Enerpac Tool Group Corp. (EPAC) Q1 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation's first quarter earnings conference call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, December 20, 2017. It is now my pleasure to turn the conference over to Karen Bauer, Communications and Investor Relations leader. Please go ahead, Ms. Bauer.

Thank you. Good morning, and welcome to Actuant's first 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 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. Good morning, everybody. Let's start on Slide 3. I was pleased with the results in the quarter. Total sales exceeded our expectations and we delivered EPS at the high-end of our guidance range. Our industrial segment grew nicely in the quarter. Tool sales were up 9%, heavy lifting technologies increased by more than 40%, Engineered Solutions was up 20% repeating the great performance we saw in our fourth quarter, energy sales stabilized in the quarter and project forecasting has improved. From a margin standpoint though, our industrial segment delivered weaker than expected performance due to our higher mix of the heavy lifting sales coupled with discrete cost of legacy projects. This effectively weakens great performance on our tool sales in the segment margins. Engineered Solutions continues to achieve higher profitability and margin performance growing at nearly 270 basis points in the quarter. And finally energy continues to suffer from lower sales volume but we will begin to see the effects of our cost reduction actions. Despite these factors and a modestly higher tax rate in the quarter, we still achieved the high-end of our EPS guidance. On December 1 we completed the divesture of the Viking business which was important first step in reshaping our energy segment portfolio. As I had communicated, our objective is to minimize Actuant's exposure to upstream oil and gas exploration and oil development. We also completed the acquisition of the Mirage Company which is a great addition to our tool product line and it gives a full range of machining equipment. In summary, it’s a great start to the new fiscal year. We have great evidence that our objectives are beginning to deliver on our strategy but we have to continue to drive on our sales performance. We have to fix our margin issues and we need to continue to drive new product development and ultimately we know that we need to pull cost out of our energy business and reshape it. So with that, I am going to turn it over to Rick to walk you through the details on the quarter and I'll come back with guidance and a few updates.

Thanks Randy, and good morning everyone. Let's turn to Slide 4 to walk through our adjusted results in more detail. Fiscal 2018 quarter sales - first quarter sales were solidly above our guidance range up 9% on a year-over-year basis. We had 3% currency benefit with core sales up 6% compared to flat core sales in our fourth-quarter. Adjusted operating profit improved 11% or 20 basis points. While not as robust as we would've liked given the sales performance, it was the first year-over-year quarterly improvement in the adjusted operating margin percent since Q4 of fiscal 2013. Excluding restructuring charges, our effective income tax rate was approximately 15% compared to 5% to 10% guidance at about 5% in the prior year. The increase in the effective tax rate above our guidance reflects the impact of approximately $800,000 of incremental tax expense on lower earnings associated primarily with recent changes in the European tax regulations. Our adjusted EPS for the quarter was $0.19 representing the high-end of our range and a penny below last year's $0.20. Turning to Slide 5, our core sales increased 6% which was well above our expectation of flat to minus 2%. Total industrial sales exceeded expectations on robust heavy lifting project activity, Engineered Solutions also outperformed with continued very strong demand across a variety of markets including heavy-duty truck, agriculture and off-highway equipment. While negative, energy core sales were a bit better than our latest outlook on strong non-energy-related Cortland rope and cable demands. On Slide 6 we summarized the quarterly adjusted operating profit margin trends where you can see a modest improvement in year-over-year margins. While we clearly had strong volumes, we did see sales mix headwinds and increases in other costs including some one-time warranty provisioning, as well as the impact of continued investments in commercial effectiveness. So let's walk through our performance by segment starting with the industrial segment on Slide 7. Core sales for industrial increased by 9% from the prior year accelerating from last quarter's 5% led by over 40% growth in the lumpy heavy lifting business. We continue to see strong demand within industrial tools globally and across various markets. We believe this sustained demand is attributable to both an improving industrial economy, as well as our investment in internal growth strategies. We did experience the sales decline in the concrete tensioning product category as we continue our efforts to improve production efficiencies. From a profitability standpoint, industrials margins were down year-over-year. We are seeing the expected incremental margins on the higher tools volumes in the 35% to 40% range even with the growth investments in commercial and engineering resources. Unfortunately, the heavy lifting revenue mix was poor and that combined with discrete cost associated with the closeout of certain legacy projects resulted in operating loss for that product line. Many heavy lifting projects involved developing customized fit-for-purpose products for specific customer applications. The project can range anywhere from six months to two years. Depending on the duration and complexity of the project overall profitability can sometimes come under pressure. As such going forward we have significantly narrowed the scope and type of projects we are quoting and have revised the quote process to improve the long-term profitability of this portion of the segments. Facility consolidation and efficiencies continued at the concrete tensioning facility although we are seeing slow but steady progress. Now let's turn to the energy segment results on Slide 8. Overall core sales declined 12% but sequentially improved from a minus 25% last quarter. As Randy noted, we completed the divesture of Viking on December 1 and this is the final quarter that Viking will be included in our results. It performed in line with expectations for the quarter. Hydratight's core sales rate of change stabilized and was down mid-teens year-over-year compared to down about 20% last quarter. Customers across the various served markets and regions continued their trend of maintenance deferrals, push-outs and scope reductions. This was the most acute in the Asia-Pacific region. Encouragingly we did experience a modest increase in year-over-year activity in the Middle East. Cortland delivered a double-digit core sales growth in the quarter on the strength of medical, defense and other non-energy related cable and rope demand despite flat oil and gas activity. Adjusted operating margins were down year-over-year but they improved sequentially due to the benefits of cost reduction actions, non-energy Cortland volume growth, and a good regional mix within Hydratight. We continue our restructuring and service excellence projects within energy. We have identified many opportunities through these efforts. While we are encouraged by the early results, we also recognize that there is work to be done in each region in order to fully harvest the identified opportunities. Turning to Engineered Solutions on Slide 9. We saw outstanding performance again from a topline standpoint delivering 20% core sales growth for the second consecutive quarter. As you have heard from many of the segments customers demand is improving and inventories are in good shape which support strong build levels. This is broad-based across off-highway markets including agriculture, construction, forestry and mining among others. Europe truck production rates for our customers grew double digits and China production was quite strong in the quarter. While Europe has remained more resilient than expected, China customer order rates have started showing the declines we had been anticipating with the year-over-year decline in the month of November. This will certainly impact the sequential revenues in the second quarter. Profit margins in Engineered Solutions improved toward 270 basis points year-over-year on a higher volume and the benefit of prior restructuring and lean revitalization efforts. However, this was partially offset by various cost increases including warranty, raw material, and preproduction engineering support for the new product platforms. Turning now to liquidity on Slide 10. As is typical, we utilized cash in the first quarter largely related to the payment of annual bonuses after fiscal year-end along with an increase in working capital on the stronger sales activity our net debt increase with the cash usage and the $28 million payment to buy out the lease obligations required to facilitate the Viking divestiture. On a pro forma basis, our leverage ticked up to 2.9 times but that is expected to decline as the year progresses based on full-year cash flow expectations and pro forma EBITDA improvement. Finally, we have been tracking the pending U.S. tax reform bill and continue to model those development. Our initial reactions are mix. The reduction in the U.S. corporate tax rate has an overall cash and earnings benefit. However limiting interest deductibility and additional tax on repatriation of foreign earnings will result in a small detriment. That being said, we continue to pursue planning opportunities to reduce our cash taxes consistent with our past practices. As we have noted consistently in the past, the sustainable ongoing or normalized effective tax rate for Actuant is in that mid-to high teens range and that is excluding the benefit of any tax planning. Based on our current view of the soon to be an active tax law, we don't believe the new normal will be significantly different. We will continue to monitor this as the law and pending regulations are finalized, and we will provide more specific disclosures as necessary. With that Randy, I’ll turn the call back over to you.

Thanks Rick. Let's flip over to Slide 11. Personnel and engineering investments we're making across the organization. Our continued sales growth is very encouraging and we are starting to launch in great new products. In the first quarter, we launched multiple new tools which continue to expand our target industries and applications. The new wind energy tool platform additions provide better assembly control quality to this growing industry sector. Within energy we received a significant pipeline of services award in Asia-Pacific which is part of the extension of the forklift service capabilities. Engineered solutions saw several new platform wins and we continue to invest in engineering and test capabilities to support our customers. Overall, I'm pleased with the progress which represents an investment and a cultural change in the organization. Flipping over to Slide 12. The macroeconomic factors impacting the end markets continue largely positive. Oil and gas prices have increased as demand improved along with supply reductions bringing inventories into balance. While higher prices don't directly impact activity, it does ultimately improve confidence around market dynamics and eventually investment in both OpEx and CapEx. Off-highway mobile equipment continues to strengthen. The agriculture sector dynamics have improved in areas of used equipment and the stock to used ratio and all major manufacturers of construction equipment - in the construction equipment market are recording improved customer demand and rental fleet utilization. The general industrial market continues to be strong and distributors are recording good quote activity. Industry recording indicates a solid growth range of between 2% and 8% and finally the on-highway truck market remains strong through the first quarter but we see reductions in production plans notably in China for the remainder of calendar '18. Turning over to Slide 13. In general, the core sales expectations we set to begin in the year remain valid. A portion of the increase in core growth in the first quarter notably heavy lifting in Cortland is simply timing between the first and second quarter. The modest change in our core growth expectations are highlighted in green on the slide and simply represent a higher than expected truck volumes in Europe and in China in the first quarter. We anticipate more difficult comparisons we progress resulting in a low to single-digit range and the balance of the year. We’ll go over to Slide 14. We've maintained our projections for sales and we adjusted diluted EPS for the full-year. The sales will be in the range of 1.1 billion to 1.30 billion with EPS in the range of a $1.05 to $1.15 a share. The effective tax rate range for the year is unchanged at 5% to 10% but we would expect Q2 to be similar to Q1 and then low single digits in the back half of the year. For the second quarter which is the seasonally weakest, we expect sales in a range of 2.65 to 2.70 with EPS from $0.10 to $0.15 per share. As I noted in the commentary on HLT, activity levels are lumpy in the strong growth we saw in Q1 will revert to negative in Q2 causing the industrial core growth in the second quarter to be in a low single-digit range. The Viking and Mirage transaction timing lined up with our initial guidance. However as we noted in the press release, there are several divestiture and impairment amounts recorded in the second quarter. And finally we are maintaining our free cash flow guidance for the full-year of between $85 million to $95 million. And with that operator, let's flip it over to questions.

[Operator Instructions] And our first question comes from the line of Allison Poliniak with Wells Fargo. Please go ahead.

Touching on industrial and the mix issues and the discrete cost, could you help us understand us, it sounds like the mix issue is going to reverse in Q2 just from the nature of what’s being sold. In terms of the discrete cost, the HLT, I imagine goes away but could you maybe comment on the facility consolidation there, just trying to understand what cost we should assume in the second year?

In the industrial segment we try to give a lot of clarity on exactly where the cost came from. They were 100% associated with the heavy-lifting technologies business. Some of them were related to legacy issues on contracts that we're closing out. Now there are two that are remaining that we have to finish for the balance of the year. So they may have some impact on the balance of the year but less so. The second issue is that we're trying to eliminate or minimize the number of very complex projects which are really not in our core area. And what we've done in the past I think we've accepted some larger and more complicated builds in an effort to drive some peripheral sales, but in fact that hasn't panned out for us. So if you look at that on the sales that we had in Q1 associated with the heavy lifting business as Rick mentioned, it was a complete loss for us. So, that effectively diluted what would've been a nice margin accretive quarter for us for our industrial business. So just to summarize, we had some legacy projects we’ve quoted out. There's a couple more of the remaining, we got to work our way through. The impact would be less. The mix issue will be better weighted towards the more profitable gantries and standard products. But it will have an effect that we will have lower sales volumes in that segment in the future quarters which will affect the total core growth of the segment. So, the reality is we know what it is, we’re dealing with it and I think that we’ll have it under control.

And then those HLT projects that maybe weren’t as favorable for you guys. I mean, is there a way that you could quantify that a little bit? Was it 80% of the projects maybe you shouldn’t have gotten involved with, any sense with that?

Well, I mean, there were several large ones, one of the Reunion Island that was very big. It was a highly complicated project. It did have a lot of content of hydraulic and lifting equipment in it. But the reality was is that the project scopes were massive and we are building equipments that in some cases were the largest ever constructed on the planet. And when you're estimating jobs like those, it becomes difficult to hit the actual manufactured cost in a very precise manner. And so we've got to be very cautious about how we would approach anything like that in the future.

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

The mix issue, I'd want to maybe ask that question of the ES business, was there anything in that business that kind of you could identify as being a negative for mix?

No. I’d say, from a mix standpoint, as we see a little bit of declines of some of our Asia truck, that's a nice mix positive for us. But I think in general Roger and his team and our ES Group have had a very broad based growth across multiple industry sectors which is creating I think a very positive mix. And we still have a ways to go on our margin improvement plan, but I do see incremental improvement every single quarter and that's been going now. I think this is the fourth or fifth quarter where we've seen nice improvements from our ES team and I would expect that to continue. The balancing effect obviously is as the truck business in Asia slows and those production plans are decreased there our objective is to make sure that there's offsetting volume from the Ag on-highway or off-highway construction machinery mining and other elements that help offset that. But I do think that from the mix standpoint we’re starting to get a good global plan of component supply.

Two other questions, could you maybe talk about the orders and please by all means viewing to this companywide but any more specifics you can do by segment would be helpful. The orders as the quarter progressed, as well as maybe how was pricing in each segment?

On the orders and I'll deal with each segment individually just try to give you a framework on that. On the ES segment, we work on known production orders based on our manufacturing production PO. So the major manufacturers release their production requirements anywhere from 8 weeks to 12 weeks prior to the actual production requirement. As we go through the year, ES will see tougher comps though, because they’ve had such good performance and good growth I think that will temper a little bit. So I wouldn't bank on 20% incremental growth every quarter, although I would love it, I don't think that Roger’s team can maintain that level of growth and comparisons. When you look at the industrial segments, we track daily order rates on a very detailed level. And I can see those from every part of the world on a daily basis. And so we see good sequential growth. It is steady. I don't see any particular region having larger than others which makes us think that this is more sustainable on the industrial side. Now energy is where the wildcard is. That tends to be a little more lumpy. We are driving our tool sales in that segment though because that would be more consistent. As I mentioned in my commentary, we did get an order in Asia-Pacific for a major build of one of the largest petrochem sites in the world which is a great win for us. There's good quote activity but the timelines between closing, service work and the initial quote activity can be as much as seven months. And then that's always subject to the particular site and company approving that maintenance activity. So I think in summary it's pretty consistent on two of our segments and energy continues to be a little bit of an unknown and more lumpy.

On the pricing?

And then on the pricing element, we have standard price increases that are contractual within the ES Group so that's very structural. On the industrial side, we have pricing that’s scheduled in the summer. We typically would want pricing between May, June timeframe. We could accelerate that based on economic conditions. We are seeing some pressure on input cost and so we could accelerate those pricing. So from that element I think that - we have that well under control and we’re planning for it. On the energy side there's no doubt that there's continued too much capacity for general service work around the world which doesn't impact pricing. Now on specialty service, whether it’s hot tapping and some of the more dangerous and specialty work that we do, I think the pricing has been more consistent. And it certainly on the tool sector and energy we've seen pricing pressure on rental and day rates of rental tools but I think that's more stabilized now.

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

Could you just talk a little bit about your margin expectations in the back half for each segment, I'm really struggling to get back to your guidance in the back half?

So from a segment perspective we saw each of folks start with Engineered Solutions. We saw them drive significant margin expansion with the 270 basis points in the back half of the year as Randy mentioned you start to see those comps get a little bit more difficult so you won't see that continued margin expansion from Engineered Solutions. We expect that to be kind of low single digits in the back half actually. And then on a energy perspective again we’re anniversarying the downturn - starting in Q2 but really accelerating in Q3 and Q4. So we do expect energy to be a little bit better combined with some of the savings that from the restructuring activities that we did here towards the end of the year and continue to execute in the first quarter. Industrial as we talked about back half of the year we expect - as the year progresses we expect a better mix which you know with the heavy lifting business kind of rightsizing we’re more normalizing that activity and the continued growth in tools. So again we expect that margin to start to look better. As we go forward on a year-over-year basis the comps as well for industrial will get a little bit tougher in the back half of the year as we start to anniversary some of the improvements.

But overall in back half margins in industrial look like they have to improve significantly to reach the…?

That's correct yes.

And then if I look at what you said was a disappointment or what some of the cost like you talked I think about warranty issues in industrial and then warranty raw material and preproduction costs in ES. Can you talk about each of those and why those might not repeat themselves again going forward especially preproduction costs that were ramping up new products?

Let me cover part of that Ann and then Rick and chime in on some more of it. When you win new platform work it requires pre-engineering approvals and a lot of work that goes in today we’ll start delivering in 2019 and 2020 and sometimes beyond that. So it's an investment you make now for the future. Rick you want cover the rest?

When you look at industrial, the majority of that actually was really the heavy lifting activity and the project close out. There is a little bit of warranty rolling through there, but for the most part it's what we discussed earlier in terms of the legacy projects and the lower margins. On the Engineered Solutions its exactly the preproduction cost, yes a little bit of warranty provisioning which is tied into the incremental sales volume and warranty rates that we haven't seen before, as well as some commodity or raw material pricing and that’s as we've historically said for the industrial and the Engineered Solutions we have been able to take price on the ES side that tends to lag given the nature of our business and the platforms and the pricing. But certainly our escalators there but take those again on a lagging basis.

But my point was why wouldn’t the preproduction cost continue as you’re ramping up new products and then on the raw material it lags, it lags by how many quarters when does that get better?

Well, you're always going to have the preproduction cost in fact you want them because - we want some platforms. I think there's going to be some commonality of platform wins on the next gen of particular companies whether its auto, truck or even some of the aerospace customers we’re working with. So you may be able to use some of that engineering work, but you just never want to bank on that because every OEM has a very specific requirement.

And the lag in raw material cost when does that get better?

Well I think that - on anytime we’re seeing increases on the raw input cost we’re trying to get ahead of that on pricing you always got to make sure that you’re keeping ahead of that from a price standpoint. Now the raw material input costs we’re working hard on our COGS an annualized cost reduction projects and if you’re doing your job right, our productivity improvements in the manufacturing and our negotiated price variances should offset that increases you’d see on normalized economics. What you can't bank on is when you have large run ups in iron ore input cost and steel and in copper input then that becomes more difficult and then you have to react with pricing.

Again I don't mean to hop on it but I’m assuming your long-term contracts with your OEM customers in ES and there are probably inflation clauses that lag and I’m just trying to get a sense of when we’d see the margin improvement as the inflation clauses kick in?

No, I think that you always - in all the contracts that we have there could be some legacy ones that don't have good pricing control. But you typically have a lag effect as commodity input price, your producer’s price index increases you're going to have price actions that flow through.

Now as Randy described given the multiple contract, it’s kind of phase-in over the back half, it's varied when those clauses kick in. So it’s difficult to say at the end of this quarter will have all of it baked in. On an industrial side, we usually can get ahead of those and we've had no difficulty getting our prices out there which contemplates cost increases, but on ES I don’t have an exact answer each contract is different and the terms and the escalators kick in at different times. But we do expect that we’ll be able to start reducing the impact of that as the year progresses.

Our next question comes from line of Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Can you spike up the core tools growth in the quarter and then just on the tensioning inefficiencies I think you're saying that it was going to ramp up but how long does that kind of carry through?

The tools growth in the quarter I mentioned in my commentary was about 9%, so - what we've said is we try to outpace the industry demand or the industry level. So as I said we’re about 2% to 8% industry growth and we’re running about nine when we’re capturing some share. So I'm actually really happy with our tools performance in Enerpac and to a certain extent in the Hydratight business. And what was your second question? The Precision-Hayes and efficiencies, we've got three of our new machine tools up and running now. We've worked hard with the supplier for the machine tools. It’s been a very difficult contractual discussion with them. We do have - we returned one unit completely and got a refund. They redesigned and redelivered two, they’ve proven that they can now - make the line rates of making the product for us. And so we have all five units now in the process of being commissioned I expect by January 20 at least that's the current view on this topic that we will be at full production capacity on our wedges and we could be putting this issue behind us.

And then on energy, I mean your 2Q guide looks a little bit low and I thought with Viking now energy would look a little bit better, but are we still at a loss in 2Q for energy?

Moderate to breakeven as we pull Viking out and kind of still see some indicators of profitability improvement we should get back close to breakeven.

And then as we mentioned in our fourth quarter and in Q1 we’re working through some additional cost actions in the Hydratight business to right-size it and that will definitely improve the overall profitability. As well as Cortland as you know it still had a piece of that business which is highly energy-related and we’re investigating opportunities to improve that and to do something different there as well. So there is still some headwinds there, but we do see definitely improvement in the Hydratight business and obviously Cortland did better in the quarter.

Our next question comes from the line of Josh Pokrzywinski with Wolfe Research. Please go ahead.

Just a follow up on some of the questions on I guess first half to second half margin progression. Rick thanks for the color there on energy I think that answer some of it. But it seems like from the run rate that we’re talking about as of 2Q guidance that you need to pick up, call it 16 million or so of EBITDA a quarter on - pretty undemanding revenue balance and I guess you could see energy being a piece of that maybe a third of that but it's really the rest of it just better second half profitability in industrial as we kind of get through some of these inefficiencies and mix issues - is it just that simple, should we just speaking in on more like a mid-20s margin in industrial in the second half?

I mean that's exactly it as the mix corrects itself, we become certainly more tools centric in the back half. You'll see some of that - you’ll see that margin flip. We also just have far more volume in the back half both on energy and industrial which will contribute to the mix for the back half and it’s seasonally our highest. The back half is always higher than the front half that’s been our historic trend.

And if you think about it it’s always hard to with our offset fiscal year our third and fourth quarter are essentially right on top of the most productive construction times when lot of our tools are being most used. And so those - seasonally it's - our second quarter is always very weak and then if you look at the pressure waves over time third and fourth quarter are always the strongest and it’s because of how we sit in terms of those summer months and those production times.

And on the ES revenue guidance specifically I think if I follow the first half second half loading there very hard to get to that guidance and still stay in the range. I guess by that I mean it's hard to have ES growing in 2Q to be a high single-digit for the first half and if that's the case it seems like there will be an acceleration elsewhere to get to the consolidated revenue I mean I guess maybe not but to find a point on does ES actually grow in the second quarter?

Yes, it’s going to grow, it’s just not going to be a 20% growth rate. I think that's the hard thing...

So I guess like mathematically high single-digit versus the 20 knowing that you have some seasonality that gets in the way as well like it does get you pretty close to flat if not down?

And you've got to remember in ES there's couple of elements in play in our second quarter. Lot of the major OEMs they’re closing out their fiscal years. So you can imagine in December they're not particularly interested in taking up whole bunch of new inventory for the January production rate because some of them are shutdown and those lines are idle. So they don't want to receive that material for use and so the lines are ready for it. So it’s a balancing that happens every single year it’s nothing new. And then as we progress through the quarter, we would expect to see the Chinese truck demand to temper a bit so that's why we're not reflecting a 20% growth rate for Q2 it's going to be in those single-digit range just like we've reflected. So I would love it if Roger and the team did another 20% quarter but I just don't see that on the horizon.

And then just one follow up on energy if I could, you guys called out some strong non-energy demand there on the Cortland side. How lumpy should we consider that is that something that’s contemplated sustaining itself into the second half?

Well this has been our strategy change that we've been working for quite some time now to develop a business that is not energy dependent and when you think about Cortland it's a materials technology company. And it applies fiber technology into multiple industries and we’re starting to see some success there. So we broke the 50% mark on the revenue splits between energy-related customers and non-energy related customers really it was in 2016 we started seeing that and now that's accelerated and growing. So we hope and our objective is to make sure that that - the nature of that business becomes more consistent and as we supply to med companies, as well as to non-oil and gas fiber supply whether it's ropes and assemblies and even cabling applications that are non-oil and gas related. So the actions we’re taking within that business to restructure it and to change its product mix away from energy and also to in some cases deal with some products and locations within that to reshape it, it will work and we've seen that working and that will help the overall profitability of that business.

Our next question comes from the line of Justin Bergner with Gabelli. Please go ahead.

First question relates to just the guide for the industrial segment for the year. Is it safe to say that if you weren't rethinking certain heavy lifting projects at the industrial guide would have been higher for the year?

Well, I think if you think about the core sales growth and if we dial back some of the larger projects going forward, the actual impact of core sales growth as a total segment will be lower than maybe we had expected going into the year. It still be quite positive and it will be in the single-digit range. But reality is we're not going to take a project that we intend to lose money on. And that's actually good for the business not to take it. And so that you may see an effect in the future where - and as we did took deals unbridled we might see a higher core sales growth number, but the fact is that will improves the margin and improves the profitability by not being so aggressive on the types of big projects we do. So that's the impact of the heavy lifting technologies, structural changes we are making right now.

So if I look at the segment sales guide, I guess it’s unchanged for core growth. I realize you are giving up some sales volume. But should I assume that the core tools business is compensating for that to leave your guidance unchanged? Or should I expect to make to lower end of the range?

Well, keep in mind a couple of things on heavy lifting. There's a long process for those projects as I mentioned six months to two years from start to finish of the project. And so, the impact this year is not that significant especially - Randy is talking about changing our coding and certainly doing all of those things going forward. So from a guide perspective, we're - that's why we’re able to hold. We anticipated a certain level of heavy lifting. We’re still anticipating that. And the project business is just a portion of the overall heavy lifting business activity.

And then, you made a comment earlier, I just want to clarify. I think that heavy lifting - there were heavy lifting losses. Was that for just these customized projects? Or is that for the whole heavy lifting business including the moneymaking parts of the business?

It was in fact with the whole business, which was unfortunate, because we have really great performance from our tool sector. And then when - relatively small percentage of the overall sales footprint creates a negative profitability, it effectively drags the margin profile of the whole business down. And that's what happened.

A few projects that caused that. It’s not like everything we sold in heavy lifting was negative, they were profitable pieces of it, but because of these cost overruns and discrete items warranty things that draws that product line to a negative profit.

Our next question comes from the line of Mig Dobre with Baird. Please go ahead.

This is Joe Grabowski in for Mig this morning. I know a lot of the questions have kind of gotten to first half - first or second half guide, and I’m going to kind of go there again. If I look at second quarter last year, you guys made $0.11. I assume Viking lost, I don’t know, maybe $0.04, $0.05 in the quarter. So maybe ex-Viking you made $0.15, this year, the second quarter guidance for sales to be up $6 million to $16 million, but for earnings ex-Viking to be flat to down. So is it more heavy lifting headwinds in the quarter, kind of what are the puts and takes in the quarter that'll make earnings ex-Viking flat to down on higher sales?

Well, couple of things. The impact of heavy lifting - as Randy mentioned we have maybe one or two more projects to digest so that definitely will impact the second quarter. The Cortland sales will reverse that run rate. So we've got a significant Q1 benefit from some of these non-energy businesses or product or sales tick up, that will be little bit negative in Q2. We talked about the China truck being down in Q2. And then we’ll continue to have our investments both at ES and continued investment in industrial. So those are the things that weren’t, some of it wasn't there in Q2 of last year. Some of them are new to Q2 of this year.

And then just a quick question on the tax rate first half versus second half. Looks like tax rate second half of this year is going to be lower than first half. Kind of what's driving that?

Part of that, I mean, it was true last year as well. Part of that is driven by the lower income in the first half of the year. And we file tax returns et cetera in the back half of the year, so we’re able to true up certain of our estimates in the back half of the year. So you always have this back half lower mix. And then also we have some planning activity that will hit us in the back half. Last year we saw some of that hit in Q1, that’s the 5% for Q1. We have that plan right now for Q4.

And I know you kind of set the new tax bill. I think I heard it was sort of a loss for your tax rate in total. Are you incorporating the new tax bill in your second half tax guidance?

It is not in our second half tax guidance. So one of the thing; we're a fiscal year tax filer. So any movement in the U.S. rate would be on a pro rata basis whenever is finalized. And it will take time for their repatriation activity wherever that lands to really have an impact.

[Operator Instructions] Our next question comes from the line of Seth Weber with RBC Capital Markets. Please go ahead.

I actually had - bunch of my questions have been asked and answered on the margin and excuse me, in the guidance. But just to put it above on it. Do you think that second quarter industrial margin is up year-over-year or down year-over-year for 2018?

It should be up. That’s my expectations. We should see margin improvement in Q2 on our industrial business. And it’s not going to be huge. But as we’ve said, we want our operating leverage in that business absent any major cost issues that we dealt within Q1 to be in that 35% to 45%. So on incremental revenue we should be seeing that. What I don't want to over commit to in this context is that the heavy lifting issues that we dealt with in Q1 which was somewhat of surprise that doesn't reoccur in Q2, because we still have some deliveries to make relative to two major projects in our second quarter. And then there should be some revenue in quarter three that we may have to deal with as well. So, my expectation and where we’re driving the company to as to get to that operating leverage number in the industrial business and we should be able to get there.

And then just you've mentioned a couple times the anticipated decline in China truck for 2018. Can you kind of ring-fence that for us. Is that like a 10% numbers, is it 20% we've heard from some of the industry players, a pretty wide range of numbers that are out there. Can you just update us what you're thinking on China…?

Where is the file ending point? I think we will see a new norm because of absolute truck fleet is larger now than when we started. But we've been watching the year-over-year progression on the sales growth. And in our fourth quarter was the first time we'd seen in a single month of a negative comp. Now we’re just slightly negative about a point negative year-over-year in the month of November. So from a reality standpoint is that we've been tracking it. We know it's slowing down. We’ve got very good contact with those three or four big suppliers over there. And I think that the other element is we’ve managed our inventory levels very tightly with those companies so that we don't get caught with any major inventory mess where we got to work through two or three quarters of inventory. So we know where it's going. What I can't say in real precise level is what's the new norm for China truck volume. But I would expect that it should have a number in that $30 million range on average.

30%.

30%, I would say.

30%.

Any other comments from Rick?

No. I mean, we anticipate a 30% decline or anticipate that in our guide, most of that was back half but we’ll start in Q2.

And then Randy, I think you mentioned in your prepared remarks you’re still looking at additional opportunities to cut costs and energy. Can you - is there any update there - can you size anything for us or when we might see some more there?

You’ll see a bit of restructuring charges in Q2 associated with the energy business. We have two regions which we are still struggling from a profitability standpoint. And I believe it's - we’re holding the restructuring outlook that we laid in for the full-year. But for Q2 I’d expect to see some more there because we want to make sure two regions are solidly profitable on today's revenue base.

So we described last call an energy Phase 2 restructuring charge of 4 million to 5 million with annualized savings 2 million to 3 million. So that's really unchanged and you’ll see that savings kind of coming to our back half of the year and fund rate will be 2 million to 3 million.

There are no further questions at this time.

Great. Thanks everyone for joining the call today. I’ll be around out later to take the follow-up questions. For your planning purposes, our second quarter earnings will be released Wednesday, March 21. With that, have a safe and wonderful holiday season everyone. 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 lines.