or at least it was flagged more. Should we expect incremental margins to be more like a normal Enerpac, 30% plus, maybe even 40% in that mix framework? Or is there some investment or other ideas we should keep in mind?

Well, there's going to be a little more investment on the engineering front. Because we're building out some of our tool platforms, particularly in our torque and tension product lines and in our tool offering. And you'll hear a lot about that next week of where we're investing. That is not big numbers. But it gives us a little bit of investment headwind. And as I said, this is an important capital allocation decision to make sure that, that business is growing fast. To be very definitive about the incremental margins, we want the Industrial business, primarily Enerpac, to have incremental margins between 35% and 40%. That would be the absolute great level that we should be achieving. So when we're below that, we're not particularly happy. We look at how and why that occurred and it occurred because of our concrete tensioning business and some underperformance on our Heavy Lifting Technologies business, which essentially is very lumpy company. And we compete similar to what large service cranes do. So it creates a lot of lumpy sales. And you get some decrements you don't like there. But we're fixing both of those things.

Got it. So 35% to 40% is the number to think about for 2018.

Yes.

Okay. And then just shifting over to Energy. I know we've covered a lot of ground here. But one thing that I guess it's harder to see externally is how price is flowing through. And I have to imagine that perhaps some of the knives come out competitively when volumes are down. How are you seeing price trend in through Hydratight? How should we think about that in the context of kind of the flat to down 5%? I can imagine that's a little bit harder to mitigate than maybe some of the other cost dynamics.

Yes. The field service component of it, particularly in the U.S., is very competitive because there is more installed base. There is more capacity than there are jobs. And you can imagine from the competitors out there, there's a lot of price pressure. On the rental side, what we've seen is not necessarily pricing issues, but duration issues, where we had more companies taking rental tools for longer durations. They're being much tighter on how they're taking them out and how quickly they are returning them. So we've seen not price pressure on rental, but more reduction in duration. On the actual tool and equipment side, there is no real price pressure there to speak of. Now it is very competitive when you go into offshore oil and gas, but if you think of the general Industrial market on tensioning and bolting product, those prices have held better. But I can tell you it's very competitive if you go into the oil fields.

Got you. I mean, I guess that's one part that may be a little bit harder to bridge in the restructuring plan here. I think the savings -- you should have pretty good line of sight into, but a couple points of negative price would carve out a lot of that. Is it your expectation that doesn't get a lot worse from here? Or how should we think about that kind of flowing through as an offset to restructuring?

Yes. We're not contemplating a big negative price realization impact for, particularly, Hydratight. We've got to drive some efficiencies to make those margins better. And that's what we're working on internally. But I don't believe that we're going to see additional price pressure to the magnitude that we've seen. And Rick, do you have any other comments on that item?

No, I think, that's right. I think what we expect to see is baked into the numbers we're providing.

Got you. That's helpful. And then just one quick little housekeeping item. It looks like in your free cash guidance, the cash taxes seem like they must be pretty low. Is that the case? And how should we think about that as kind of a go-forward number? Looks like the effective tax rates a little higher this year, but is the cash tax rate going out -- not necessarily for '19 guidance, but I think -- the point is more on sustainability of cash tax versus ETR.

The cash tax that's included in the guidance, certainly, don't match the 5% to 10% that we've guided for 2018. As we've talked about before some of the planning actions we did in '17 will help us relative to the cash versus effective rate in 2018. If you recall, we had some significant planning around Viking losses. The timing of the realization of those credits or refunds will also impact our cash taxes. So a little bit of volatility, but lower than the current effective rate, maybe slightly -- maybe flat to modestly up relative to 2017, pending the timing of some of these planning items.

Our the next question comes from the line of Justin Bergner with Gabelli & Company. Please proceed with your question.

My first question relates to the first half versus second half organic growth guidance. Obviously, the comps in each of the segments are changing when you go from the first half to the second half. But sequentially, sort of excluding seasonality, how should we think about the progression of organic growth in each of your segments? Is it relatively similar in the second half versus first half sequentially or a slight pickup or slight worsening?

So let's just take it one by one. The Industrial side, as I said, between that 4% to 6%. It's going to be pretty consistent until we get to the back half of the year, where those comparables get tougher. And -- but overall, the rate of growth is going to be quite similar. On the Energy side, the comparables get easier on the back half of the year, because that's when the wheels came off in Q3. So Energy is going to look a little easier as we progress through the year versus the front end, which still benefited from some prior projects in our first quarter. And then, Engineered Solutions, the big wildcard there is when does the truck -- on-road truck business start to mitigate and slow down. We're contemplating that kind of the back half of the year, where the front half is going to track similar to what we've seen in the prior couple of quarters.

Okay. So it looks like...

Sorry, Justin, it's sort of opposite sequentially, right? Where Energy gets better as you go through the year, because I've got easier comps, where I have the opposite situation in Engineered Solutions and Industrial.

Okay. So pretty similar sequentially, with the exception of perhaps Engineered Solutions that could taper if trucking tapers.

Yes. So we need to watch that market really closely.

Okay. And then my other question relates to capital deployment. Obviously, there are a lot of leadership changes and flux at the organization. Does that sort of put your capital deployment -- or inorganic capital deployment plans on hold? Or are you focused more sort of on revitalizing the organization organically at this point and then you'll get back to inorganic activity?

We still have quite a few acquisition targets that we're working through. Certainly, we would want our segment President in this seat before we made any large tool company acquisitions, and that would coincide with what we're working on right now. As far as the ES side, there's not -- we don't have any targets in front of us at the moment. But clearly, our shift from trying to get the base organic growth of this company on its feet and running properly, now we're ready to start looking at more inorganic growth opportunities, which really is going to take the form of, primarily, tool businesses, industrial tool companies and things that really bolt in well with the Enerpac business and also in the service realm that come in and help us grow out our footprint in the Hydratight business. As I said, we have 24 service locations in the world. We intend to grow that.

Our next question comes from the line of Seth Weber with RBC Capital Markets. Please proceed with your question.

Just trying -- I guess, mostly a clarification here. I'm trying to kind of glue together some of this margin commentary. So first, the clarification is on the Industrial incrementals, the 35% to 40%, is that for the total Industrial business? Or that's just tools?

That would be Enerpac -- that would be Enerpac.

Because I'm trying to kind of, like I said, tie some of the guidance together, and it looks like, based on your comment about Engineered Solutions in the 30% range incremental and your Energy margin guidance, it seems to imply that you're guiding Industrial incrementals over 40% for this -- for 2018, for the total segment. Is that not the right way to think about it?

No. It's a bit high. I think when Rick was talking before about the Energy margins in the back half, I think, we were confusing first half and back half. Back half, we should see, on an operating profit basis, mid-single digit kind of margin rates in the back half with the benefit of that restructuring beginning to come through and some of the easier comps, essentially, little bit better revenue.

So the Energy business, I imagine, is kind of a low -- modest profitability for the year, right, on a margin basis? Is that -- you lose money in the first half you make a little money in the second.

In low-mid range. So when you say -- I don't want to imply its flat or zero, there's some margin there as we get into the back half.

And it sounds like Engineered Solutions is sort of mid- to upper-single digits or something. That's -- for a 30% incremental margin, we get just sort of that mid- to upper-single digits. So that still implies to get your EPS guidance though, I think it implies that Industrial incremental, north of 40%. But it sounds like -- is that not what you're guiding? I just want to make sure I'm understanding the guidance here.

Yes, it's -- I mean, it's not that -- it's at the juicier end, right, because we're going to have -- we'd expect to finalize the inefficiency piece. And as we talked about that incremental investments year-over-year, while still there, would be moderated down from the basis point impact, if you will, this year.

And then -- so Karen, you just touched on it. Does this facility consolidation headwind then go away soon? Is it still going to be there in the first quarter, it sounds like, and then maybe it goes away.

Yes. So [indiscernible], I gave a little color on our third quarter call. We have a supplier of machine tools that has really brought us to our knees. We had bought five units that would significantly improve the operations and the cycle time of making those wedges, and the delivery was late to start with, and then when the equipment came in, it didn't work at all. And it's taken most of this year to correct that issue. We've done unit runoffs now, the equipment is starting to work the way it is supposed to, and we have commitments directly from their President of the ownership of that business in Europe, that it is going to get corrected and it's going to run at the efficiency levels we paid for. And so my expectation is that we were going to get -- we will get this straightened out in our first quarter, and we'll get back to a normal run rate in terms of capacity. I've got a lot of confidence on our management team down there. We've replaced some people last year to get better focus on this issue, and I have no doubt that as we exit this first quarter, we're going to be putting it behind us.

[Operator Instructions] Our next question is a follow-up question from the line of Mig Dobre with Baird. Please proceed with your question.

One small one on the truck business. Can you maybe remind us how large China truck is on a rolling 12 months basis, last 12 months, basically?

Yes. It's about a $40 million revenue business for us. It's been growing steadily over time, and just to remind you, it was related to some regulation changes that China made on the loading capacity of on-road vehicles, and effectively, it increased the requirements for trucking in their country. And one of the things that we all know China does very well, when they regulate, it happens. And so the build-out of that new fleet is, certainly, I would expect it'd be coming to an end and then going back to a normal run rate. The good news is that run rate now is on a larger fleet of trucks, a good third of them are going to be brand-new though. So that's what we're waiting for is that gradual decline. It hasn't occurred yet, but we need to plan for it.

Okay. Very helpful. And then, Randy, looking at towards, maybe, the Analyst Day next week, setting some expectations here. I remember last year, you talked about, call it, roughly $200 million worth of incremental EBITDA over a five year period. But cost savings was a relatively minor component, only 35 million. The remainder really kind of came from growth. Given the fact that we know a lot more now than we did back then in terms of demand progression, how should people think about the framework going into next week? Are we still primarily focused on growth? Or are we likely to see more on a cost-saving front as a primary driver of profitability?

Well, business by business, I think if you take the Engineered Solutions business and the Industrial segment, we are in a growth mode, and we are investing. As I said, capital allocation, in the form of investing in ourselves, is a very big part of their strategy, and it is paying off right now. The downside is, it just hasn't paid off enough to pay to offset the decrements that we've seen from Energy. Energy, you will see cost savings there. And you will see portfolio moves there. And we'll walk you through the strategy, how it relates to what we told you last year. The blend between organic growth and portfolio management are two key elements of that, that strategy. I'd say, on the organic side, I feel very good about two of our businesses or two of our segments, and we've got to give you that framework of where we're at in terms of the progression. And then, as far as the acquisitive side or the nonorganic growth, we're not taking our eye off that. We have a lot of capital to deploy, and we intend to do that.

Ms. Bauer, there are no further questions at this time. I will turn the call back to you. Please continue with your presentation or closing remarks.

Great. So thanks for joining the call today. I'll be around all day to take your follow-up questions. Just for your planning purposes, the first quarter earnings call for 2018 is scheduled for Wednesday, December 20. Thanks. Bye-bye.

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