Enerpac Tool Group Corp. (EPAC) Q2 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Actuant Corporation's Second Quarter's Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, March 21, 2019. It is now my pleasure to turn the conference over to Barb Bolens, VP, Corporate Strategy, Investor Relations, and Communications. Please go ahead, Ms. Bolens.

Thank you, Operator. Good morning and thank you for joining us for Actuant's second quarter 2019 earnings conference call. On the call today to present the Company's results are Randy Baker, Actuant's President and Chief Executive Officer; and Rick Dillon, Actuant's Chief Financial Officer. Our earnings release and slide presentation for today's call are available on our website at actuant.com in the Investors section. We are also recording this call and we will archive it on our website. Please go to Slide 2. During today's call, we will reference non-GAAP measures such as adjusted profit margins and adjusted earnings. You can find a reconciliation of non-GAAP measures to GAAP in the schedules to this morning's press release. We would also like to remind you that we are making statements in today's call and presentation that are not historical facts and are considered forward-looking statements. We are making those statements pursuant to Safe Harbor provisions and federal securities law. Please see our SEC filings for the risks and other factors that may cause actual results to differ materially from forecast, anticipated results, or other forward-looking statements. Consistent with how we have conducted prior calls, we ask that we follow our one question one follow-up practice in order to keep today's call to an hour and also allow us to address questions from as many participants as possible. Thank you for, in advance for your cooperation. As a reminder during the call and as in first quarter we may refer to our Industrial Tools & Service segment as ITS or Tools, and our Engineered Components & Systems segment as EC&S or components. Now I will turn the call over to Randy.

Thanks Barb and good morning everybody. Let's start today on Slide 3. As you read in today's press release, Actuant delivered a solid quarter, and I'm very pleased with the performance of the businesses not only did our sales and marketing teams drive incremental sales but our operations were able to overcome significant weather related delays and achieve our quarter. With that in mind, I'd like to provide special thanks to our factory operations team and the management for the commitment to their customers and maintaining a high level of on time delivery. As we progress for 2019, we are maintaining our focus on long range strategy. Our core sales growth initiatives continue to yield results in both segments. During the quarter, we launched more new products and significantly improved our service sales. As a result, the Industrial Tools & Services core sales growth increased by 12% in the quarter far exceeding our expectations. On the Engineered Solution side, we continue to capture new product and platforms, increasing our product vitality index. These are ones that are critical to achieving our strategy of outperforming the prevailing market condition. In an effort to improve our structural cost, we have taken actions to fully align the Enerpac and Hydratight businesses. This process improves our operations while enhancing our ability to invest in new product development and better serve the customers. Rick will provide more details on the efficiency program including costs and ongoing benefit. As you noted from our announcements during the quarter, we have made major progress in our portfolio management strategy. Our sequential approach of realigning businesses, improving profitability and focusing capital allocation towards almost profitable companies is reaching its final stage. We completed the sale of Precision-Hayes and announcing the intentions to divest in the Engineered Components & System segments. This action will unlock significant value for our shareholders, while focusing our management and capital resources. Now turning over to Slide 4. Our second quarter results exceeded our expectations in all our primary categories. Core sales grew by 7% led by outstanding performance from our Industrial Tools & Service segment. Tools sales grew broadly across multiple regions and markets, and we experience significant improvement in our service operations. The Engineered Components & Systems segment held ground year-over-year with stable demand from both on- and off-highway sales and good price realization. From an earnings perspective, we improved operating profit by 36% year-over-year while increasing EPS 46%. This was a direct result from our efforts to improve operation, contain costs and focus on organic growth. On the balance sheet front, we continue to maintain our debt leverage well within the desired range and position the business for future investments. So overall, I'm very pleased with the results of the quarter and the advancement of our strategy. Moving over to Slide 5. As noted earlier, our portfolio management strategy advancing into the next stage and reshaping Actuant. As we entered 2018, we restructured Actuant into two operating segments comprised industrial tools and component systems. By doing so, we have been able to separate the two companies and bring focus in terms of management and capital resources. The new Industrial Tools & Service segment is a highly profitable, growth oriented company comprised of two outstanding brands. Enerpac is a world leader in heavy industrial tools with one of the most complete dealer networks in the market, and Hydratight is well known for high quality complex service, but also is a major supplier of industrial tools. The combination has created a great business for future growth and maintaining high quality of earnings. Engineered Components & Systems have become a much stronger operating company, focused on serving the world's major OEMs. Our quality, our costs and delivery have improved dramatically over the past two years, which has qualified Actuant as a preferred supplier. Additionally, our investment in engineering has enabled the improved product vitality and a sustained growth. However, given the profit profiles of Engineered Solutions & Components, it simply cannot compete for Actuant's capital allocation priorities and would be better served in the ownership. As a pure-play tool company, Actuant will have the opportunity to create significant shareholder value through superior earnings, growth and cash generation. Moving over to Slide 6. The framework of our capital allocation priorities remain unchanged. We will continue our discipline toward investing in ourselves first, maintaining a strong balance sheet while looking for strategic acquisitions which support for tool company strategy. And finally, we'll always look for opportunistic share repurchases to return value to shareholders. Our priorities have not changed, and Rick and I are very committed to these principles and the creation of long-term shareholder value. I'll turn the call over to Rick now to go through the details in the quarter and then I'll come back with the market outlook and guidance. Rick, over to you.

Thanks, Randy, and good morning everyone. Starting on Slide 7 with our one-time items. In the quarter, we recorded 6.9 million of charges related to an additional impairment of 3.5 million of the Cortland U.S. business and 2.6 million in the deal costs related to all of our corporate development activities. We also incurred 2 million of additional tax expense related to the revaluation of certain tax credits as a result of law changes during as a result of tax reform. If we turn to Slide 8 onto our adjusted second quarter results. Fiscal 2019 second quarter sales actually increased 3% adjusting for the impact of divestitures in the quarter. Core sales increased to healthy 7% and this was offset by a 4% headwind from the impact of the stronger dollar. Adjusted operating profit improved year-over-year for the six consecutive quarters of 240 basis points with strong flow through on incremental sales. Our adjusted effective income tax rate was approximately 26% for the quarter in line with our expectations. Our full year effective tax rate is still expected to be approximately 20%. Our third quarter rate is expected to be in the mid-teens with the fourth quarter rate in the mid-20 similar to our second quarter here. Adjusted EPS for the second quarter was $0.19 compared to $0.13 last year and near the top end of our guidance. If we turn to Slide 9, core sales performance surpassed by 3% to 5% guidance range, and we delivered our six consecutive quarter of solid core sales growth. As Randy mentioned in his opening comments, our team executed extremely well to achieve these results by significant whether challenges we experience in the middle of the quarter, which led to slowdowns and shutdowns of some facilities as well as within our supply chain. The ITS segment sales continues to be strong with core sales up 12%, we saw strong growth in North America and the Middle East. The EC&S had flat core sales resulted from the growth, new platform launches, and price realization offset by softer demand in some of our end markets. I'll provide more color on core sales when we discuss the individual segment results here in a moment. Let's turn to Slide 10 for a summary of our top-line performance. So, a 7% core sales growth, driven by 17 million improvement from volume and price. This was offset by currency headwinds, which reduced sales by approximately 9 million as well as the impact of the divestitures, which was 11 million. If you take a look at both adjusted operating profit and adjusted EBITDA on Slide 11, as we noted, a 240 basis point margin improvement year-over-year. A few items to note here, as we experience in the first quarter, the elimination of the custom heavy lifting offering was cost 2 million of cost overruns in Q2 of 2018 continues to drive profit improvement year-over-year, while sales and heavy lifting products are lower than Q2, the standard product line remains profitable. We saw solid profit flow through on incremental sales volume in line with our target, price realization from actions taken in fiscal 2018, and earlier this fiscal year also contributed to the margin improvement. Last quarter, we provided a detailed review of pricing versus tariffs. Tariffs in the quarter were approximately 2 million and in line with our expectations. We continue to expect that our pricing actions will be sufficient to cover commodity and other inflationary increases including tariffs. As we discussed in Q1, should the 301 Tariffs be increased to 25%, it would require further actions likely in form of surcharges. Our objective is to prevent margin erosion due to inflationary cost pressures. SAE expenses increased in the quarter, over prior year due to a number of factors including a few extraordinary medical claims, increased equity and cash compensation costs, bad debt recoveries in the second quarter to prior year that did not occur this year, new product launches and timing on certain consulting costs. We expect that the rate of spin versus prior year will moderate in the back half of the year. As you move through the EC&S divestiture process, we need to ensure that we maintain an efficient cost structure and one that is aligned with our business objectives. As a result, we have initiated our restructuring program focused on the continued integration of the Enerpac and Hydratight businesses as well as driving efficiencies within our overall corporate structure. We expect to achieve full-year run rate savings in the range of 12 million to 15 million with one-time costs in the range of 15 million to 20 million. We anticipate completing these actions within the 18 months to 24 months, and we will continue the process of assessing our corporate structure as we move closer to the divestiture of the EC&S business. Now let's turn to Slide 12, and we will move through the segments in detail starting with ITS. Core ITS sales increased by 12% year-over-year, and this is one of the strongest second quarters for the combined segment we have had in our history. Core tool sales were up mid to high single digits and service up in the low 20s. Growth was driven by double-digit tool demand across North America, and exceptionally strong service demand across all regions led by the Middle-East. European core tools were in line with prior year. Service growth was attributable to additional scoping on few key projects and fairly wrap-up of a large project originally scheduled to be completed in the back half of the year. Our HLT product category was down as he moved away from the special project business and the losses and lower margins associated with them in the prior year, which is one of the primary drivers of our profit improvement year-over-year. Incrementals for the segment were in line with our target range of 35% to 45%. Turning to EC&S on Slide 13, core sales were flat in the quarter, the stronger dollar reduced sales by 2% and the divestiture of Cortland Fibron and Precision-Hayes reduced year-over-year sales by 16 million, resulting in an overall 11% reduction. New platform wins and pricing actions done top line improvements in the quarter and were partially offset by slightly lower sales volume for on and off highway yet overall market conditions remains stable. Our open cable volumes were down during the quarter and we saw flattish sales demands across all of our other markets. As we expected China truck sales volumes are stabilizing where we saw sales improved over both last year and over the first quarter. Profit margin in the segment increased 360 basis points year-over-year, primarily as a result of improved pricing and operational efficiencies, including lower overtime warranty and freight cost compared to the second quarter as well as the impact of the divestiture. Turning now to liquidity on Slide 14, we used 31 million of cash during the quarter, in line with expectations and normal seasonality's for our business. Accounts receivable were up significantly year-over-year attributable to later quarter shipments fitness as a result of the weather conditions. CapEx increased approximately $4 million year-over-year, and we also saw higher cash taxes and deferred revenue really attributable to time. We ended the quarter with $170 million in cash on hand. During the quarter we pay down our term loan by $40 million consistent with our capital allocation priority. Leverage measured by net debt to per forma EBITDA was steady sequentially which show substantial improvement from Q2, 2018. We are currently at 2.1 times down from 3 times at the end of the second quarter in the prior year. We remain right in the middle of our preferred range of 1.5 to 2.5. With that, Randy I'll turn the call back over to you.

Thanks Rick. Now let's move on to the market outlook and move over to Slide 15. Macroeconomic factors remain largely unchanged from our first quarter. North America demand continues to show stable growth while the European markets have experienced sequential slowing. As earlier stated, the industrial tools and sales continue to be strong globally, and with the improved conditions in an energy market, service revenue experience increased demands. Off-highway mobile equipment manufacturers have forecasted continued to grow through 2019 although at a lower rate, in turn creating a healthy environment for our component businesses in North America. And the on-highway, sales are stable which is reflected in our future projections. Then moving over to Slide 16. The projections for core -- 2019 core sales growth remain unchanged from our first quarter guidance. Industrial tools and services are expected to grow our rate between 3% and 5% for the full year with the second half performance being the mid-single-digits. We're projecting Engineered Components & Systems growth in the second half and mid-single-digits, and we are maintaining the full year estimate of between 2% and 5%. On the consolidated basis, we are projecting growth of between 3% and 5% for the full year and mid-single-digits in the second half. Now moving over to Slide 17. We're maintaining our full year guidance including the recent divestitures at a range of $1.150 billion to $1.190 billion. Full year EPS remains unchanged that between the $9 and the $20 and effective tax rate for 2019 is about 20% or double the 10% rate incurred in 2018. Our third quarter sales are projected to be between $295 million and $305 million with EPS of 40% to 45%, $0.05 per share and an effective tax rate in the mid-teens. And finally, free cash flow remains unchanged between $80 million and $85 million. As always, all guidance excludes the impact of future acquisitions and/or divestitures. That concludes our prepared remarks for today. Operator, let's open it up for questions. Thank you.

[Operator Instructions] Our first question comes from a line of Mig Dobre with Baird. Your line is open. Please go ahead.

If I may start with just a clarification on the guidance for the third quarter, can you walk me to how you're getting to mid-single-digit core growth? I mean, you know the midpoint you're going to be down revenue wise about 5.5 year-over-year. So I'm trying to understand maybe FX versus divestitures? And then I got follow-up there.

When you look at the back half that 3 to 5 in the back half, a couple of things, if you remember our prior year, we had kind of an unusual back half in that we had a fourth quarter that was extremely high and a third quarter that was not our peak quarter, which it should be. And so when we're saying 3 to 5 more so driven on the comparisons, we've got a strong finish in Q2 much stronger than last year. Some of that is timing associated on the tool side. That will get us back to a normal flow for tools and service with Q3 being our highest quarter Q4 kind of moderated back down. So from a market perspective, the 3 to 5 is really a right side and you're not going to see the kind of core growth you saw in Q2. It will be somewhat normal in that 3 to 5 in Q3, but it caused Q4 to be down and that's a reflection of timing more than anything in the flow through of our businesses.

Just to be specific here. When I'm talking about the third quarter, the midpoint is $300 million of your guidance. I'm trying to understand, what is your expected FX impact in the third and how are, how much are divestitures, how much of a drag do we get from the divestitures?

So that's a 3 to 5 this quarter. And so the midpoint is 300. The divestiture impact is around 20 million and the FX is somewhere between 6 to 8 million on the quarter and that should net you out to the guidance for the quarter.

And then question on margin as well. If I'm looking sequentially revenue versus EBITDA, it implies a pretty significant incremental margin on EBITDA in the third quarter. Can you maybe help us think through this dynamic here? Is it mix? Is it savings? Is it something else that's boosting the margin?

So, Mig, if you always look at our incremental margins by segments, you'll get to the answer pretty quickly. On the tool side as we’ve always said, we're going to drive this business between that 30% and 45% incremental margins and that's where it's going to land. And on the ES side, obviously, that's a lower incremental margins business in the 20-ish range. So, if you net them all out and then you can apply that to our third quarter margin advancements, that's the expectation, we have where we're going to land for the quarter. There should be good margin expansion in the third quarter and just as we've seen in the second quarter. So I don't see anything on the horizon that could damage that. But that's the objective. And we've now demonstrated that we're capable with delivering that on a regular basis. So Rick, do have any other comments on that topic?

No. I mean, I think that that's how I would look at it as well in terms of the incremental.

And then I'll squeeze one more. In terms of the restructuring program that you've announced, how should we think about this in terms of the potential -- relative to the potential of the synergies that you're going to have once EC&S is gone?

So if you look at and we've talked about our corporate overall structure, SAE structure post an EC&S divestiture there is two elements on that. The plan we announced today is really around driving the efficiencies within the IT&S business I mean we are looking there, there was largely key elements to that there is some operational efficiencies that will grow and involve facilities and then there is kind of regional structural operating as it is between the two segments where there is an opportunity to streamline operations. And so -- and then on top of that there is some lower cost segment level corporate level in synergies that we can gain in the short-term. So, these are actions that you guys really to Randy's comments that allow us to segment alone, expand the EBITDA margins beyond, it gives us the benefits about or beyond that normalized incremental of 20, but also allows us to right size our structure. So that on a consolidated basis going forward, we can come out of this as a incremental or 20% EBITDA margin business. So that's how we look at that, what we've just announced as more so on the segments side with some corporate actions. It's a combination of people or headcount I should say and some facility movement. The majority of that will be executed in our fourth quarter, you should see savings start, we see savings in fiscal 20 and we will get to run rate probably mid-20 where all of those actions will be substantially done with maybe some handle to facility action. Obviously as we move closer to the EC&S divestiture. We will take even closer look at the remaining true corporate costs and they were likely be some additional actions and structural changes that we have to make, as a result of that, but that's pending on the nature of the transaction and how that takes up here going forward.

Thank you. Our next question comes from line of Charley Brady with SunTrust Robinson Humphrey. Your line is open. Please go ahead.

I just want on the divestiture I don’t know if I miss this or not, but are you looking at this as a single unit? Are you going to piece it out because our distinct business is within that segment itself?

So Charley, we've spent several years preparing for this moment where we, as you've seen, taking out certain businesses that didn't have a relationship to our motion actuation control strategy, which has created a pretty consolidated group of companies, which serve a defined group of OEMs. So our objective is to sell it as in one piece and that's exactly how we're marketing, how the process is proceeding. And that's also why Cortland Fibron was sold separately. That's why precision haze was sold separately. And why the remaining Cortland business is being marketed separately because it is distinctly different type of company and doesn’t went itself to synergies or customer types that would bring us together and buyer would see it's valuable. So it is we think that we've got to prepare properly and we're pretty pleased with the process thus far.

Is there any indication of timing is when you think this might get done and by end of fiscal year or beyond that?

Well, we kind of anticipate a lot of questions surrounding the divestiture. So I'll try to be as clear as I can. We can't give you timing proceeds values or things of that nature because obviously we're right in the midst of the process as we speak. So as we hit certain milestones, we will be making public announcements to try to keep our investors and the analyst community up to speed on what's going on. But our objective is to be as clarity, provide clarity when we can provide the clarity. But in terms of where we're adding the process, proceed values I just can't give you a lot of detail on that for obvious reasons.

No, understood. I'm just wondering on the, you've commentary on the industrial tools segment, the services business is seeing a nice uptick there, part of that being on a project that was completed in 1H instead of second half. I'm wondering from a margin standpoint given that that services business tends to have pretty decent margins that. Does that -- what's the impact on the second half margin? Particularly Q3, I'm still looking for up year-over-year in the tools business or have we kind of pulled some of that forward into 2Q?

We're still up year-over-year in the tools business. With the service activities, there is no real margin impact that when we say going forward is more subject the timing of when the work was going to be done. And so there's no margin pressure in the back half on service. And when you think about our service work, that the thing to remember is that we're really focusing on what we call specialty, to specialty service we talked now for several quarters we getting out of the commodity type service work. So in our guide it reflects focus and saw the unusual path that you see in Q2. There is, isn't an expectation that that'll continue at that level in the back half of the year because we're being far more deliberate about the service that service work that we will do. But in doing that, it will be much more profitable service work. And so, definitely, the growth on the tool side in the bank for both service and tools not the kind of growth we saw in the quarter. When we talked about pull ahead, it's more or so timing of a specific large project that we have phasing out into Q2 and -- I'm sorry, into Q3 and Q4. And then also, as happens on some of our other projects, we had some scope benefits to some scope benefits to some work we were actually working on in the field.

I just wanted to add a one comment to that. Charley, the composition of our tool and service company is that a very, very large percentage of our company's profit footprint and revenue footprint is focused on either product sales at extremely high margins and/or rental which is also at a very high margin. The combination of those two comprised 85% of our revenue stream, and we provide that detail and a lot of our analysts and meetings we do throughout the year. And that's what makes our tools and services company, so structurally profitable as when you have 85% of your revenue, comprising a very large percentage of your profitability. It's a very winnable scenario. So services a great additive thing as we run job sites around the world, we’re able to rent our equipment. We’re able to sell our equipment, but we focus on high margin and sometimes very complex service where the margins sit, so it's never going to be a big portion.

And just one more for me. You mentioned some supply chain slowness that you experienced in the quarter. Can you just elaborate a little bit on that where you are?

That was, in the quarter, that was more so weather related during the polar vortex. We had our some of our facility shut down. We had delays. We had -- some days they were actually not moving. And so, we think we made our way through back in the quarter. We talked about a huge finish in February to kind of get back on track and get back to on-time delivery. But things are running smoothly now is just a mid-quarter slowdown, it did cost us, did have an impact in the quarter. But we were able to recover from a volume and profitability perspective.

Our next question comes from the line of Allison Poliniak from Wells Fargo. Your line is open. Please go ahead.

Just going to that service, Rick, you had talk about that project finishing a bit sooner. If you could quantify what the impact is, you guys were just talking about the profit side. But what about with the revenue side, can you maybe help us understand sort of the normalization I guess in the back half of the year?

I think without getting clean guide where we serve as separate. I think all we're trying to say there is, it's the revenue you saw in Q2 relative to our guide for the year. There was no real incremental revenue relative to this project. It was just the timing of the completion of the work. And so I know, I'm, that's about as granular as I can get relative to the project, but it's not an indication of market. It's not an indication of last work. It's just, there is a large project that we won a year ago now that we had paced out, where they were able to get all of the work and the required activities done sooner than we had anticipated. So within our forecast, majority of it just finished in Q2 versus what have been majority in Q3, a little bit in Q4.

So I guess, asking another way, sorry, it wasn't a huge incremental to the upside in the segment in the quarter relative to your estimate and were there other components to that?

Well, the upside…

Other components to that?

Yes, it was and it did have a big impact on the core growth relative to our expectations for the quarter. It does not have an impact on core growth relative to our expectations for the year. And so that's what we're saying.

And then on just moving to sort of the acquisition environment, your leverage is in a decent range. Any color on sort of the price of things that you're looking at multiple that you're seeing out there?

Well, we've got a very active pipeline of companies that we're investigating and working with. I don't want to provide any clarity that because people believing that we're looking at a third later this tool, it will be acquisitions related to tool companies that support our strategy to become a larger, more meaningful tool provider. Multiples, and I don't want to publicly speak what our desired multiple range is certainly I want to get the best value we can, but I don’t want to tell the numbers out there that establishes and may damage our ability to negotiate particular deals. So I really think that we have a good pipeline, our tools company is working hard to identify those businesses I'm personally involved in several and we will continue to work it and certainly as we kind of move forward as a pure play tool company you're going to hear a lot more about that. And if you -- you'll find in our capital allocation priorities can be extraordinarily disciplined and we will not make the acquisitions unless they are the great fit for this company.

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

So I know there is some noise with this service the timing issue, but I'm just going to looking at the tools guidance off plus 8 in the first half mid-single digit from the back it seems like in worst-case you are doing 5% and maybe better. So it just seems like there's a miss match between what you're seeing for the second half and what you already did in the first half versus the full-year guide?

Well, there is always a combination of fact between the service volume that we've got in the first half of the year as Rick told that one pretty hard but when you do a 12% core sales growth for your tools and services business in the quarter it does create an expectation that that's going to keep going in the quarter three and quarter four and we expected that commentary to come out as pretty hard don’t know why, why is the back half only mid-single digits. The reality is that the tool side has been right in line with our expectations of 35, in fact it's did sound in that number. The lumpy nature of our service revenue to the extent but we can get some larger projects in the back half there could be benefit but I never want to guide based on what we think we can close and complete, we want to guide on what we know we can do and to create an environment where we still -- were still making our credibility march forward Jeff, and we want to make sure we don't provide guidance, and so optimistic that we have chance if we're going to miss it, So I think that the 3 to 5 in the mid-single digit for the second half of the realistic number and were standing by.

So Jeff, the other thing to keep in mind and when we talk about service that will come down in the back half and that's part of the not being able to sequentially see the growth. The other thing as we have really strong comps tools in the back half of relative to what we saw in '18 so we are in the mid-teens in the fourth quarter of '18. So it mathematically looks like we should see more growth. We like that 3 to 5 hopefully to raise upside but feel like we are giving the fair estimate.

And then just last one. You talked about the kind of the higher SG&A numbers and some I think the medical claims and kind of one-timers in there. Is there way to close out, what you think was kind of one-time or abnormal versus kind of the trend?

I think we're $7 million up. And that’s I think normal inflation, probably about $4 million or $5 million of that onetime-ish versus just normal SAE growth.

Okay. So there's like a couple of million of kind of one-timers, is that the way to think about it?

A couple of million -- there's more than a couple of million of one-timers, there is about call it $2 million to $3 million of just normal growth in equity comp and salaries even inflation and stuff like that. And then the rest of that increase would be either one-timers in the current year or one-timers that occurred in the prior year that didn't happen this year.

Our next question comes from a line of Justin Bergner with G. Research. Your line is open. Please go ahead.

Thank you, Randy. Thank you, Rick. First question regards the -- I guess mix effect in Industrial Tools. Was there any mix effect there? And I guess the second question would be outside of this timing of the service business, what parts of Industrial Tools were tracking better than your expectations?

On the next side, there are certain lines within our tool platforms that are very profitable. But as we've talked, we’ve got margins that are all north of 50% across the line on our tools. So it's a question do we sell more on a bolting platform? I didn't see a great deal of mix impact, I think the mix impact year-over-year was relative to the HLT product lines, which had dragged down our margin significantly last year and we talked through that and it was quite painful last year. I'm hoping at some point we can stop talking about last year's event. But from the standpoint of this year, the mix was pretty regular across the line. As far as regionally impacts, North America is still very active. European operations is active but to a lesser extent. Latin America is still quite active and we see a little lower activity in Asia. But generally speaking, it's all fallen within that 3% to 5% growth rate that we had forecasted. And so we feel like we called that market pretty tightly and the margins we're very pleased with.

Okay, great. And then just in terms of the contributions, you said the contribution margins were sort of in-line with your expectations, but your operating profit and EBITDA effect from volume and pricing was $11 million and the sales effect was $17 million. So I'm just wondering how to reconcile the -- what appears to be stronger contribution margins with your comment that it was sort of in line with where you expected them?

So I guess, can you repeat the question again? I'm sorry.

Sure, just in your sales and EBIT bridges, the effect of volume and pricing on profit was plus $11 million. And the effect of volume and pricing on sales was $17 million, that $11 million over $17 million seems to be higher contribution margin than what you would expect within your business? I was just curious if there was some way to help reconcile that?

I think the -- there is a couple of things happening. We have pricing -- you got about 12 million of volume and then you have pricing of 5 million, we flow that through the -- a portion of the pricing goes away with the tariff of 2 million. So when you look at in terms of margin expansion, I think the only thing that you're missing there is the impact of the divestitures giving us an incremental boost. So from a volume perspective, although to Randy's point, heavy lift was down, we replaced a majority of that with standard product, so you only had about 1 million to 2 million of heavy lift decrease but improved -- significantly improved profitability because you got rid of the 2 million of losses. So I think what you're seeing flow through there is a little bit of mix within the volume and tariffs in terms of impact on operating profit.

[Operator Instructions]. Our next question comes from the line of Deane Dray with RBC Capital Markets. Your line is open. Please go ahead.

I wanted to follow up on the restructuring action questions. Just to make sure I was clear that these are not focused on the areas of what we would consider to be stranded costs post the divestiture. And assuming that's the case, can you size for us what the stranded costs might be and how you might be attacking those and what time frame?

We -- you cut out. So I'm sorry. Can you repeat your question? We missed the majority of it.

Sure. Just asking for the -- on the restructuring actions, not including -- not addressing stranded costs post-divestiture and maybe just take this opportunity to size for us what you think the stranded costs might be and how you might be attacking those, any way you can provide color or size of that would be helpful.

Sure. What we said and this is before this restructuring announcement, we have about 25 million in corporate costs. And the objective post transaction is to come out of that 20% EBITDA margin business. So when you look at our SAE and you look at the 25 million in corporate costs, it’s the adjustments that we will have to make to get to that 20% consolidated EBITDA. Now, that being said, when you look at the 25 million in costs, there are certain costs that will naturally scale down as a result of divestiture. And so those costs will come out of the base. And then there'll be others that we have to actually take actions to scale appropriately for the size of business that we are. So without -- we have and without providing here is the standard cost, et cetera, in part because we won't know until the transaction is -- we get closer to the transaction, we know that there will be a need to adjust that structure without that business to get us to the desired EBITDA margin of 20%. So part of those actions part of that effort is covered by this restructuring announcement, and then as I noted earlier as we get closer there likely be other actions that allow us to get there.

Got it. But part of it sounds as though you're going to sought for the structure that gets you to 20% margins?

Well, we’re going to sought for an efficient structure, at a minimum of that’s going to get me to 20% margins.

Our next question comes from the line of Ann Duignan with JP Morgan. Your line is open. Please go ahead.

Hi. This is Abdul Tambal on behalf of Ann. Most of mine have been answered, but can you just give us an update on your growth strategy following the ECS divestiture? What regions would you focus your growth opportunities on primarily?

What we've said -- our organic growth strategies have always been framed around a couple of key elements. Number one is trying to continue our R&D investments and getting new product launches. We want a minimum of our tools and services companies o have 10% of its ongoing revenue attributed for new products, and that's measured on a three-year rolling average and we’re not quite there yet. WE’RE making good ground. We've launched a lot of new products this year. We launched a lot of new products last year. We’re just below our objective on the 10% line and we made a lot of progress over the last couple of years of building -- I consider now building a great engineering group with a lot of talent and some real creative people that look at tools on an everyday basis and so that's piece is one. Secondly for organic growth we are going to be the best sales company out there, and we've proven that. We've added more boots on the ground over the past three years than we've ever had. We cover our dealers better. We respond better and we’re commercially better than we've ever been. And that's how we capture above market condition. The third piece of that is obviously regional. Now we’ve made a lot of progress in our Asia Pacific market. We’ve grown dramatically over the past couple of years. We still like to be stronger in a better footprint of dealers and companies that we own and operate within Asia Pacific market. So those are the three main elements of our organic growth plans. Then beyond that is how we operate from a manufacturing side. We want to be extremely efficient driving best-in-class lean manufacturing and quality costs and delivery metrics, which we’re doing quite well at now. And then the third piece is that we always want to be driving a component of M&A. So if you look back at our original strategy of growth, we said we're going to have a CAGR rate of 10%, half of that's coming from organic and half of that's coming from M&A activity, give us very, very high marks on the organic side of that. Now that we've proven that we can in fact buy and run companies we’re starting to shift gears into the portfolio, which is part of the issue of supporting the company and focusing on the big tool side of it. So -- and that kind of gives us the top level if you want growth, but I think our CAGR rate of 10% is still going to be in our gun sites. We will reissue our long-range strategy for the company later this year, once we -- gets completed with a few things and at that point we will refresh, who we are and what we are as a standalone tool company.

Our next question comes from a line of Scott Graham with BMO Capital Markets. Your line is open. Please go ahead.

So I was just hoping you could -- this is just more of a housekeeping more than anything for you, Rick. Precision-Hayes, could you just give us what the revenues were at divestiture, annual?

Okay. For -- well, Precision-Hayes, overall revenue on average is about $50 million, average revenue $50 million for that business.

Just making sure, okay. And then maybe you can unbundle a couple of things for us on sales. Were there any pre-buys in Industrial Tools ahead of pricing?

No, we did not see any pre-buys. If you recall, our pricing for tools went to effect -- the last one went into effect at the beginning of the first quarter. And so we've seen no real impact for pricing on our end or from a purchase perspective as well.

Understood. And understanding that HLT gave you $2 million of EBIT impact, what did that cost you in sales in the quarter?

I think net down, we're down somewhere 1 million and 2 million.

Okay, and is that a number that continues or is that sort of isolated through this quarter?

Well, yes, well, it'll go down because if you recall at the end of the second quarter, we indicated that we weren't taking any more special project. The special project revenue was actually down closer to call it $4 million. We replaced that volume with standard product revenue for the net down. That delta as special project revenue year-over-year continues to drop off. And standard continues to grow, won't be as significant. So it is somewhat of a higher impact in Q2 and you'll see the rest of the year.

So you're saying that that's really actually a $4 million number this quarter?

I don't understand.

Gross, grossed up?

No.

On the special projects, no?

Well, heavy lift technology in the quarter is down about $2 million.

If you remember, Scott is this on the special projects that, that was comprising between $12 million and $15 million a year. In almost every year we incurred either expenses or extraordinarily low margins as we attempted to do those projects. So we're just simply not doing. We will accept projects where we're adapting on known hydraulic lifting technology and we're able to do it profitably. And we still do a few of them. But we've done them profitably and we've been very selective. So overall that, that business on an annualized basis will be up about $4 million from its peak, once we hit the full run rate of not doing specialized tool builds. But I think I'd much rather own a business at $35 million to $40 million on a very respectable profit than one that we do some really fun projects, but we lose money at it.

Understood. Last question, would you be able to split the pricing by segment on the sales side?

No, we won't, we don't have that. I mean, I think when you look at it from our tariff discussions about 50-50 ITS, ECS.

We have another question from the line of Justin Bergner with G. Research. Your line is open. Please go ahead.

Just on the restructuring actions, is the 12 million to 15 million of cash costs? And is some of that cash costs being absorbing your 80 million to 85 million free cash flow guide. And then I guess just a final part of question would be, there are reasons why this restructuring action didn't begin sooner and beginning now, are there just organizational reasons why it makes sense now versus sooner than now?

I guess. First part, yes, a portion of that is cash, not all of it, some of it is related to facilities. As I noted, the majority of this restructuring will happen later in the fourth quarter. So there shouldn't be a significant impact and that is -- it isn't factoring into our 80 million to 85 million cash flow for the year. In terms of timing of the restructuring, if you recall and Randy can chime in here but if you recall we announced the merger of the segments. We said, we were going to focus on the opportunity first, and we did not do that for cost savings purposes. This was a go-to-market seeking opportunity to improve both businesses by leveraging our presence on both sides of the aisle and reaping some of the benefits of owning Enerpac brand and Hydratight brand and combining those tool products and services across the aisle. That was the initial focus. We have done that, you're seeing that, we're in full launch. And so now there's an opportunity to look at the infrastructure, because one of the things we said we weren't going to do was destroy these two businesses trying to do all of that at once. So now we have the opportunity to look closely at the infrastructure and do that with a clear strategic view of where we're going to play in the market, where we're going to actually go after service, what some other opportunities are with both businesses combined. So the timing is really driven by strategy execution.

Rick covered it very, very well.

No that’s a great answer. Thanks. Just I -- it came across a little muted. So the restructuring cash cost this year is not in the 80 million to 85 million, right?

No. That -- and there won't be significant restructuring cash cost this year, due to the timing of the restructure.

We have no further questions queued up over the phone lines at this time. I will turn the call back over to you.

Thank you everybody for your participation today. We'll be around stay if we have questions and otherwise we look forward to speaking with you again in June.

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