Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation’s Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, March 22, 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 second quarter earnings conference call. On the call with me today are Randy Baker, Actuant’s CEO; and Rick Dillon, CFO. Our earnings release and the slide presentation for today’s call are available in the Investors section of our website. Before we start, a word of caution. During this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Investors are cautioned that forward-looking statements are inherently uncertain and that there are a number of factors that could cause actual results to differ materially from these statements. These factors are outlined in our SEC filings. Consistent with prior quarters, we will utilize the one question, one follow-up rule in order to keep today’s call to an hour. Thank you in advance for following this practice. And with that, I will turn the call over to Randy.

Thanks a lot Karen. Good morning, everybody, and thanks for joining our second quarter conference call. Lets start today on Slide 3. As you read in today’s press release, Actuant met our sales and earnings commitments for the quarter delivering results within our guidance. Overall core sales were modestly better than our expectations. Our industrial business grew nicely in the quarter, which resulted from improved general industrial activity and benefited from commercial actions. We saw continued stabilization and moderating of destocking in our customers’ Engineered Solutions business. Secondly, our China operations experienced strong sales in truck components and industrial tools positively affecting our growth. On the down side energy fell short, impacted by difficult comparisons, weaker maintenance spending. I will cover the industry dynamics later in the call, but I’d describe most of our end markets as stable with some evidence of positive customer sentiment. Adjusted diluted EPS excluding restructuring charges was $0.11 per share, which was in the middle of our anticipated range. Net debt remains at flat at the normal seasonal low cash flow usage with net leverage of 2.9 times. I will now turn the call over to Rick to walk through the details on the quarter and I will come back later with some additional updates and guidance. Go ahead, Rick.

Thanks, Randy, and good morning, everyone. Please turn to slide 4; we can do a quick recap of our performance for the quarter. Fiscal 2017’s second quarter sales were at the higher end of our guidance range, but down 2% year over year. Core sales were down 3% excluding a 2% net benefit from acquisition and divestiture activity and 1% negative impact from FX. Adjusted operating profit declined from $18 million to $15 million, primarily as a result of the lower sales volume and an unfavorable sales mix. This along with the higher income tax rate resulted in second quarter 2017 adjusted EPS of $0.11 compared to $0.21 per share last year with income taxes accounting for $0.05 of the decline. Turning to Slide 5, our core sales rate of change improved considerably on a sequential basis from down 14% in Q1 to down only 3% in the current quarter. This was modestly better than the decline of 4% to 6% we had anticipated. The call out here, as Randy discussed, is better than anticipated industrial activity across multiple product lines. I will walk through core sales by segment shortly, but the overall trend certainly bodes well for the expected sequential improvements we continue to forecast for the back half of the year. Slide 6, summarizes the quarterly adjusted operating profit margin where you can see margins were down about 90 basis points year over year. This is largely due to an overall unfavorable mix at the gross margin level with industrial segment growth weighted towards Heavy Lifting Technologies coupled with Energy segment volume declines. So, let’s walk through our performance by segment in a little more detail starting with the Industrial segment on Slide 7, Core sales reflected positive for the first time in seven quarters. We saw growth…

Thanks a lot, Rick. Turning over to Slide 11, like many of you I visited ConExpo in Las Vegas a few weeks ago. We highlighted a number of new products and applications. The new Enerpac gantry product range provides enormous flexibility to customers and resulted in multiple new bookings for us. We unveiled a new brand for our integrated solutions offering now called Enerpac Heavy Lift Technology. This name more accurately defines the equipment and innovative solution we have developed and resonates with our Heavy Lift and rigging customers. In addition to Enerpac, several other Actuant businesses participated in ConExpo including our off-highway machine display business, CrossControls, Power-Packer hydraulics and our Precision-Hayes pre-stressed Concrete Tensioning business. Overall, the industrial landscape is showing encouraging indicators, although the stability and trajectory of the improvement is yet to be determined. Overall I am very pleased with the progression and the growth strategy deployment across Actuant. Moving on to Slide 12, oil prices have unfortunately stalled driven by continued oversupply as U.S. producers more than offset the OPEC production cuts. The current price range is particular problematic for downstream customers which continues to squeeze their margins and cash flow. As I have said in past calls, they need discipline in the oil industry to improve price dynamics. Off-highway mobile equipment, notably construction and agriculture, remain stable at low levels. However, dealer inventories appear more balanced and will affect production orders and launch of awarded new products. Commodity prices continue to increase with primary metals up between 25% and 60% in 2017. This generally signals an increase in consumption and eventual global industrial growth. General industrial markets have stabilized and experienced easier comparison. We see indications of growing demand, although it is still early to call the pace and trajectory of the improvements. China on-road…

Thank you very much. [Operator Instructions] And our first question is from Jeff Hammond of KeyBanc Capital Markets. Please go ahead.

Hey, good morning, guys.

Good morning.

Good morning.

So, if we can just go back to the incrementals, I think you commented the 150 basis point headwind. Can you split that between what was the investments and what was mix? And then as we look into the back half, how should we look at kind of continued investments impacting that margin line at Enerpac?

Sure. When I spoke of 150, it was actually closer to a 180 basis point drag. That was just on the mix with the balance being the investment in both – commercially and OpEx.

So how much was the investment, incremental investment?

About 90 basis points.

Okay. And is that likely to be a drag in the second half?

The mix we think will correct itself or moderate in the back half. The continued investment, as Randy spoke of, you will see some continued investment as we go throughout the year.

And Jeff, we expect some acceleration as we go through the year – the individual businesses, which you know what the incremental margins look like on Enerpac versus the Precision-Hayes business. And so it is difficult to call it real precisely because both businesses are growing and it is a very broad spread of growth throughout multiple regions and multiple product line. So it is more difficult to nail it down.

Okay and just on Hydratight, you mentioned some of the near-term challenges. But as you get into the seasonally stronger period and kind of the spring turnaround season, what are you hearing from your customers anecdotally that kind of gives you any confidence that you get the seasonal uplift? Thanks.

Jeff, some of the things we really look at in tight detail are the labor utilization rates. That is the best leading indicator for us to understand how much service contract revenue we are going to get. And I can say generically that the labor utilization is climbing again. We saw some pretty rough lack of utilization in Q2; we are now climbing out of that not only just in the North American business but globally. And certainly the one that was most drug down in the second quarter was our North American business.

Okay, thanks, guys.

Thanks Jeff.

And our next question is from Charley Brady, SunTrust Robinson Humphrey. Please go ahead.

Hey, thanks, good morning guys. Hey, Karen.

Good morning.

Hi.

Back on that last comment, to Jeff’s question. I am trying to square that up with your response to rising labor utilization rates looking better with the fact that in the prepared remarks you talked about push outs and reductions in scope, crude is down 12% since the end of the quarter, which I would think would be obviously more negative. So, can you just kind of square that up as to how that comes together? It sounds as though the situation looks a little bit worse than it would have been a month ago.

One of the most difficult things you have in a maintenance-related business is it is very short cycle. So when we have an indication from a petrochem site or a oil transfer center or even just a pipeline job, you get an indication of the work – labor to start, we mobilize and they can cut those jobs at a moment’s notice. And we have seen that in the second quarter. So it makes it difficult to predict it. But I can tell you at the point now that we are starting into the third quarter we see better dynamics in that utilization of labor. Now it is tough to call it as we go through the quarter and we want to be cautious of how optimistic we are that it is going to turn because the decrimentals in the second quarter were not good.

Yes. No, understood. And just on that point, going forward on the margin for Energy, you lost money in Q2 I think for the first time. Second-half obviously coming in a little stronger would you expect to be in the positive for margin on that?

Definitely. And I just want to reiterate, as everyone knows, the Hydratight business is a very healthy and profitable business even at lower margins and lower volume. So, as I think you’ve heard from some of our people that it is seasonal in nature, we see lumpiness as we go through the season. But this is a great business in a down market and it is an extremely good business in up markets. So I am confident in the third and fourth quarter they are going to be profitable and healthy.

All right. So one more for me. Quickly on Enerpac, can you quantify how much the basic Tools business, but core Tools business was up in the quarter?

Sure. I will give you the walk of – so it gives you some clarity of some of the mix issue. But the main thing is the Heavy Lifting Technologies, which is basically our heavy equipment sector, have seen great new bookings. We went through and revamped that entire product range of gantry and lifting systems. And so, they have had better bookings on gantries and essentially mobile equipment that they have seen ever. That is our highest growth area. The second one is Precision-Hayes and the Concrete business in North America has been quite good, which is always a good lead indicator to health of that industry, because people aren’t buying consumable products for pre-stressed concrete unless they are working jobs. So that has been positive, that is number two. The standard Tools business was up mid-single-digits; it was positive for the first time in more than probably eight or nine quarters. And I really account that to a couple things. We saw a very broad global demand improvement. I think that is partially because we have put a tremendous effort in getting our sales teams and commercial actions out there in covering the market better. Secondly, I think that you are seeing some general industrial improvement. And the thing I like the most about it is I am not seeing lumpy sales from the daily order rates from our Tool business, it is very consistent and it has consistently grown sequentially. So it is not just a few dealers placing large stock orders. So I feel pretty good about this Industrial segment.

Thanks. Very helpful, thanks.

And our next question is from Ann Duignan, JPMorgan. Please go ahead.

Hi, good morning.

Good morning, Ann.

Good morning.

Just following up on the Industrial segment again, the core sales improved on the second-tier brands. Why wouldn’t we expect that to weigh on margins as we go forward as that business starts to take hold and becomes a greater percent of the total segment? And thus why wouldn’t we anticipate lower incrementals going into fiscal 2018?

That’s a great question, Ann. And I think we talked about this in some of our strategy meetings. But what we have done with this product range, both the Larzep and the Simplex line is we have brought that into our industrial footprint and leveraged our supply chains. And one thing you have got to remember about the Simplex product range, it is a lower technical content than the standard Enerpac product range. And so the margins between the Enerpac product line and the Simplex product line and Larzep is getting there, I can’t say that that one is there yet, but they are nearly equally. So as the Simplex second brand grows, which it is growing in the U.S. now and particularly in Canada, we see very nice sales revenue which is not decrimental in nature. So, one of the things that I learned over the years of running a lot of different businesses is if you develop a second brand based on de-contenting current product you really struggle. But when you bring in a product that is specifically built for the market and the price point and has less technical content it is a winner. And so, that is the early results on it. I can tell you that Simplex is up this year for the first time since we bought it on the tool line. And I am very happy with the results of the team.

But my question was more around should we anticipate that incremental profits will be lower just because of mix, not necessarily the top of margin?

No. Very direct, no. It will not create a margin drag as a result of a second tier brand.

Okay. And then switching gears a little bit, just on input costs versus pricing power, can you talk about what the trends are there and what we should look for, again, going into maybe the first half of fiscal 2018?

Well, I think the two elements that we have to deal with is looking forward on the commodity prices are continuing to trend up. So we have to watch our cost base. We have a very, very good supply chain structured in low-cost countries, so we are benefiting from that. We have and do execute scheduled price increases on most every single platform that we have. And the platforms that we don’t have price increase scheduled or contractual price reductions related to Tier 2 or Tier 1 supply, then we have to go after the cost basis just to maintain margins and that is something we are doing.

And would you anticipate then net neutral this year?

On pricing – on price realization, yes, I would say neutral. As we get into a more dynamic and growth market I think price realization becomes more realistic. And as we launch more and more new products we are going to get better price realization as well.

Okay, thank you, I appreciate it.

Thanks Ann.

And our next question is from Mig Dobre with Baird. Please go ahead.

Yes, good morning, everyone; and Rick, welcome to the call.

Thanks.

I guess I want to go back to industrial margins as well. And first a clarification. When we are talking about Heavy Lift Technology, this is basically the IS business, right?

Correct.

Okay, okay. So you called out call it nearly 180 basis points worth of mix headwind because of Heavy Lift and because of Precision-Hayes. Now I am trying to square the math away here because to my knowledge, correct me if I am wrong, these two businesses combined account for less than 20% of the segment. So I am trying to understand how we could have had this kind of margin drag from what is a still relatively small business?

Yes, it is about 25% of the total and they both have grown. And so if you look at the IS or Heavy Lift Technology business, this is a classic heavy equipment business. And so, you have margins more in alignment with what you could see in any type of construction machinery, not so much on the agriculture side, it has better margins than that. But that is where it is at and it is growing. And on the Precision-Hayes you are in a similar boat. It is a consumable and we sell also tensioning equipment. So it falls into that same bucket. That is a more price sensitive market. It just doesn’t command those very, very high margins that you see out of the tool industry.

Well, maybe to put this bluntly, the growth that you are experiencing in these two businesses, is it basically coming at a lower price point or outright lower margin, hence the outsized margin drag?

Yes. No, that is a great question because it is something that we should bring clarity to. No, that is not the case, particularly in the Heavy Lifting Technologies. We have actually executed on very, very strong pricing and commercial controls to improve the margins of that business and I think we have. Now on the Precision-Hayes business, that business was suffering from a little lower margins and it will hit higher margins as that volume continues to increase. But we are not pricing our way into the market, which is to answer the blunt question you just asked.

Okay, fair enough. Thank you for that. And I guess I am also a little bit confused with regards to mix in the back half of the year. Because if you are talking about having very good orders out of these two businesses in IS, the best ones you have seen in quite some time, I am trying to figure out why this margin drag doesn’t continue into the back half of the year.

That really has to do with the overall mix and what we are projecting business by business. And we expect some lumpy sales with the IS business; there are some larger projects out there plus we are expecting more bookings on gantry systems. On the Precision-Hayes side we see incremental growth every single month and quarter and we have done for literally the last two quarters. So the dilution factor is going to be there, there is no doubt about it.

Oh, okay. If you will allow me one more question on Energy. I recall from the third quarter of last year that Hydratight actually had some pretty good MRO activity and growth in 3Q 2016 and that business was up double-digit. Which to me, given the margin profile of that business, would suggest pretty difficult comps that you are facing in the third quarter here. Do you think you are going to be able to buck those comps? And how should we think about really the progression of profitability coming off the seasonally weak quarter, if you would, in 2Q?

Our toughest comps in Energy, and particularly Hydratight, was Q1 and Q2 because we were working through several big connector oilers in the Subsea 7 project. And those were very large CapEx projects that we were working on. And secondly, we had the very large Petro Rabigh project. And we would love it if we could find more multi-million dollars – I think it was a $20 million project that we did in the Mid-East. So I think for the Q3 the comps are going to be still difficult but less impacted.

Can you comment on margin at all?

Yes, Rick, do you want to comment on that one?

Sure. Well, two things on margins. We’ll be down year-over-year, but definitely still positive and the sequential trend will be positive is the take there.

Okay, thank you.

And our next question is from Justin Bergner, Gabelli & Company. Please go ahead. I’m sorry. Gabelli & Company. Go ahead.

Good morning, Randy. Good morning, Rick.

Good morning.

Good morning.

First question is on the Industrial segment core sales guidance. Within the improved Industrial segment core guidance, is Enerpac also an improved outlook relative to where it stood three months ago or is it only…

Definitely.

Okay. And then the other question relates just to the Energy segment and the challenging maintenance activity which is affecting Hydratight. I assume that a good chunk of the reduced second half core sales guidance for Energy does include Hydratight. And I guess what I was trying to understand is on the ground are you being affected negatively by the shift from offshore to onshore? And are customers figuring out how to do more with less and just sort of triage their service spending?

It is very different market-to-market. And if you look at Mid-East that has been a pretty good market for us. In fact, they were on plan for the first half of the year and doing quite well. Where we see the biggest impact was in North America. And I think a lot of that had to do with some of the petrochem sites push outs. And from – I think the big picture is that the push outs I think are going to slow down a little bit. They can’t delay them forever. And I think you are going to see a little bit better activity as we go into the rest of the year. We just don’t want to be too bullish on that until we actually see evidence of it.

Okay, thank you.

[Operator Instructions] Our next question is from Scott Graham, BMO Capital Markets. Please go ahead.

Hi, good morning. I have two questions for you. Could you – maybe the Tools being up in the quarter, that was a nice positive for you guys. I know you mentioned general industrial, Randy, as one of the markets, but that business serves a lot of markets. What else would you stack up on the positive side for the Tool’s growth?

Well, it is tough to nail them down. I think if you look at some of the generalized industrial reports, particularly Cleveland Research and some of the others, that spell out the vertical markets, certainly the general industrial activity as far as industrial maintenance, as the factories start picking up on their production they are going to do maintenance work. That certainly is impacted. Number two, aerospace has been very good and is improving. And it kind of goes down through the channel. I would say the ones that we haven’t seen a lot of impact yet, obviously oil and gas and mining are in the low end of the scale. The piece that gives me I think most encouragement on the Industrial Tools piece of it is that it is not just one market or one region that appears to be improving. It is very broad-based and it is exactly what you want to see as you get into a growth pattern is not just one market doing well and the rest of them not doing well. So, I am encouraged by what we have seen. And believe me, we are getting after it in terms of the sales effort. And that part of the effort is how do you attack shelf space with our customers and help them sell and to be a better supplier.

Very good. My follow-up question is on the Engineered Solutions margin. So we had a little bit of organic growth there and it seemed to come from areas where margin mix was not really much of an issue. You have taken a lot of cost out of this business. I guess maybe I would have expected on really almost any organic growth that there would have been more of a pop in the operating margin. So what is holding the margin back here? I mean we are at historically low levels, it didn’t get the type of improvement that I was expecting. What is it about this margin right now that – what is holding it back? Obviously some things have structurally changed a little bit. But kind of just comment on why the margin in this business continues to be under 5%?

So, keep in mind, although we did see some growth in the quarter, the largest margin business or product line is in the ag market. And as we said, that has been somewhat tepid and no real growth seen. And so, that is why in the quarter you didn’t see that growth, along with – even though that said, we did see some benefit from our restructuring activities kind of offsetting it.

So, you are essentially attributing what seems to be – at least versus historical – 500, 700 basis points below even fairly recent history. That all of that is ag?

No. I mean it is a piece of it. But the thing that hurts us is we have had so many businesses that have been impacted by lower levels of volume, and particularly in off-highway heavy equipment because we serve construction and agriculture. The ones that have performed well is on-road truck, that has been a positive number for us. The auto industry, in terms of power referrals [ph] tops has declined as those platforms have declined. So that is why we put a tremendous amount of effort on installing true lean manufacturing efforts in every one of those factories to drive margins and improve that. What will help us as we go forward is simply improving our volume in the individual companies. And so, we have totally restructured our sales effort in the Engineered Solutions business so that we are going to drive better platform coverage in almost every single market. And I can see some evidence of progress there where we are getting more orders and getting back to some of those historical run rates that we should be at. So there is still a lot of work left to do on our Engineered Solutions business.

The other piece I would add is some of the restructuring activities around facility closures and consolidation, those are happening in the back half of the year. So in the quarter you still have some under absorbed costs that are also weighing in on margin.

Okay, fair enough. Thank you.

And we do have a follow-up question from Justin Bergner, Gabelli & Company. Please go ahead.

Thank you again. I guess back to the Hydratight business. I mean, given that one-third of your MRO is offshore MRO, was that a source of pronounced weakness? I know you referred to the sort of petrochem weakness, but was the offshore also a lot weaker than you thought?

Well, I will give you the walk around the world and try to give you some more insights. So Middle East and Caspian has been reasonably good, they made their quarter and it looks like they have a pretty good projected pipeline of projects through the balance of the year. So I put a nice checkmark from our Middle East operations. North Sea, which is offshore, that one actually saw reasonably good performance in the second quarter. And so, from an offshore perspective you look at Shell and BP, those two companies spend well over $1 billion each on maintenance every year which we get a chunk of. I would like to get a want more of it, but it is a nice market and we haven’t seen a lot of reduction because there are certain things you simply have to do. When you move then into the Asia-Pacific market, that has been weaker. If you recall that is that CapEx market down there where we finished out the Gorgon project and Wheatstone. And as those projects have wound down we haven’t filled the pipeline as quickly for those types of projects. One of the things that I look at for Asia-Pacific in the oil and gas industry are what are the unproven and developed fields down there and how much true maintenance activity can we really attack? Now that is going to be onshore and it is going to be offshore. And then of course North America, one of our growth areas and targets, is in fact offshore because the bulk of our business in North America happens to be onshore. So it is a mixture around the world and I would say the weakest performance in the quarter was associated with our North American performance – onshore activity.

Okay, thanks. And then, since it hasn’t been asked yet on this call, any update on sort of the pipeline for bolt-on M&A deals looking at the second half?

We have got a pretty good list of activities. Now we are cautious about what we buy and how we buy so we are running through multiple diligence processes right now. Our priorities, as I have mentioned in multiple calls, is number one. Our Industrial Tool segment, building out a strong and broad Tool segment to make the great business in Enerpac bigger and better. Number two priority is building out the Energy MRO sector. We probably have more targets in that segment than we do on the industrial side, but both have targets. We are working them hard right now. So stay tuned, there is things coming.

Great, thanks again.

And our next question is from Seth Weber, RBC Capital Markets. Please go ahead.

Hey, good morning everybody.

Good morning.

Good morning.

I just wanted to go back to the Engineered Solutions margin discussion. With the cost cuts and restructuring here coming in the second half of the year primarily, is it – can we assume that the margins there – do you think that that margin could be something in the kind of upper-single-digits for the back half of the year assuming volumes get better and with the cost cuts?

I would say mid to upper, keeping in mind some of these restructuring activities will wrap up kind of mid to late third quarter and you won’t start to see some of them actually in the fourth quarter – you won’t start to see full run rate savings until 2018. But mid to high-single-digit.

Okay, and then I mean so can you just give us a dollar number from what you are expecting the savings to be on a year-over-year basis?

We typically don’t do the dollar number. We talked about – last year about $14 million, $15 million in savings and somewhere in the order of magnitude for the year about$5 million to $6 million or $4 million to $6 million.

For 2017?

For 2017.

Incremental in 2017 versus 2016, kind of that – I think we said $0.04 to $0.06 or something like that. And that tends to be weighted towards Engineered Solution.

Right, okay. And then we can assume that some of that is going to carry over into 2018 as well for…

Absolutely, yes.

Okay.

We expect a lot of our lean manufacturing projects to wrap up before summer, particularly on the Weasler operation. We have got our Dallas operations wrapping up and finishing out that consolidation. We finished our Antigo operation, we have worked on the Red Wing operation. We are about halfway through the Hengelo operation. So it has been a very target rich environment of getting sites cleaned up and leaned out. So we will continue to provide color on that in terms of the performance improvements.

Thanks, Randy. So it sounds like incrementals for the Engineered Solutions next year could actually be above the kind of 20% level you guys have talked about historically?

That is the objective. We want to turn those businesses back to extremely well profitable and growing, both Tier 1, Tier 2 auto supplier, ag supply, getting our display businesses growing again, targeting industries that we haven’t gotten into in the past, particularly in the Elliott business in aerospace. So there is a lot of things the guys are working on right now and I see a lot of progress there.

Super. Okay, thank you very much.

And there are no other questions at this time.

Great. Well, thanks, everyone, for joining the call today. I will certainly be around all day to take any follow-up questions. For your planning purposes the third quarter call is scheduled for Wednesday, June 21. Thanks, have a great day.

And ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation, everyone, have a good rest of the day. You may disconnect your line.