Karen Bauer - Communications and Investor Relations Leader Randy Baker - CEO Andy Lampereur - CFO Rick Dillon - Incoming CFO

Alison Poliank - Wells Fargo Ann Duignan - JPMorgan Jeff Hammond - KeyBanc Capital Markets Scott Graham - Bank of Montreal Mig Dobre - Baird Charley Brady - SunTrust Robinson Humphrey Justin Bergner - Gabelli & Company

Ladies and gentlemen, thank you for standing by. Welcome to the 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, Wednesday, December 21st, 2016. It is now my pleasure to turn the conference over to Karen Bauer, Communications and Investor Relations Leader. Please go ahead, Ms. Bauer.

Great. Good morning and welcome to Actuant’s first quarter earnings conference call. On the call with me today are Randy Baker, Actuant’s CEO; Andy Lampereur, current CFO; and Rick Dillon our incoming CFO. Our earnings release and the slide presentation for today’s call are available in the Investors section of our website. But 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 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, Karen, good morning everybody and thanks for joining our first quarter conference call. I'd like to begin today by welcoming Rick Dillon to Actuant. As we announced a few weeks ago, Rick will become our next CFO. He brings an enormous and strong industrial background, he's going to make a great addition to the team, so welcome aboard Rick. Secondly, I'd like to recognize and thank Andy Lampereur for his service to Actuant. Andy is one of Actuant's founding team members and was a key contributor to the Company in its success and on behalf of Board of Directors, Andy thank you very much. So starting over on Slide 4, I'm very pleased with our results in the quarter. We met our commitments in sales and earnings excluding the impact of restructuring and transition charges. Core sales were consistent with our guidance in all three segments and on a consolidated basis. We saw the expected stabilization and easier comparisons in our industrial and engineered solutions segment, and as expected our energy segment had difficult year-over-year top line performance given last year's non-recurring Hydratight project. I'll cover the industry dynamics later in the call, but I would describe most of our end markets as sequentially stable. Diluted EPS excluding restructuring and transition charges were slightly above the $0.14 to $0.19 guidance range with benefit of lower than anticipated tax rate, which added about $0.02 a share. We generated $8 million of free cash flow in the quarter and the net debt leverage was about 2.7, both of which were within our guidelines and expectations. Now, I'll turn the call over to Andy to run through the details in the quarter and then I'll come back with additional updates and guidance.

Thanks, Randy, and good morning everyone. I am going to start my review with the bridge schedule on Slide 4, which removes both the restructuring and previously announced transition charges from our GAAP results to align them with what was contemplated in our guidance for the quarter. Excluding the combined $0.12 a share drag from these two items, our adjusted operating profit was $19 million, and our adjusted EPS was $0.20 a share, which is a $0.01 above our $0.14 to $0.19 a share guidance range. Slide 5 is a comparison of our adjusted first quarter results for the first quarter of '16 and '17. As forecasted, our fiscal '17 results declined year-over-year due primarily the weakened market demand and difficult energy comps which led to a 13% year-over-year sales decline. Our operating profit declined from $30 million to $19 million as a result of lower sales and profit margins, the latter due to reduced production levels and unfavorable sales mix. Our adjusted earnings per share in the current year was $0.20 a share, compared to $0.31 last year, again reflecting the combination of lower sales and margins partially offset by the benefit of lower effective income tax rate. Turning now to Slide 6, we'll start with the discussion of core sales rate of change. On a year-over-year basis, our first quarter sales declined 14% on a core basis and reflect lower year-over-year sales in all three segments. This is in line with the 14% to 16% forecasted core sales decline that we've projected in the quarter on our last earnings call with the sequential core sales reduction from the fourth quarter due to very tough comp in energy versus the year ago. On a core basis, the Industrial segment was down 4%, Energy was down 31% and Engineered Solutions down 5%. I'll provide more color in my segment level reviews, but can summarize market demand as being pretty similar to what we discussed on our last earnings call, overall it was stable. We expect the trend to be less worst in the second quarter as comps get easier especially in energy. Slide 7 summarizes our quarterly adjusted operating profit margin trend, consolidated first quarter OP margin was 7.2% compared to 9.8% in the first quarter of last year. This 260 basis points year-over-year decline reflects lower sales volume and reduced absorption due to lower production levels and unfavorable sales mix with some of our highest incremental margin business units such as Hydratight and Viking generating sizeable sales reductions. Well, down our first quarter margins were in line with expectations. We've continued to expect profit margins will rebound in the second half as restructuring benefits and increased volumes take hold. Now, I'll spend a few minutes on each of our three segments starting first with Industrial segment here on Slide 8. The Industrial segment reported first quarter sales that were 2% below the prior year. Our core sales were down 4%, while acquisitions provided a 2% benefit, and currency changes were not meaningful. The 4% core sales decline for Industrial was a sequential improvement from the 8%, 9% and 14% year-over-year declines, we saw in each of the last three quarters, which we take as continued stabilization of market demand. Geographically, we saw this less worst year-over-year core sales rate of change in each of the three geographic regions which is another good sign. The Americas continues to be the weakest of the three regions for industrial. One area of growth within the industrial segment is a Precision-Hayes business, which provides concrete pre-and post-tensioning products to the construction, infrastructure and mining markets. It has the growth from the first quarter which we expect will continue. Consistent with our full year view from last year, last quarter, we anticipate improving core sales trend rates from industrial as we move deeper into this fiscal year as comps continue to get easier, new products are introduced and our second-tier branding strategy takes hold. From a profitability standpoint, Industrial is 22.3%. First quarter operating profit margin was down a 160 basis points from last year on lower volume and unfavorable sales. We continue to be confident of this segment margins and their ability to rebalance our purchase to the historical levels when the volume returns. Now, on to Slide 9 where we will discuss Energy segment results. As expected our year-over-year sales declined significantly in the energy segments with reductions in each of the three primary businesses. Viking and Cortland each posted year-over-year declines of over 35% on difficult comps and continued weak off-shore oil and gas, drilling and exploration. Meanwhile, Hydratight's prior year first quarter included about $15 million of revenue from the large Middle East service job and about $5 million of U.S. service jobs that have been pushed out from the fourth quarter of 2015 into the first quarter of 2016, so a really tough comp quarter for Hydratight. We continue to see CapEx spending headwinds and difficult service comps from last year in the second quarter before we see easier comps for energy in the second half of fiscal 2017. Profit margins to be hit in the quarter in Energy segment on lower revenue and sharply reduce Viking rental revenue, which comes with high very low margins given the rental nature of that business. With seasonality in the off-shore oil and gas market including weak demand power utilization, second quarter energy profit margins are expected to continue to be weak before improving in the second half on better volume and utilization. I will wrap up my segment level discussions with Engineered Solutions on Slide 10. Total year sales were down 8% year-over-year to $94 million, which includes a 5% core sales decline. We saw a continuation of trends from the last few quarters with weaken market demand exacerbated by OEM destocking. Heavy-duty truck was a notable exception with strong growth in China offsetting moderating trends in Europe. We also noted that inventory levels are improving in the ag-base and some OEMs reported encouraging preorders for the upcoming year. Not surprisingly, profit margins in the Engineered Solutions were pressured with the lower production levels and the resulting weak overhead absorption. Looking ahead, we expect similar demand trends for the near-term, which should give way to growth when OEMs entered destocking and start production on new models that we have already won. We are also making progress on facility consolidation activities in this segment which should benefit margins in the back half of the current year. So, that’s it for my comments on the first quarter P&L to summarize in two words, as expected. I’ll now shift gears and discuss cash flow and capitalization. We had a very good start in terms of cash flow generating about $8 million in the first quarter. Seasonally this is a normally one of our weaker quarters to the annual funding of our 401k and bonus plans. We entered the quarter pretty much even with this start at about $400 million of net debt and net debt EBITDA leverage of 2.7 times. I am confidence of the $85 million to $95 million free cash flow forecast for the year when combined with our $175 million of cash in our untapped $600 million revolver. These provide plenty of funding for capital deployments in operating each for the balance of the year. That’s it for my prepared remarks today. I will turn the line back over to Randy.

Thanks Andy. Turning over to Slide 12, we get many questions from investors related to our industrial growth strategy, and clearly it is an important element of our 2021 vision we outlined in our Investor Day. And as implications of the second half of 2017, as a recall we have four areas of focus product range expansion, regional penetration, channel effectiveness and expanding our serve industries. All areas are showing initial signs of progress especially in the second-tier product range in the industrial tools base. Our Simplex and Larzep brands are beginning to show share gains, and we are adding new distribution in two regions. The strategy includes differentiated products with price points designed to address markets not covered by any impact. We also expect margins to be similar of impact as a cost structure has been set to meet the market requirements. In summary, we expect a true incremental sales growth from our second-tier product range. Overall, I am pleased with the progress in all of our strategy and deployment which is our best tool for top line growth in a very challenging market. Moving on to Slide 13 and an update on the macroeconomic factors we are currently facing. Oil prices trended up on plant OPEC and non-OPEC production customer -- the mark needs discipline to reduce oversupply and maintain price consistency. We continue to remain focused on maintenance especially in those regions where production cost may facilitate increased activity. Off-highway mobile equipment demand notably agriculture remains week, manufactures continue to reduce the dealer inventory; however, we believe we were closer to the end of the destocking with good plant itself to production rate increases in the later part of our fiscal year. Commodity markets are increasing on a year-to-date basis, primarily metals are up between 20% and 60%. This is really a cautious sign of global market growth and increased consumption. The general industrial market is stabilized and is reflecting easier comparisons, but shows little signs of demand growth. The industrial distributors anecdotally commenting on improved optimism given it well and other commodity prices increasing and potential infrastructure spend in the U.S. However, there is not translated to an actual other activity. In the vehicular market, China on-road truck is very robust supported by overloading, regulations enforcements. However, European trucks saw its first monthly registration decline in October after nearly two years of growth. Going forward, we expect this market to flatten. Moving on the Slide 14, market dynamics are consistent with the expectation we projected in our fiscal year and therefore we are maintaining our 2017 core guidance by segments. As earlier stated, we are executing our growth strategies with the objectives of outpacing the market conditions. So, moving on to Slide 15, we are maintaining our sales guidance range for 2017 of 1.75 billion to 1.125 billion, but we have increased our EPS guidance by $0.10 a share to a $1.10 to a $1.30. The $0.10 a share increase as a result of first quarter performance and initiatives that are anticipated to reduce the current year tax rate. Our restructuring projects are on track while there are minor puts and takes within the various underlying businesses, we do not currently expect much variation from the original guidance range. We continue to expect free cash flow of approximately 85 to 95 million for the fiscal year. The second quarter is typically our weakest of the year and we are expecting sales in the range of 250 million to 260 million with EPS of $0.08 to $0.13 a share. Slide 16 illustrates the seasonal flow and the impact of holiday shutdowns and lower service utilization. The EPS rebound on the back half as the year is amplified by lower tax rate, core sales growth, and completed restructuring projects. Both Q2 and full year guidance exclude restructuring, transition charges and any future acquisitions or divestitures. In closing, I'm sure you picked up at the theme of the day as expected. Actuant met its commitments for the first quarter and I am pleased with our progress in driving a performance based culture. Again, I'd like to thank Andy for his leadership and distinguished service to Actuant. He developed truly strong financial organization and a foundation for the Company. And finally, I'd like to wish all of a very safe and happy holiday season. Operator, with that, let's open it up for Q&A.

Thank you. [Operator Instructions] And our first question comes from the line of Alison Poliank with Wells Fargo. Please proceed with your question.

The industrial growth strategy Randy that you outlined, could you help us understand, I mean is it, you had talked about incremental growth. Do you expect to see that in the back half which is giving you some comfort or is it more sort of fiscal '18, and any ability to sort of quantify what you would expect in terms of above market growth with that?

As we talked about in the Investor Meeting, we have a lot of projects that are designed to drive growth, and the objectives always to have enough of them that offset any market condition. And what where we're seeing some improvement obviously is on our second-tier brand, and in the fourth quarter, I'm really hopeful we're going to start seeing some incremental sales out of that. Secondly, we’re driving some things in our Asia-Pacific market, but I really believe we're going to start yielding some excellent growth. And in certainly our coverage strategy in North America and in Europe, we're trying to get a higher concentration of feet on the ground to better cover these markets. All of these things are designed to give us incremental sales volume and part of that is contemplated in our third and fourth quarter.

Great, thank you, and then if I remember correctly last quarter you highlighted potentially 25 to 50 basis points of margin expansion this year. Are you still comfortable with that range?

Yes, I think we're still targeting that same type as it goes.

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

Let's start with maybe sequentially moving into the back half. What would you anticipate incremental profits to be for each of the segments been relative the detrimental this past quarter, energy was quite weak and the others were kind of in the mid-20, so what should we think about once we start to get some volume?

I don't think we're going to provide it by segment, I mean our overall in terms of segment by quarter. Overall, what we've consistently said with our business is the Industrial segment has got 40% to 50% normal incremental margins, Energy is 30% to 40% and Engineered Solutions would be more in the 20% range. Some of that's turned out instead when you look at the back half to year because restructuring savings are coming in a couple of these segments, and that'll have quite impact in Engineered Solutions in particular. So, we've got a lot of restructuring programs in place some of which will be benefitting Q3, more of them coming through in Q4, from savings standpoint but clearly there are some decent incremental margins coming through the back half, the year on this line.

And I think you can gather from our focus on industrial that we know that that's where the biggest increments can come from. So, we put…

Absolutely, from a mix standpoint, we'll be helped. Because we're anticipating growth in Industrial, as Randy mentioned in the back half of the year, and that will help from an overall mix because it's highest margin business.

And then as my follow-up it's kind of more philosophical, at your Analyst Day, we were sort of surprised when you issued EPS growth targets of 15% to 20% based on an estimate of this year's earnings, right, because we've never seen that before usually companies begin with the prior year and actual year as a base. But now you've raised '17 estimate which makes that 15% to 20% growth even more difficult. Can you just talk about philosophically why you chose to use 2017 estimates as your base for the five-year outlook?

And I guess I would -- we built up certainly the next five years based on what we thought 2017 would be, 2018 would be, but when we're talking about 15% to 20% EPS growth that includes '17. So that is coming off of '17, that is coming off of the growth there. So, I'm not quite sure where you're coming from I guess, on your question on that, because we clearly are looking at a five-year CAGR not off of '17, but off of '16.

Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Please proceed with your question.

So, you've mentioned kind of the OPEC's cuts, and we've seen crude kind of bounced here. Just any tone change within any of the businesses on that move? And then maybe just on the Hydratight refinery business, we're hearing chatter that maybe you're going to start to see some normalization in refinery turnarounds maybe just comment on what you've hearing not anecdotally there?

I think the thing that the OPEC move is very positive, and you saw the nice balance on bad crude and standard crudes, and it really is a very positive move for us. And one thing you keep in mind that U.S. refineries is relatively small for us. We do refine a return around, but suddenly it less than 5%, as we look at the global footprint, but I will tell you that the idea of curtailing productions particularly in the Middle East means that they have more maintenance hours available. And so, we do think that that's going to lend itself to a little bit in increase in the maintenance activity in some of the Middle East markets. And so where we haven’t seen any yet, we see some nine code activity. But I do think that's going to help. Certainly, it is the great move by OPEC to single that and the non-OPEC participants to come in line. The key is as we have to make sure that U.S. producers don’t go to full speed again and because if they, they can damage it and drag the price down. So, it is on demand, but let's us keep an eye on it. We need at least two or three quarters of consistency for to seek.

Okay, great. And then Andy, I think the concern last quarter maybe still if the concern is kind of the backend loaded nature of the year. Can you speak to two things on that; one, maybe give us the tax cadence by quarter first half or second half? And then, I think you called out restructuring savings of 3 million to 5 million incremental most of that would be back half? Is there more savings in their? Or kind of how does that flush out for first half and second half? Thanks.

The savings are all backend loaded in terms of the restructuring on that once we complete two consolidations that are schedule one to wrap-up in at the end of the second quarter another one to wrap-up at the end of the third quarter those would be coming on. We will put some new restricting activities and we certainly alluded to that on our last call, but some of those will be more each in savings as opposed to 2017 savings. So, it won't necessarily take those into account. In terms of the tax cadence, the rates clearly will be higher in the first half of the year than the second half of the year, as you can just see in our overall guidance that we laid out, in the second quarter we've called for the 5% to 10% tax rates versus for the full-year, we're probably looking a lot of mid-single digits probably 2% to 5%, 2% to 6% range for the years. So what is means is the tax rate will be lower in the back half of the year than you've got in the front half of the year and that will definitely benefits kind of that or accounts for some of the backend loading if you will from an EPS standpoint.

Our next question comes from the line of Scott Graham with Bank of Montreal. Please proceed with your question.

First of all, Andy, congratulations distinguish carrier as CFO of this company. I wanted to really kind of talk about two things. The first is kind of how mix it seems to be affecting a lot of the business. Could you kind of go through mix by segment just the overarching elements?

Okay. Yes. So, it's within industrial obviously the Enerpac Business, the Enerpac IT Business in particulars was the highest margin business in the segments whereas IS is behind that. Precision-Hayes is more in line with our IS is. So it's lower -- clearly lower than base Enerpac and Precision-Hayes was the business within the segment that showed some decent growth in the quarter and we expected to continue to grow going forward. The other comment that isn’t probably front to mind is large that we acquired that in spring of last year is small, but clearly the market is that being came in with or not at 30% EBITDA margins like the base IT business here. So you get some margin headwind that has results of that. There is also some modest differences by geographies of course where the profit is made within Enerpac IT is an example. And we do very well in the Americas relative to rest of the world. So that also comes into play. If we move into the energy segments, in the highest incremental decremental margins by far in this business belong to our rental product lines first in four most of the Viking and with that business being off considerably in the -- on the year-over-year basis, because we are still up against one of the really strong quarters of the run that we have in fiscal '15 with the business. It is the decrementals that are literally are 80% and 90%. So that ways on it. Hydratight rental business similar situation, not quite as much as of an impact because of revenues, the volume isn’t quite as high. And then Hydratight margins would be North of Cortland overall. Moving to the Engineering Solution segment, what we got going on there is that our highest margin business is within that segment being our ag exposure as well as some of the cost control, maximum effect exposure. Those are the businesses that are probably still -- they are down the most right now from a revenue standpoint whereas our more stable business like automotive doesn’t generate great margins and truck decent growth, but again the margins are not as robust as what you see in the energy. So, there are just different margins by end markets even within some of these individual businesses because the general rule that's kind of laid the land.

Hugely helpful. Thank you. And if you could, sort of the similar way, if you look at the Energy and Engineering Solutions some margins sort of on a year-over-year basis, would you kind of bucket sort of the bridge in Energy, the large energy margin decline. Is that mostly Hydratight?

If your question was -- let me just ask this -- is your question was a majority of the margin decline in energy this quarter? Was that a result of Hydratight?

I know that it's a volume problem and I know that it's a mix issue certainly as you just led out. But what I am saying is that we kind of look at a little differently, 700s basis point decline. Would you say that a sort of more that was hydro type, that’s the biggest piece?

I would say half of it is Hydratight, the other half would be the volume decline in the other business more slanted toward Viking because of those these 80% to 90% decrementals. Viking was that much down considerably in the quarter. All rental revenue that has quite an impact on it despite cost reductions we had.

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

All right, happy holidays everyone. Andy, on my behalf as well best of luck going forward, it's been a real pleasure working with you over the years, and really I was going to start with a question on earnings progression, but Jeff stole it from me. So I guess I'm going to have to ask about something else. And I guess my question is really around the tax rate where you certainly have done a remarkable job with the tax rate over the last few years. But for me, I'm not frankly really understanding how Actuant can generate low the tax rate as it does and whether or not that's in any way sustainable going forward, ex any changes obviously that Congress might implement?

So, our guidance going into the year was roughly 15% for the full year, knows the year a little bit backend loaded as far as with the lower rates in that. In last year, we also had a similar situation, we went into the year having spent 70% margins excuse me not margins but tax rate and we came in much lower. Unfortunately over the last two to three years some of the reason the tax rate is low is we have six credits out there that don't change with profitability levels, but with volume and what not, so some of those have bigger impact on the overall tax rate taking it down than you have in a period of growing profits. That's part of the situation but the reality is there's substantial work behind the scenes going on by the whole finance group to tax group, and trying to look at ways how do we reduce our tax liability just the way the purchasing guys? How do I reduce my cost quality guys? How do I reduce cost of non conformance? And those sorts of things, so we have a large tax group that is focused on this thing there is nothing at all in this that I am uncomfortable with at all from a tax standpoint in terms of audit risk or anything like that, on it just as part of this is a favorable structures that we got in place, we got because a lot of acquisitions are acquisitions allow you to reorganize your business, restructure your business. The stronger dollar has helped us well. We've had some savings related to that from its ex play as well. So there are a lot of different levers that are played. But what I want to do is bring you back to the strategic plan that we laid out a couple of months ago. I had a tax already built in for that whole stretch 15 to 20% and I absolutely believe that we will be able to deliver a 15 to 20% effective tax rate going forward. A 2 to 5% tax rate that I'm talking about right now is that sustainable over the next five years? Heck, no. It isn't but high teens is sustainable for this business that's what was baked into the guidance that's what was baked in our five year targets and what not and I'm very comfortable that we'll be able to continue to do that going forward.

But again not to parse this too finally, but my understanding from what you just said is that if for some reason the profitability doesn't improve meaningfully given the way you're structured you continue to have the sort of tax tailwinds given your credit situation?

We probably won't have as much of them as we've had in the past. For some of the levers that we pulled, we won't be up to do them going forward. But again I'm very comfortable with our teams actually going forward with this business. Again when you look at where our profits are, half of revenues were outside of North America, the U.S. by far, by far and not even close is our highest tax jurisdiction we're in. And we're in a lot of different markets where the tax rates worth our effective rates there are 10% or less. So, that's having quite an impact on our overall mix here.

And then my follow-up is on Energy. There're a lot of moving pieces here given all the projects you had last year obviously Viking and Cortland been down, as you're looking going forward is it fair to assume that Viking and Cortland are now at a point where sequentially these business can stabilize? Or do you expect to see continued erosion and I'm talking ex-seasonality here?

Well, let's see with Viking first, because that's the most stressed business, we think we're at a stable revenue stream on Viking, there're a few spots in the world where there're semisubmersible platforms in the water and we've those projects. So, we're running the business for cash flow purpose as of this point making sure we're covering our DNA on it. It is a stressed business, there's no way to characterize it any differently. It still has very upstream product and service that we provide to the industry. Cortland is in much better shape. We've been actively pursuing ways to expand where we sell product and I can tell you that our percentages of non oil and gas revenues has grown substantially in that business. In fact we've broken the 50% mark due to as real strong efforts by that team. It would be great to see some additional subsea umbilical work. That sort of thing it's going to pick up first. The seismic work, I don't see that coming in the short-term. That could be multiple years out. So, we know that if we can manage how we structure the sales in that business and attack non-oil and-gas segments, that business is going to be profitable and do pretty well.

But just to be clear in your guidance, in your outlook for this segment, do you have Viking, Cortland sequentially getting better, worse, or flat?

From a seasonality standpoint, they will follow the normal trend. So, when we're talking about stabilizing or whatnot, that is the pace, right, you still will see year-over-year declines in Viking, absolutely for the next couple of quarters. We hit the first really bad one in the fourth quarter. This would be our second quarter, so we get another couple of quarters here before. The trailing 12 month number doesn't decline. So, that business is going to half here to year-over-year and we talked about that. That's not the good news on it, so yes you'll continue to see core sales being pretty nasty comps in a couple of these businesses. But sequentially, we expect Cortland to pick up as they normally do in the back half of the year, and you can see it on Slide 14 in our deck here as far as what the expectations are overall for the segment. But, some stuff got pushed out of Cortland from quarter one into quarter two and quarter three. So, I think little bit hectic there, but we do believe the pace on that business is stabilized as Randy said on the oil and gas side.

Our next question comes from the line of Charley Brady with SunTrust Robinson Humphrey. Please proceed with your question.

I want to clarify your commentary on the European truck which as you noted was down for the first time and about 21 months in October. Is your expectation embedding your guidance? Did I hear you correctly you are expecting that Euro truck flat in 2017?

Yes, it should flatten out. And if you look at how the European truck market trended over the last couple years, it is gone through a replacement cycle. So, we are on the backside of that replacement cycle. So, we are expecting that to soften as we go through the year.

If Europe will soften as the year goes along, the rest of the world tied truck is growing. So, overall truck business will be flattish to down I hear, but Europe we do expect to continue to moderate as we go forward.

And I mentioned that the Chinese truck industry is doing quite well.

How much of truck ES is China?

About 20% to 25%.

All right, that's helpful. And just one more follow-up from me just. Can you comment on what's you are seeing if anything on raw material costs but particularly what steel cost have done?

We're watching it very closely in fact we just had a review on the producer price indexes and various raw material index, as we haven’t seen any substantial increases from supplier yes they are making noises along that line in some markets but no major price increases, but we got to keep an eye on that one because of the copper and iron ore and everything on the it's only a matter of time before we get some pressure there.

Your guidance is not embedding an assumption of increased raws from where we are kind of currently?

There is some assumption on a going forward, but a lot of it is muted because of the stronger dollar. I mean, we are buying a lot other stuff coming out of Asia as the RMB is now weakening against the dollar. We are going to be getting some benefit from that going the other away, so it's not a significant factor of in our guidance for the year.

[Operator Instructions] And our next question comes from the line of Justin Bergner with Gabelli & Company. Please proceed with your question.

Good morning everyone, and, Andy, congratulations on your Actuant career and looking forward to future endeavors. My first question just relates to the sequential second-quarter earnings guidance. If I look at the last five years, the second quarter was about $0.10 per share below the first quarter, but the sales declined sequentially about 20 million from 1Q to 2Q on average over the last five years. I guess, this year, you are expecting sales to decline about 10 million sequentially, but you are expecting a similar $0.10 earnings decline. So, are there any sequential margin headwinds looking into the second quarter versus the first quarter and a unique seasonality this year that would explain what seems like a slightly weaker sequential bridge?

The biggest impact is mix in the various businesses.

Okay. And where might the -- I guess where would the mix be more challenging in the second quarter than in the first quarter?

Well, particularly in the energy your mix is as you track into the second quarter in Energy, we wind up a lot of underutilized labor. And so what that does is, it puts pressure on your margins and you have an underutilized labor components, and quite honestly that we have seen that in the past. But since last year, we had most of those people working through finishing up those projects with the sure labor utilization was much higher at last year. So here is the issue, when you hire people and you train them to level of training, we do at Hydratight, you don’t want to lose them. So you do have to observe some of those costs as you prepare for the next job.

Thank you. That’s actually very helpful perspective. Secondly, on the tax rate, is the benefit in the current fiscal year on the tax rate only on the adjusted tax rate, or is it also on the cash tax rate? In other words, is the free cash flow guide now going to be boosted from a lower cash tax rate?

Yes, we don’t have -- it's a great question. We do not have baked into our free cash flow that the reason being as we expect the benefit of this lower rate to be coming through next year's cash taxes as opposed to this year. So, you will see a benefit next year forward as opposed to this year. On the cash flow standpoint but the P&L benefit as this year in a tax rate.

And Ms. Bauer, there are no further questions. At this time, I’ll turn the call back to you. Please continue with your closing remarks.

Great, well thanks for joining our call today. Just a reminder for your planning, our Q2 call will be held on March 22nd. I’ll be around all day to answer any follow-up questions you have. And you have happy holidays everybody. Bye-bye.

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