Karen Bauer - Communications and Investor Relations Mark Goldstein - Chief Executive Officer Andy Lampereur - Chief Financial Officer

Rob Wertheimer - Vertical Research Partners Matt McConnell - RBC Capital Markets Allison Poliniak - Wells Fargo Jeff Hammond - KeyBanc Capital Markets Mig Dobre - Robert Baird Charlie Brady - BMO Capital Markets Scott Graham - Jefferies

Ladies and gentlemen, thank you for standing by. Welcome to Actuant Corporation's First Quarter 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, December 18, 2014. 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 fiscal 2015 earnings conference call. On the call with me today are Mark Goldstein, Actuant's Chief Executive Officer; and Andy Lampereur, Chief Financial Officer. 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 today in order to keep the call one hour. Thank you in advance for following this practice. And with that, I'll turn the call over to Mark.

Thanks, Karen. And thank you for joining us on our fiscal 2015 first quarter earnings call. As you saw this morning, we reported first quarter results that were modestly below our guidance and consensus estimates. The stronger U.S. dollar and unexpected litigation charge were the primary drivers versus our original guidance. Compared to the prior year, EPS was down due to those same items, as well as an $0.08 per share headwind from higher effective income tax rate. Andy will provide more detail on these items in his prepared remarks this morning. During the fiscal quarter we repurchased $3.3 million shares of stock for $104 million. This coupled with normal seasonality, tax payments on last year's RV divestiture and a build in working capital resulted in an increase in our net debt leverage during the quarter. The Energy segment core sales growth in the quarter was strong at 6%, with 30 plus percent core growth in Viking, which had its best quarter under Actuant ownership. With the exception of Cortland, Energy segment results were in line with expectations and not significantly impacted by the dramatic decline in oil prices. However, the oil price drop has now started to become more visible on pricing and order patterns across Energy. Sales in the other two segments continued to reflect sluggish and inconsistent demand. In Industrial, Integrated Solutions sales continue below expectations, but new orders picked up and backlog grew. In Engineered Solutions, we had a tough prior year comp in European truck, as well as slowing demand in ag OEM. As communicated in this morning's release, we lowered our guidance for the year, taking into account the 35% plus decline in oil and gas prices over the last 90 days, as well as continued inconsistent demand in other markets. We will spend time on this topic later on the call, especially on the Energy outlook. With that, overview, I'll turn the call over to Andy to go over the quarterly details.

Thank you, Mark, and good morning, everyone. Sales for the quarter were approximately $328 million and diluted earnings per share was $0.38 a share. The stronger U.S. dollar against virtually all other currencies had a meaningful impact on our financial results. Versus guidance, currency rate changes cause us $6 million sales shortfall, a 2% EPS headwind and an $8 million increase in net debt. The euro and pound weakened against the U.S. dollar by about 5% during the quarter, while currencies for Brazil, Norway and Australia, all heavy oil and gas markets each weakened about 10%. Slightly higher effective tax rate compared to our guidance was a $0.01 a share EPS headwind as well, along with the $0.02 a share litigation provision that we booked in the quarter. Excluding this item, EPS would have been within the guidance range and sales at the low end. Compared to last year's $0.44 first quarter, it's important to remember that we had 8% effective tax rate last year versus 24% this quarter, which in it itself was an $0.08 share headwind. That's an addition to the currency and litigation headwinds. Excluding these items, first quarter earnings per share grew year-over-year, essentially the result of stock buybacks over the past year. Turning now to slide five, I'll provide a few comments on sales. Our consolidated first quarter sales were down 3% year-over-year, with core sales down 1% and currency being 2% headwind. Current year sales from the Hayes Industries acquisition essentially offset the divested RV product lines revenues in the first quarter of last year in the year-over-year comparison. Engineered Solutions had a tough comparable due to last falls emissions related European truck pre-buy and finished down 7% core. While Industrial segment core sales were down 1% and Energy was up 6% on a core basis. I'll provide more color on sales by segment shortly. Our consolidated operating profit margins were down 120 basis points year-over-year to 11.7%, 60 basis points or half of this was -- client was attributable to the litigation charge and about 25 basis points due to currency. The remainder 35% basis points -- 35 basis points or so of margin erosion was the net impact of all other items, including reduced production volumes, mix and lower spending. I'll now turn to segment level results, starting first, with Industrial on slide seven. We saw sequential improvement in year-over-year core sales in Industrial segment from minus 7% in the fourth quarter to minus 1% in the first quarter. The Industrial Tools portion of the business was up 1% core, but Integrated Solutions declined 17%. In general, customers are extremely cautious on pulling the trigger and projects across many of our businesses, not just in Industrial segment. That being said, bookings were strong in the quarter in Integrated Solutions, including the $10 million project that Mark will expand on. Operating profit margins in Industrial were 26.1% in the first quarter, 120 basis point reductions from the prior year, almost entirely due to the mix from the Hayes Industries acquisition, which currently operates at lower profitability levels than the base Enerpac business. Hayes is off to a very good start, while it’s not included in the core sales calculation, its topline grew again over 10% in the quarter and its profitability was in line with our expectations. Moving onto the Energy segment on slide eight. Energy had a solid quarter with 6% core sales growth and 290 basis points of year-over-year margin expansion. I am happy to report that much of this was due to a great quarter from Viking, which posted 30% plus core sales growth and EBITDA margins north of 25%. This was Viking's best sales and earnings quarter since being acquired 15 months ago and it’s a type of growth and profitability we knew it was capable of generating when we acquired it. Hydratight also grew in the quarter, but overall segment results included a core sales declined at Cortland. Cortland saw it’s seismic market sales declined in the quarter on account of the lower oil prices, while customers in other product line hesitated in starting new oil and gas projects. Geographically, for the segment in total, Asia and the Americas were strong, while the North Sea and the Middle East soften during the quarter. We will dive deeper into the impact of lower oil and gas prices later on this call. Rounding out our segment discussions, I will finish up with Engineered Solutions and I am on slide nine. We knew that we’d have a down quarter in this segment versus the prior year's 15% core sales growth. The European truck pre-buy last year was a big headwind as were weaker demand in emerging markets such as China and Brazil and softening demand in agriculture. The 7% decline in core sales growth, the divestiture of the RV business last quarter and currency headwinds called -- caused Engineered Solutions sales to decline a total of 14% from a year ago. Operating profit margins declined over 400 basis points year-over-year, the result of lower volume and related absorption of fixed costs. These margins are not where we want them to be and our segment leadership team continues to work on improving them, including additional facility consolidation, management changes and other actions. To wrap up my part of today's prepared comments, I will cover cash flow and capitalization now. As you saw in the press release, we continued repurchases of stock during the quarter. In total, we bought back 3.3 million shares, including approximately 1.5 million shares since our year end earnings call on October 2nd. Taking into account the additional 600,000 shares that we've acquired so far in December, there are approximately 5 million shares remaining under the current 7 million share buyback authorization. The combination of the $104 million of capital we spent on buybacks in the quarter, plus the $8 million net impact of currency changes on net debt and the approximate $31 million of negative free cash flow in the quarter increased our net debt by $146 million in the quarter. Net debt-to-EBITDA leverage increased to 1.8 times at quarter end. Our first quarter cash flow was impacted by a $17 million building working capital and $10 million of income taxes on last June's RV divestiture gain, as well as a handful of other items. Despite the weak cash flow quarter, our liquidity and availability have looked in great shape to handle future capital deployment and acquisitions, organic growth opportunities and buybacks. I'll now turn the call back to Mark.

Thanks, Andy. Before covering to the rapidly changing energy environment we are facing, I wanted to highlight a number of positive things going on at Actuant. One of these items, Andy referred to earlier and is a significant win for the Enerpac Integrated Solutions business. The project is a very unique and typical of the creativity that our IS technology can enable. An elevated offshore roadway is being constructed around one corner of Reunion Island, which is an Island off the eastern shore of Africa, where rockslides are common and potentially hazardous to drivers on the existing coastal motorway. The IS team has begun working on this $10 million order and we will start to see revenues in the fourth quarter of this fiscal year. The second area I want to highlight is that Hydratight booked another order for its patented Morgrip subsea connectors in the quarter from Petrobras, the large Brazilian oil company. These mechanical connectors are used in emergency subsea repairs often when ageing infrastructure fails. Oil company, such as Petrobras, are making sizable investments in such contingency products regardless of the decline in oil prices in order to reduce the risk. Another important link took place at Gits, which booked a couple of large orders for highly engineered valves, worth in excess of $50 million over the truck platform from a leading European OEM. This is another example of the fruits of years of investment in technical solution selling. Shipments don’t start until 2016 and 2017. Our investments in people and new technology continue to pay off, as evidenced by these new wins and a top new product award for our ag seeder patented system that we highlighted at our October Investor Conference. Unfortunately, these successes have been overshadowed recently by the significant market changes and headwinds we’ve encountered since starting the current fiscal year. And to summarize these, we’ve seen a 35% decline in oil prices since we provided our current year outlook and frankly this remains a very uncertain picture. Simultaneously, we’ve seen a meaningful strengthening of the U.S. dollar, which impacts not only the translation of our international results into U.S. dollars, but also input costs of those foreign units buying components from U.S. dollar denominated suppliers. We’ve seen demand in Europe, Brazil and China weakened pretty much across the board and finally both European truck and ag OEMs have reduced build schedules for their products, impacting our forecasts as we move deeper into fiscal 2015. Collectively these factors and the lack of positive GDP momentum attraction have caused us to recalibrate our outlook for the fiscal year. Within our portfolio, we don't have any short cycle or consumer facing businesses that made benefit in the near-term from a dramatic reduction in oil prices. Before we review our revised guidance for the year, we wanted to address investors’ questions on energy exposure and provide a perspective on how the rapid reduction in oil prices will impact us going forward. Here on slide 13, we've isolated our exposure to oil and gas markets, which extends beyond but does not include the entire energy segment. Approximately, 34% of our total sales are related to energy markets, with a portion of that not tied to oil and gas as we illustrate on this slide. In total, we estimate that about 28% of our total revenues are linked to oil and gas, with exposure in both the energy and industrial segments. So if you dive deeper into this approximate $400 million slice of our business, you can see that we've essentially no exposure to midstream oil and gas. Our upstream exposure where most of the project deferrals and cancellations have occurred, primarily impacts Viking and portions of Cortland. These two businesses are more impacted by oil price changes than Hydratight. Viking is largely focused on mooring drill rates and we have been talking about reduced demands and deferrals in the North Sea and in Norway specifically. However, Viking has won large new products in Australia and Southeast Asia, which more than offset the North Sea weakness in the first quarter. Although, we just reported that Viking had its best quarter based on dialogue with its customers, we expect it to soften as the year progresses. However, even with this deceleration, we still expect to see full year core growth in Viking. Two-thirds of Cortland sales are tied to oil and gas. Its seismic tow cable product lines are used in exploration and have already been impacted by the oil price reductions in the first quarter. While its umbilical and workover cables are frequently used in maintenance applications, there are larger dollar in nature and therefore more tied to capital spending patterns. As such, we feel demand will decline as capital spending is pared back. Our downstream oil and gas exposure primarily relates to MRO sales and service at Hydratight and Cortland. We believe this is likely to be the least impacted since it's tied in with safety, production and uptime, all of which are mission critical. There is a potential for customers to reduce maintenance scope under extended intervals between turnarounds but thus far, this has been minimal. While we haven't owned our energy businesses to numerous cycles, we do know that our customer demand was pretty consistent despite significant oil price movements over the past decade. Additionally, our energy segment held up relatively well in the great recession. We're bullish on energy and oil and gas for the long-term and that has not changed. We will manage the current situation aggressively, but cannot predict with certainty at this time how long this will last, or how much it will impact Actuant but the situation is dynamic. That’s a great segue into guidance, which I’m now going to discuss starting on slide 15. As noted in the release, we lowered our fiscal 2015 sales guidance to a range of $1.33 billion to $1.37 billion and earnings per share to $1.85 to $2 a share. The biggest challenges from our prior guidance are our sales outlook and completed share buybacks. From a sales standpoint, we are lowering the core sales growth expectations for all segments, but most notably in energy. We now expect energy core growth to be roughly flat, moderating from the 6% we delivered in the first quarter to negative single digits by the end of the fiscal year. For industrial, we still expect growth but we slightly narrowed our core growth estimate to 3% to 4%. And for engineered solutions, we’ve adjusted our expectations to negative 2% to 4%, predominately for the agriculture in European and China truck markets, which are experiencing moderating order rates beyond what we originally anticipated. On a consolidated basis, our core growth range for the year is now negative 1% to positive 2%. As we saw in the first quarter, worldwide currency rates weakened across the board against the U.S. dollar, with the biggest movements in currencies other than the euro and pound. As a frame of reference, the change in currency rates versus last year impact sales by about $52 million and the change in rates caused a $31 million headwind versus our prior guidance. From an earning standpoint, we expect normal decremental margins on a lower volume. We expect to offset a portion of this decline with cost reduction activities and we are implementing contingency plans established for this sort of demand change in each one of the businesses. Partially offsetting the impact of lower volume is an approximate $0.05 benefit to EPS from share repurchases completed since issuing our previous guidance. To round out the full year guidance discussion, we expect our free cash flow in 2015 to be approximately $150 million and the fifteenth consecutive year of free cash flow conversion over 100%. Our expectation for the second quarter is for sales to be in the $310 million to $320 million range, with EPS of $0.25 to $0.30 compared to $0.30 in the prior year. As I reviewed earlier, currency definitely impacts the comparison to the prior year and represents an approximate $0.02 year-over-year headwind. Finally, our second quarter has always been our weakest of the year due to normal seasonality. Just to reiterate, all guidance excludes the impact of any future acquisitions or share repurchases. In this case, just to be clear, any that take place after today's earnings announcement. That wraps up our prepared remarks. Let’s open up the phone lines for Q&A please, operator?

Thank you. [Operator Instructions] Our first question comes from the line of Rob Wertheimer from Vertical Research Partners. Please go ahead, sir.

Hi. Good morning and thanks for the extra disclosure on oil and gas disclosure, all was great and that was very helpful, so thank you. One question just so I make sure I understand it right. On the downstream side, you are lumping in like the more stable production. It’s not -- it doesn’t just mean refinery and petro kind of means production, et cetera?

Yes. It does. That’s correct.

Okay, perfect. And then just wanted to ask, I mean, there’s been some rumblings of even production curtailments in the North Sea and maybe another offshore areas. Are you hearing any of that from your customers? If it happened, do you anticipate it would take two and three years and lot of people planning or whatever, or are you hearing any weakness on that side of the business, let’s say?

Yeah, Rob, what we’re seeing and what we talked a little bit about last quarter was in the North Sea, specifically with the Statoil up there. They have warm stacked a couple of rigs and so that [Technical Difficulty] -- and they plan to go back into service sometime over the next quarter or so. So we have seen that trend there. But that’s where we’ve seen it specifically. We haven't seen it in Australia or Indonesia or any of the other markets where we’re actually offsetting some of the decremental revenue from the North Sea and making it uptown in the Australia and Indonesia.

Just to clarify that would be -- those rigs are drilled rigs as opposed to…

Production rigs.

Production rigs, right. So we have not heard. I mean, there’s a lot of things that are under consideration by our customers. But we haven't gotten any kind of feedback that there's any kind of change as far as rigs, production rigs coming down and they are kind of meaningful right now.

Yeah. Nothing definitive.

Perfect. And then your guidance is, kind of, based on what you're hearing from customers now or what you’re guessing, they might tell you -- I know it’s a tough question. But what you’re guessing, they might tell you in three months or kind of what you’re hearing now or how far down the curve of guessing about it, could get to do you try and incorporate? Thank you. I’ll stop there.

Yeah. Yes, there's a really number of things you are looking at. We go through a bottoms-up forecast from the businesses based on what they see. We look at the macro environment. We have a history, certainly would be -- from a specific standpoint in energy. We have history through the [Technical Difficulty] and so we take a number of these elements as well as customer feedback into the guidance recommendations.

Thanks guys.

Our next question will come from the line of Matt McConnell from RBC Capital Markets. Please go ahead sir.

Thank you. Good morning.

Hi Matt.

Good morning, Matt.

I'm hoping you can help with a little more of the historical context around the newer parts of your energy business. So you know we know what Hydratight did last cycle. But how would Cortland and Viking impact that and do you have looked at it peak-to-trough last cycle or how they held margins or anything also can help us understand the historical context?

I guess, it depends what you consider the last cycle to be. During great recession, we do know Cortland because we own Cortland and certainly that piece came off considerably more than the base Hydratight business. And we saw about 20% declines in that business because it’s more aligned with capital spend. Seismic markets as an example are impacted more whereas some of the other markets impacted less. Margins did click down because of the absorption factor on it. Viking, we did not own at that time. So we really can’t comment.

Okay. Okay. I'll just have to estimate, I guess. I guess, switching gears to industrial maybe and I know there is some comp issues with integrated solutions, and that creates some noise. But now it’s on about 10 quarters of no organic revenue growth. So I know the environments are tough, maybe based on PMI or industrial production, you’d expect some growth but any reason why that decoupled over the past few years, I guess?

Yeah. Let me answer couple of different ways. Just to talk about industrial in general, I need to separate the integrated solutions part of the business from the core industrial tool side of the business. So in the last quarter, we had a negative 17% in the integrated solutions business and plus one in the industrial tool side of the business. We're seeing that sort of low growth in all markets across the board. We started seeing a decoupling from PMI ISM data probably about 18 months ago or so, maybe even little bit further than that. And there's couple of theories. One of the theories around that is we’ve significantly reduced our cycle time on orders if customers want the shipments immediately. There is about 400 SKUs in industrial that we ship within 24 hours of the order. And that's really been done over the past year or so to get that service level where it needs to be. As a result, distributors don't have to carry the inventory and so part of the process in the past was as the ISM PMI data came out, inventories were stocked in distributors. And we’ve really taken a lot of the inventory out of the system. So I think that that has added to it. The other pieces I look forward, the incoming order rates. We saw moderate improvements in both the IT and the IS order rates over the past quarter, which makes us feel better. And if you take a look at the North American market in particular and you look at the customer base, the national accounts like Grainger, MSC are growing very strong, mid single to double digit year-over-year increases. The larger independents are growing positive and where there is -- where there is shortfall year-over-year are in those distributors that focus on one of the vertical end markets like mining or like oil and gas where we’re seeing some headwinds. And so that in a nutshell matter is what we see going on. We've seen this decoupled for the past 18 plus months.

Yeah. Okay. Thank you. That’s very helpful.

You’re welcome.

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

Hi guys. Good morning.

Good morning, Allison.

Good morning.

Just let me go back to Viking. Make sure I understand the business a little better. In North Sea, it sounds like you have some visibility that there could be some improvement in that market this year. But as you look to, sort of, Asia Pacific where you’re seeing strength, what’s is taking so much of visibility there in terms of things getting pullback or delayed. Do you guys have any thoughts on that?

Yeah. We aren’t seeing pullback. So I would say within Asia, that’s for sure. I mean, the growth that we’re seeing in the last three quarters since been coming out of Australia and Asia Pacific, it’s actually been the North Sea that has been weak. And now I’d expect the North Sea to continue to be weak at Norway, in particular. The U.K. side of it appears to be hanging in there better. We had several projects going on in the last three to six months in Australia. One of those is winding down the end of this month and next month. So the growth rate will moderate a little bit down there, but we still expect it to grow as we move forward. So we had a super quarter. This quarter we are locking down some contracts longer term, so continue the -- continue the floor of revenue in this length. But it will grow for the year but clearly it’s going to come off. I think we’ve seen the best -- we’re seeing the best quarter of the year and it will come off and North Sea will come off more than Australia and Asia-Pac.

Okay.

Yeah. Just -- Allison, just to reiterate there. We are not projecting the North Sea to bounce back. We have had a number of rigs hot stacked as they come and go but that’s where we see, to Andy’s point, more softening.

Okay. That’s fair. And then just -- even going back to the industrial comment, booking is strong in the integrated solution -- I mean, is that sort of what gives you the confidence as for the back half of the industrial could get a little better based on the first half, since you’re there?

Well, certainly the first quarter was below my expectations from a revenue standpoint, Allison. So that's one of the reasons that either we look forward and took a look at what we need to do for the remaining three quarters of the year. I think our quote on the IS of the business, our quote funnel is strong and -- but that being said, IS was down about 30% in the second half of last year. So the comps are going to be a little bit easier coming in. And we just -- we're starting to see some orders. We’re not claiming victory yet but it's a step in the right direction from the order flow that we saw in the prior quarters, prior periods. But it’s still -- it's still low single digit, mid-single digit that area.

Okay, great. Thank you.

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

Hey. Good morning, guys.

Hi, Jeff.

Hey. So just like the Engineered Solutions, I mean, you kind of, you got a 6 point swing in the growth rate and it seems like a quarter ago, we understood ag was kind of getting worse and Europe truck was maybe struggling kind of post pre-buy? So, I just want to understand a little bit better, what changed so materially over the last three months that you did -- your swing in your forecast that much?

Yeah. Let me take a swing at it and then you follow in behind me, Andy. From an ES standpoint, going into this year, from a truck standpoint, we had originally felt pretty good about truck. And actually in the first quarter, truck performed stronger than we anticipated against very high comps from last year with the pre-buy over in Europe. What we found as the quarter progressed is that the bookings continue to get reduced as the year went on and especially, in China and Brazil, and Europe, those three markets. And so those are the trends that we saw in the first quarter that have led us to bring down the full year guidance from a revenue standpoint in truck. On the ag side of the business, if you take a look and look at we serve OEMs through our Elliott business with the drivelines and Weasler is the aftermarket through the, excuse me, flex shafts at Elliott to the OEMs drivelines through the aftermarket. The aftermarket was really compensating for the reduction that we’re seeing on the OEM side of the business and we haven't seen any reduction or improvement in the order flow on the OEM side and the aftermarket has softened as well and so because of those trends we’ve brought that forecast down as well.

Yeah. Within ag, just to frame out ag for everyone again. This is about our $125-ish million segment for us. Last year we grew at high-single digits. Our expectation for this year -- from the last guidance was 3% to 4% growth on that. The base Weasler business certainly did that in the first quarter, both on the aftermarket standpoint and the OEM standpoint, but our order intake bookings were down in North America. So we’ll expect that growth rate to slow as we move forward. And the other piece definitely is outside of North America. Europe has slowed down considerably on the ag side in Brazil, which was going to be one of the growth areas for the ag seeder, where we had some customers lined up, that market is in shambles right now from economic standpoint and everything is pushed to the right, everything…

And we anniversaried the ag seeder as well, which is impacted us. So we have a number of dynamics in there, Jeff, that are driving those forecast.

Okay. And then just on 2Q guidance. I think you’re guiding kind of flat earnings to down earnings. And just as I look at the piece, is it seems like core growth is flat, even lower tax rate give a materially lower share count? So is it something happening with profitability, just because of absorption or there are other -- some other costs or restructuring it’s in there that I’m not seeing, because it just seems like a pretty conservative assumptions given where tax and share count are going?

Yeah. Couple of things there, Jeff. I comment both sequentially then and -- and then on the year-over-year basis. Certainly, sequentially, there is no question that our profitability goes down first quarter to second quarter, and we are definitely going to see that again this year. When we look at it on the year-over-year basis, currency is definitely coming into play in this. There was headwind where some of our supply chain when we’re bringing the product out of Asia, those tend to be -- those currencies tend to be locked in with the U.S. dollar. They have not moved but the euro is falling down, so this 5% reduction is creating purchase price variances coming through our numbers relative to the prior year. The other item in here clearly is absorption. And as our volumes come down and we’re seeing OEMs in some of our end markets, auto would be a good example of it. Well, they have cut back their production schedules for Q2. Truck, I’ll say the same thing, European truck they cut it back because of inventory levels and whatnot, that’s impacting it in the quarter. When you look at the other piece of this been the energy. It’s a high margin business. Clearly, it's moving within energy. Though, you will see less benefit from Viking in Q2 than you did in Q1, because the volumes come off in Q2 on a seasonal basis and because we wind up one of the rental jobs in Asia. And again, these rental jobs are very high incremental margin. So, all of that kind of gets mashed up into our expectation on it. So you have sequentially, clearly, a reduction in margins year-over-year. Yes, there will be a reduction in margins based on what we’re forecasting right now in margins Q2 to last -- from last year to Q2 of this year.

Okay. Thanks, guys.

Yeah.

Thanks, Jeff.

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

Good morning, guys.

Good morning, Mig.

Sort of sticking with the guidance here. The thing that I’m trying to understand that, if I look at the second quarter and the full year, you're basically guiding for 35% of your earnings to occur in a first half and 65% to occur in the back half and that’s a pretty healthy ramp. Historically, you've been closer to call it like a 45-55 and even last year you've done 40-60. So I'm trying to understand how we get this earnings ramp, especially since your commentary seems to suggest that things are getting tougher rather than easier going forward?

Yeah. I guess I haven't run the numbers looking at it that way, Mig. When I’m looking at what’s going on here, clearly, we will -- we are definitely backend loaded from a profitability standpoint. We always have done in this thing. We are expecting from a mix standpoint. We’re expecting mix to improve as the year goes along as industrial grows on a core basis as opposed to being a drag on a core basis. That will help out. From a saving standpoint and some of the restructuring actions that we’ve taken last year and this year, for example, we are still halfway through the move of our automotive production from our Oldenzaal plant in Holland down to Turkey, that’s going to be completed roughly mid-year and early spring. So we have duplicate overheads in both places that will be coming out as an example. Clearly, as a result of the downward revision and our outlook here in sales and whatnot, we are taking actions now that will benefit the second half of year. I mean, we can’t undo the cost in the first quarter, that’s in the books, right. So we are taking actions now and we’ll see Q3 and Q4 reflect more of those savings as we go forward. And the other item, clearly, that to hit that we have in the first quarter of the year that comes in the place, well, a couple million dollars now its -- it had an impact when you look for first half of last year.

But -- I appreciate that, but is there where you can quantify some of the savings that we’re talking about here? I mean, are we talking $4 million, $3 million, more or less?

I mean, we are -- our guidance incorporates all that, so I don't want to incremental -- incrementalize what’s going on. Clearly, there are going to be cost savings coming out of the business on this thing. But, I mean, I really don’t want to get into providing our estimates first half, second half on spend and that sort of stuff.

Yeah. Mig, the way we look at is you’ve got industrial mix picking up in the second half, which is higher possibility. Restructuring benefits, as we get the second half benefit contingency planning, that the businesses are focused on right now and some of the other cost reductions, which will have a second half impact. And you have the one-time charge in the first half. And I think those are the components of what our margin improvement is in the second half.

That’s great. And then I guess my follow-up, going back to industrial specifically, you have brought down the core growth assumption just very slightly but obviously energy is, call it 12.5% oil and gas of that segment. And you were commenting earlier that demand trends in the tool business remains fairly sluggish. What leads to this acceleration as the year progresses if you would?

In industrial in total, I think we answered that question earlier that we are going from minus 1% core for the year, 3% to 4% core second half minus 30% last year in IS. We expect to be up in IS. In the back half of this year, we are seeing improvement in the trend order of IT, as we move though. So that’s essentially what we are seeing. And I think the other thing from an energy exposure side within Enerpac, we are not expecting a significant impact. I mean, it is $50 million of exposure within Enerpac give or take. It’s not going to have a significant impact on a consolidated total here. It’s downstream. It’s tied in with maintenance.

And a big part of the narrowing of the range for the full year for industrial was at the first quarter was lower than we expected. And so we are a quarter behind where we thought we’d be relative to that.

That’s helpful. Thank you, guys.

Sure.

Our next question comes from the line of Charlie Brady from BMO Capital Markets. Please go ahead.

Thanks. Good morning, guys.

Good morning, Charlie.

Can we just -- I just want to jump over to Viking again and just on one of the prior questions about how it’s performed in the past cycle. I mean, I understand you guys didn’t own it in the past cycle, but I mean, clearly it’s part of the due diligence when you’re buying it and you’ve got now the historical financials and results of the company. There must be some sense as we look back to the last oil disaster 2008, 2009. Some sense as to how that business performed, even taking into account the fact that it’s bit of a different business today since you guys have bought it and you kind of broadened it out a little bit. But I mean, can you give any kind of sense you can help us with, as to get a magnitude of how this business performed in the last oil shop?

One thing to remember as you think about this is that in the last cycle the last -- the Great Recession, the business was exclusively North Sea, so it was U.K. and Norway. There was no Asian business right now which is really -- or Australia business, which is really offsetting what we see right now and that’s why we feel pretty comfortable with the way we will manage through this. I don't have off the top of my head what the impact was with Viking during the last recession I think.

Certainly, it was down in the North Sea. I don't have a specific percentage for you, Charlie on that. We think we factored in a reduction in the North Sea on a go-forward basis. But we have very good momentum in Asia. That momentum will moderate as we go forward, but we had very good growth there.

I think the only other thing, I will add is as I said before, the forecast, the way we assembled the forecast and that leads to guidance is really a bottoms up by customer from the businesses. And so the guys that are in the middle of this and working with the customers on a daily basis supporting this together. So we feel comfortable with what they’ve brought in.

No, that’s helpful. And fair point on the fact that it had 100% North Sea exposure last time and clearly doesn’t have this. So the downside probably not nearly as bad as it was. Could you tell us how much Cortland was down in the quarter?

We can get it offline, let me, for us is, it’s 10-ish something.

Yeah.

10%, 12%, I can’t guess.

It’s low teen something.

Okay. And then on the one project that you guys have coming off on the Viking business, I mean, how much -- it’s obviously going to impact some of the growth you talked about that kind of winding, coming down a little bit because that project comes off. When does that project come off and can you give us a sense of the magnitude of what that might do?

Yeah. It’s coming off in the second quarter here. I think it’s a $0.5 million, $0.75 million a month type thing.

Okay.

That's incorporated in guidance, yeah.

Got you. Okay. One more question. Can you give us a share count at what it stands today, the fully diluted share count incorporating the buybacks?

The numbers that we are using in our guidance, I believe are about 74 million to 75 million. I am sorry. 64 million to 65 million would reflect what’s happened through today is 64 million to 65 million shares.

Okay.

And it’s going to get further.

That’s great. Thanks, Andy.

Yeah.

Our next question comes from the line of Jefferies. Please go ahead.

Hey. Good morning.

Good morning, Scott.

I am hoping to just talk about sort of more of a 40,000 foot. At the Analyst Conference, you guys presented a scenario that the 2005 to 2015 prior guidance could be supplemented by share buybacks of 6 million, which would be additive to EPS by $0.18. What is the share buyback thinking now versus that 6 million?

I would say that that 6 million, you remember we put it in context that that was a scenario that, if we would buyback 200 million of stock during the year and if we would do acquisitions, this is what it could look like on a go-forward basis. That was not necessarily our prediction of what was going to happen in the year. So in terms of what our expectation is for the year, our expectations will continue to buyback opportunistically. Obviously, you get an idea from the last two quarters here. We’ve deployed a fair amount of money in buybacks because we think it’s a good buy and based on what our outlook is for cash flow and acquisition pipeline and timing of deals and where we want to be from a leverage standpoint, I don’t think it’s changed at all. Obviously, we revisit it quarter-to-quarter but there’s really no change in our view.

And just to remind you for the first quarter, we bought back 3.3 million for the first quarter and deployed about a $104 million. And so we still have a significant amount of shares available on the authorization that we received from the Board in October.

Right. Well, let me just try the math this way, right. If we ended up on an average basis 69 million in the fourth quarter of last year, are we going to be in 64 million, 65 million, ranks, essentially assumes that there is a -- somewhere in the 5 million of share repurchase range, so let’s call that $0.15 a share. So between then and now, I understand currency went the other way and I understand energy for everybody. What I guess I would like to know more about it is that’s pretty deep delta in operating income versus just two months ago. And so what are we doing on a go-forward basis to maybe and keeping in mind, of course that the Analyst Conference occurred when one month of the quarter was already done? What are we doing on a go-forward basis that maybe to get ahead of that as opposed to kind of being behind it now that we’re seeing we’re going to cut some cause which is the right thing to do, great. But if we also consider the fact that in fact this one of my questions to you Mark that, there was also some of those top-draw contingency cost reductions that would kind of protect the guidance and now kind of versus where we are now. I guess it’s on a go-forward basis. What do we do to sniff this out? It is just a pretty big delta in operating income. How do we sniff that out a little faster and get ahead of it as opposed to being behind it?

Just a couple of things to remember, Scott. First of all, we’ve had a precipitous fall in oil and gas over the past $19 millions. So this is in its all dynamic, it’s a real-time stuff. And so it’s not as easy as having all the facts in front of you and putting together contingency plan. The contingency plans were put together based on some parameters and for the energy team in particular, it was $100 plus oil. And so what was the developed then, it’s a different scenario now. We are in -- so that reality is a little bit different. The C-plans have been implemented in each one of the businesses that are impacted by this. We’ve got additional consolidation and facilities that we had a couple of this quarter, this past quarter. We’re optimizing new organizations not only from prioritization standpoint, but sharing resources across segment where it make sense. We’re sharing facilities. We’re driving supply chain down given that we think that there is some opportunities there on a material standpoint and freight. And we’re redeploying some of our corporate staff around functions like lead office and very critical projects within the business to make sure that we drive operational excellence. So I know, it doesn’t give you the line item specific data that you’re looking for, but that’s in a nutshell where what changed between October and now and what we’re doing about it. Andy wanted to add some color on it.

Yeah. Absolutely. When you look at our original guidance to where we are at right now, we lowered it by roughly $90 million on the top line, and roughly $20 million of operating profits on that. So that in and of itself would normally be 20 -- low 20 EPS impact from that. We talked about the $0.05 benefit from the stock buybacks that we did do and are incremental to what we had in the original guidance. And so that brings down the decremental impact of this volume down to about a $0.15, a $0.15 to $0.20 decline. We’ve broadened out to a range a little bit obviously in our guidance here. But I’m not sure I’m beyond that in $20 million on the $90 million decline and the third of that decline is currency to reiterate on this thing. It doesn't seem crazy given the decrementals in our business.

Next.

Yes.

Fair enough. Could you -- in the past, you guys have been kind enough to treat us to a pretty deep dive into your M&A pipeline? I was talking about numbers and segments and even a little bit of a hint toward timing from time to time. I was wondering, if you guys could do that for us now kind of where we stand on M&A pipe?

Sure. I would say that we've got a robust funnel of M&A opportunities out there. And similar to last quarter, the majority of them are what I call tuck-in acquisitions, which are in the $50 million to $100 million purchase range. The opportunities that we have out there stand across all of our segments, and we are all focused on those macro drivers that are part of our Actuant strategy. Infrastructure, energy, food and farm productivity and natural resources and productivity, and again we’ve got opportunities for these tuck-ins across all businesses. I would say that things are progressing with the funnel. These are really hard to predict, Scott as you know. And I’m encouraged with the funnel in the progress and we’ll let you know as soon as something happens.

Okay. Thanks a lot.

Sure.

And our last question comes from the line of Ann Duignan from JP Morgan. Please go ahead.

Hi. Good morning. This is Thomas [indiscernible] on for Ann. I think, you’ve already addressed most of the questions on oil & gas. Thank you for that.

Okay.

Just one question. Have you seen demand across your agriculture business impacted positively by the recent rally in soft commodity prices?

No.

No. No we have not seen that and no I think that’s relatively short time. We typically wouldn’t see those kinds of positive or negative effects in our businesses.

Okay. Thank you very much. Happy holiday.

Thank you. Same to you.

Okay. Well. Thanks everyone for joining the call today. In closing, I just wanted to take a minute to summarize a few key points figuring that we would deep dive into a couple areas today. First on strategy, we continue to be bullish on the long-term growth characteristics of our businesses in the macros that we’re following. Second, the global nature of our business gives us diversity during uncertain times like this and gives us a platform to serve international markets and customers. Third, we continue to invest in growth, both organically and through acquisitions. And as we just talked about our capital deployment priorities, if that change, we’ve got a robust funnel of tuck-in acquisitions and continue to opportunistically buy back shares. Cash flow remains our hallmark. We’re forecasting even with the reduction 2015 to be a 15 consecutive year of free cash flow conversion in excess of 100% of net income. And finally the organization is very strong. And I’ve extreme confidence in my team to exclude the forecast in the phase of some challenging macro economic headwinds. So from all of us at Actuant, we hope you have a happy and healthy holiday season. And enjoy relaxing time with your families.

Finally a quick note that our second quarter call will take place on March 18th. I will be around all day to answer any follow-up questions you have. So have a great day and wonderful holiday.

Thank you.

Thank you.

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.