Q4 2019 Earnings Call

September 26, 2019

Ladies and gentlemen, thank you for standing by welcome to the Enerpac two groups fourth quarter earnings Conference call. During this presentation, all participants will be analysts and only mode. Afterwards, we will conduct a question answer session.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Enerpac Tool Group's Q4 Earnings Conference Call. During this presentation, all participants will be in a listen-only mode. Afterward, we will conduct a question-and-answer session. At that time, if you have a question, please press the star followed by the number one on your telephone keypad. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded Thursday, 26 September 2019. It is now my pleasure to turn the conference over to Barbara Bolens, VP, Corporate Strategy, Investor Relations. Thank you, Ms. Bolens. You may begin.

At that time, if you have a question. Please press the star followed by the number one on your telephone keypad.

If at any time during the conference you need to reach an operator, Please press star zero.

A reminder, this conference is being recorded Thursday September 26, 2019, there's now my pleasure to turn the conference over to par Poland VP corporate strategy Investor relations, they give us but once you may begin.

Barbara Bolens: Thanks, Donna. Good morning, everyone, and thank you for joining us on our Q4 2019 earnings conference call. On the call today to present the company's results are Randy Baker, President and Chief Executive Officer, Rick Dillon, Chief Financial Officer. Also on the call with us today are Fabrizio Rasetti, General Counsel, Bryan Johnson, Chief Accounting Officer, and Bobbi Belstner, Director of Investor Relations and Corporate Strategy. Our earnings release and slide presentation for today's call are available on our website at enerpactoolgroup.com in the Investor section. We are also recording this call, and we'll archive it on our website. Please go to slide 2. During today's call, we will reference non-GAAP measures such as adjusted profit margins and adjusted earnings. You can find a reconciliation of non-GAAP measures to GAAP in the schedules to this morning's release.

Thanks, Don Good morning, everyone. Thank you for joining on joining us on our fourth quarter 2019 earnings Conference call.

On the call today to present, the company's results are Randy Baker, President Chief Executive Officer.

Rick Dillon.

Chief Financial Officer.

Also on the call with US today, our <unk> General Counsel, Brian Johnson, Chief Accounting Officer, and Bobby Calciner director of Investor Relations and corporate strategy.

Earnings release in slide presentation for today's call are available on our website.

<unk> Dot com and the Investor section. We are also recording this call archived on our website.

Please go to slide two.

During today's call, we will reference non-GAAP measures such as adjusted profit margins that adjusted earnings.

You can find a reconciliation of non-GAAP measures to GAAP in the schedules to this mornings release.

Barbara Bolens: We would also like to remind you that we will be making statements in today's call and presentation that are not historical facts and are considered forward-looking statements. We are making those statements pursuant to the safe harbor provisions of federal securities law. Please see our SEC filings for the risks and other factors that may cause actual results to differ materially from forecasts, anticipated results, or other forward-looking statements. Consistent with how we have conducted prior calls, we ask that you follow our one question, one follow-up practice in order to keep today's call to an hour and also allow us to answer, address questions from as many participants as possible. Also as a reminder, we are now reporting continuing operations financial results following our announcement in July that we have reached an agreement to divest the EC&S segment.

We would also like to remind you that we'll be making statements in today's call every situation that are not historical facts that are considered forward looking statements.

We're making those statements pursuant to safe Harbor provisions of Federal Securities Law.

Please see our actually see filings for the risks and other factors that may cause actual results to differ materially from forecast anticipated results for other forward looking statements.

Consistent with how we have conducted prior calls we ask that you follow our one question once all of practice in order to keep today's call to an hour and also a lot of satcher address questions from as many participants as possible.

Also as a reminder.

We're now reporting continuing operations financial results.

Following our announcement in July that we have reached an agreement to divest DCNS segment.

Barbara Bolens: As a result, all financial information reported to date, including fiscal 2020 guidance, will be in the continuing operations format. Now I will turn the call over to Randy.

As a result, all financial information reported today.

During fiscal 2000 guidance will be on the continuing operations formats.

I will turn the call over to Randy X Bourbon and good morning, everybody where to start today on slide three but before I review the quarter and full year results I want one announced one of the most pivotal data Center company history.

Randy Baker: Thanks, Barb, and good morning, everybody. We're gonna start today on slide 3, but before I review the quarter and the full year results, I want to announce one of the most pivotal events in our company history. This week, we officially launched the Enerpac Tool Group and the new stock symbol, EPAC, which is clearly symbolic of our new company name and commitment to the tool industry. This is the culmination of multiple years of hard work to transform Actuant into a top-performing pure-play tool company and to set the stage for our future. Enerpac is a premium brand with 110 years of history, providing high-precision, reliable, and safe products to a demanding industry. Our new company serves both the light and heavy industrial tool market, spanning a total servable customer base of over $8 billion.

Last week, we officially launched the Enerpac tool group and the new stocks at bolt you pack, which is clearly symbolic of a new company name and commitment to the tool industry.

This is the culmination of multiple years of hard work to transform actuant into a top performing pure play tool company and to set the stage for future.

Enerpac is a premium brand was 110 years of history, providing high precision reliable and safe products to a demanding industry.

Our new company serves both light and heavy industrial tool market spanning a total circuits servable customer base of over $8 billion.

Randy Baker: This provides ample space for organic growth and strategic acquisitions while delivering superior margins, cash flow, and ultimately, shareholder returns. We are a company focused on 4 product families, 14 tool categories, and serving 13 vertical industries. The breadth of our product coverage and served industries creates an environment for stable growth and lower cyclicality. The 4 tool categories include general industrial, bolting technology, hydraulic pumps, and lifting systems, which are the focus of our product development and acquisitions. The general industrial tool area has the widest variety of applications including aerospace, power generation, manufacturing, and many more. Bolting technology is also a period of growth, and in the past 2 years, we have increased market share through new products and increased marketing. Lastly, hydraulic pumps and lifting systems have always been a cornerstone of Enerpac through their commanding market share and innovation.

Just provides ample space for organic growth and strategic acquisitions, while delivering superior margins cash flow and ultimately shareholder returns.

We're a company focused on for product families 14 tool categories, conserving 13 vertical industries, the breadth of our product coverage in Serbia industries creates an environment for stable gross and lower cyclicality.

For two what categories include general industrial Bolting technology hydraulic pumps and lifting systems, which are the focus of our product development and acquisitions.

The general industrial tool area. It has the widest variety of applications, including aerospace power generation manufacturing and many more.

Bolting technology is also a curious growth and in the past two years, we have increased market share through new products and increased marketing.

Lastly, hydraulic hamzah lifting systems always been a cornerstone of enerpac through their commanding market share in innovation.

Randy Baker: The Enerpac Tool Group is a market leader and will never compromise in our effort to supply the highest quality and precision tools in the industry. Moving over to slide four. Enerpac is a high-quality business comprised of three sales categories: Industrial Tools & Services, which is comprised of rental operations and manpower. Our strategy to deliver growth above market conditions remain consistent for the company. Given the breadth of our product line and wide participation in the thirteen vertical industries, we are well-positioned for continued organic growth. More than 80% of our sales emanates from the high-margin tool and rental sales, which provides an excellent platform for profitability. Second, our investment in new product development is beginning to yield results in the form of higher sales contribution and is approaching our goal of 10%.

The Enerpac tool group is a market leader and we'll never compromise in our effort to supply the highest quality and precision tools in the industry.

Now moving over to slide for.

Enerpac is a high quality business comprised of three sales categories industrial tools and service, which is comprised of rental operations and manpower.

Our strategy to deliver growth above market conditions remain consistent for the company given the breadth of product line in participation widely in the 13 vertical industries, we are well positioned for continued organic growth.

We're like 80% of our sales emanates from the high margin tool and rental sales, which provides an excellent product form for profitability.

Second our investment in new product development is beginning to yield result in the form of higher sales contribution and is approaching our goal of 10%.

Randy Baker: Lastly, our efforts over the last three years to create a more effective sales force for serving our more than 2,000 dealers worldwide has been successful. From an operations perspective, the Enerpac Tool Group is comprised of 13 manufacturing locations positioned to serve the local markets. With any company, the key to our success starts with our engaged and dedicated employees committed to delivering the highest precision in quality tools in the industry. As I've stated in prior earnings calls, our capital allocation priorities have not changed. We are firmly committed to investing in organic growth, maintaining a strong balance sheet, and making strategic acquisitions which reside in the tool growth plans. Lastly, we'll return capital to shareholders through opportunistic share buybacks, which we achieved in our Q4 through the purchase of over 1 million shares.

Lastly, our effort over the last three years to create a more effective sales force for serving more than 2000 dealers worldwide has been successful.

In operations perspective, the Enerpac tool group is comprised of 13 manufacturing locations position to serve local markets and it with any company. The key to worst success starts with are engaged in dedicated employees committed to delivering the highest precision in quality tools in the industry.

As I've stated in prior earnings call our capital allocation priorities have not changed we are from firmly committed didn't dusted inorganic growth maintaining a strong balance sheet in making strategic acquisitions, which reside in the tool growth plans and lastly, we'll return capital to shareholders through.

Opportunistic share buybacks, which we achieved in our fourth quarter through the purchase of over a million shares.

Randy Baker: We'll provide more clarity into our long-term growth strategy during our investor day later this year. However, we are consistent in our approach of achieving organic growth, maintaining world-class operations, making disciplined acquisitions, and strict adherence to our capital allocation strategy. Now turning over to slide 5. Our Q4 demand was weaker than expected, impacted by the developing global economic uncertainty. Our dealers are becoming more conservative, driven by slower retail demand. Secondly, the Q4 was impacted by our efforts to reduce low-margin service sales, which we announced as part of our ITS restructuring earlier this year, and the seasonally lower Middle East market. As a result, core sales declined by 3% in the quarter. While the lower sales volume impacted the quarter, our adjusted operating margin maintained steady versus last year.

Well provide more clarity into our long term growth strategy during Investor Day. Later this year. However, we are consistent in our approach of achieving achieving organic growth maintaining world class operations, making disciplined acquisitions and strict adherence to our capital allocation strategy.

Now turning over to slide five.

Our fourth quarter demand was weaker than expected impacted by developing global economic uncertainty our dealers are becoming more conservative driven by slower retail and then secondly, the fourth quarter was impacted by our efforts to reduce low margin service sales, which we announced as part of our ideas restructuring earlier this year and the.

Seasonally lower middle East market as a result core sales declined by 3% in the quarter.

While the lower sales volume impacted the quarter, our adjusted operating margin maintained steady versus last year.

Randy Baker: EPS was also flat to last year, and both results were driven by actions we took to restructure the business, reduce our costs, and deploy cash to reduce interest expense. Our restructuring actions, which we initiated in Q3, will improve our cost position and positively impact incremental margins going forward should the economy continue to slow. Lastly, we are taking swift actions to reduce inventory to align with the lower volume expectations. Now turning over to slide six. Our fiscal 2019 was a very successful year in terms of growth, profitability expansion, and execution of our portfolio rationalization strategy. Core sales grew by 4% with solid performance from most product lines and regions. Operating profit increased by 190 basis points with a very high incremental margin of 102%.

Yes was also flat to last year and both results were driven by actions. We took two restructured the business reduce our costs and deploy cash to reduce interest expense.

Our restructuring actions what should we initiated in the third quarter will improve our cost position and positively impact decremental margins going forward should the economy continue to slow.

Lastly, we were taking swift actions to reduce inventory to align with a lower volume expectations.

Now turning over to slide six.

Fiscal 2019 was a very successful year in terms of gross profitability expansion and the execution of our portfolio rationalization strategy.

Core sales grew by 4% with solid performance from most product lines and regions operating profit increased by 190 basis points.

It's a very high incremental margin of 102%.

Randy Baker: The higher profitability translated to EPS growth of almost 50%, bringing us one step closer to our long-term objectives. 2019 was our best new product introduction in many years. We released more than 30 new products to the market, which further advanced us towards our 10% contribution goal. Our strategic objective of delivering growth above the prevailing market condition was achieved through our intense sales focus and commitment to new product introductions. As I earlier stated, the launch of the new Enerpac Tool Group is the culmination of our portfolio strategy execution. During the year, we sold two smaller businesses in preparation for the Engineered Components & Systems segment's sale. We are continuing the separation process, and we remain confident the sale closure will occur in the calendar Q4 of 2019.

The higher profitability translated to EPS growth of almost 50%, bringing us one step closer to our long term objectives.

Thousand 19 was our best best New product introduction in many years, we released more than 30, new products to the market, which further advances towards our 10% contribution goal our strategic objective of delivering growth above the prevailing market conditions was achieved through our intense sales focus and commitment.

New product introductions.

As earlier stated the launch of the new Enerpac tool group is the culmination of our portfolio strategy execution. During the year, we sold two smaller business in preparation for the engineered components and systems segment sales.

We are continuing to separation process and we remain confident the sale closure will occur in the calendar fourth quarter of 2019.

Overall, we're very pleased with the continued progress towards becoming a top performing pure play tool company.

Randy Baker: Overall, we're very pleased with the continued progress towards becoming a top performing pure-play tool company. Now I'll turn the call over to Rick Dillon to go through the details on the quarter, then I'll come back with a market update and our guidance. Rick?

Now I'll turn the call over to Rick I want to go through the details of the quarter, then I'll come back with the market update on our guidance Rick.

Rick Dillon: Thanks, Randy, and good morning, everyone. Let's take a deeper dive into our adjusted Q4 results. Just a quick note that a reconciliation of the one-time items excluded from our adjusted results has been included in the appendix. If you turn to slide 7, fiscal 2019 Q4 core sales decreased by 3%. Tools and service sales were down 4%, partially offset by growth in the Cortland medical business. The impact from the stronger dollar reduced net sales by an additional 2%. If we turn to slide 8, tools and service core sales declined 4%. It is comprised of flattish core tool products, a low- to mid-single-digit decline in service, and a double-digit decline in heavy lift products.

Thanks, Randy and good morning, everyone. So, let's take a deeper dive into our adjusted fourth quarter results. Just a quick note that a reconciliation of the onetime items excluded from our adjusted results has been included in the appendix. So if you turn to slide seven.

Fiscal 2019 fourth quarter core sales decreased by 3%.

Tools and service sales were down 4%, partially offset by growth in the Cortland medical business the impact from the stronger dollar reduce net sales by an additional 2%.

If we turn to slide eight tools and services core sales declined 4%.

This comprise a flattish core tool products, a low to mid single digit decline in service and a double digit decline and heavy lift products.

In North America, our largest region product sales demand decelerated during the quarter ended up flat to prior year and this is in line with the U.S. manufacturing indicators, we believe our distributors are being more cautious on inventory levels due to the uncertainty of market conditions.

Rick Dillon: In North America, our largest region, product sales demand decelerated during the quarter and ended up flat to prior year, and this is in line with the US manufacturing indicators. We believe our distributors are being more cautious on inventory levels due to the uncertainty of market conditions. Product sales in Europe were down low to mid-single digits as Brexit and other geopolitical issues weighed heavily on demand. The rest of the world was also relatively flat. Service was down 3%, with the largest driver being the strategic actions we took earlier this year to exit our less profitable, more commoditized North American service work. The top-line impact was a little stronger than anticipated as we exited these activities during the quarter, but the impact on profit was favorable.

Product sales in Europe for down low to mid single digits as Brexit another geopolitical issues weighed heavily on demand. The rest of world was also relatively flat.

Service was down 3%, but the largest driver being the strategic actions. We took earlier this year to exit are less profitable more commoditized commoditize, North American service work.

The top line impact was a little stronger than anticipated as we exit these activities during the quarter, but the impact on profit was favorable as expected. The large service projects that drove significant oversight service growth. This year were completed in a third quarter. It contributes to the fourth quarter year over year and sequential decline.

Rick Dillon: As expected, the large service projects that drove significant oversized service growth this year were completed in Q3 and contributes to the Q4 year over year and sequential decline. Heavy lift sales were also down in the quarter as we discontinued the large custom products. These declines were partially offset by pricing, which covered the impact of tariff and other commodity costs. We launched 7 new products in the quarter, bringing the full year total to over 30. As Randy mentioned, we continue to get closer to our target of 10% of sales from products introduced in the last three years as we ended the year over 7%. As noted on slide 7, despite the reduction in core sales, our adjusted operating profit held steady. Let's walk through the key drivers turning to slide 9.

Having the sales were also down in the quarter as we just continue the large custom products.

These declines were partially offset by pricing, which covered the impact of tariff and other commodity costs, we like seven new products in the quarter, bringing the full year total to over 30 as Randy mentioned, we continue to closer to our target of 10% of cells from products introduced the last few years as we ended the year over 7%.

As noted on slide seven despite the reduction of core sales our adjusted operating profit held steady.

Lets walk through the key drivers turning to slide right.

Rick Dillon: As expected, the North American service strategic exits and restructuring provided an immediate benefit to operating profit, partially offsetting other market-driven volume declines. Pricing net of tariffs and other known commodity cost increases was slightly positive. As far as other cost activity in the quarter, the benefit from reduced incentive compensation expense offset lower productivity, increased medical costs, and lower bad debt recoveries in the current quarter. The decremental profit margin on the sales volume decline was approximately 13%, reflecting the service strategic exits and the elimination of the lower heavy lift custom project work. Continuing operations includes the $13 million of EC&S corporate costs. Excluding these costs, our operating profit margin for 2019 would be approximately 14%.

As expected to North American service strategic exits that restructuring providing immediate benefit to operating profit, partially offset offsetting other market driven by declines.

I think Medicare and other non commodity cost increases was slightly positive.

As far as other cost activity in the quarter the benefit from reduced incentive compensation expense offset lower productivity increased medical costs and lower bad debt recoveries and the current quarter.

The decremental profit margin on the sales volume declined by approximately 13%, reflecting that service strategic exit.

And the elimination of the lower heavy lift custom project.

Okay.

Continuing operations includes that $13 million Vcs corporate costs. Excluding these costs are operating profit margin for 2019, but being approximately 14%.

If you turn to slide 10, the overall adjusted EBIT to story for the quarter since in the same as operating profit. So we won't spend any time here.

Rick Dillon: If you turn to slide 10, the overall adjusted EBITDA story for the quarter is essentially the same as operating profits, so we won't spend any time here. Moving on to slide 11, adjusted EPS for Q2 was $0.21, in line with last year. Tax expense was lower than expected, primarily as a result of lower European earnings than expected, driven by core sales declines and resulting in lower GILTI tax. Slide 12 is our normal segment slide. Because we're reporting continuing operations only, we just included this for comparability purposes, so we won't cover this slide. Slide 13 is our core sales trend for ITS. We have broken out tools, heavy lifting, and service. The tools product trend continues to be relatively stable, and we have seen more fluctuations from both service and heavy lift.

And moving on to Slide 11, adjusted EPS for second quarter was 21 cents inline with last year tax expense was lower than expected primarily as result of lore European earnings.

Unexpected driven by core sales declined and resulting in lower guilty.

Slide 12 in our normal segment slide because we are reporting continuing operations only we just included this on for comparability purposes. So we won't cover the slide slide 13.

As our core sales trend frights, yes, we are broken out too heavy lifting and service the tools product trend continues to be relatively stable and we have seen more fluctuations from both service and having left will provide more information historical product and service performance for the new Enerpac tool group at our Investor Day come.

Rick Dillon: We'll provide more information on historical product and service performance for the new Enerpac Tool Group at our Investor Day coming up. Turning now to liquidity on slide 14. We generated $50 million of cash during the quarter, which was well below our expectations. The key drivers being the lower EBITDA and higher primary working capital for both continuing and discontinued operations. We also saw increased cash restructuring as we accelerated the timing of some of our planned actions. For the full year, we generated $27 million in cash reflective of the Q4 miss. On a year-over-year basis, increased EBITDA and primary working capital improvements from our continuing operations was offset by the large tax refund from the Viking sale received last year, increased cash compensation costs from the fiscal 2018 bonus payout, and essentially no stock option proceeds in the current year.

Yep.

Turning now to liquidity on slide 14.

We generated 50 million of cash during the quarter, which was well below our expectations. The key drivers being the lower EBITDA and higher primary working capital for both continuing and discontinued operations. We also saw increased cash restructuring as we accelerate the timing of some of our planned actions.

For the full year, we generated 27 million in cash reflective of the fourth quarter Miss on a year over year basis increased EBITDA in primary working capital improvements from our continuing operations was offset by the large tax refund from the biking planning received last year increased cash compensation costs from fiscal 2000.

In 18 bonus payout and essentially no stock option proceeds and the current year.

All of these combined with approximately 30 million less cash from the east, Yes business, starting the year and 9 million in cast divestiture costs drove the year over year cash flow reduction.

Rick Dillon: All of these, combined with approximately $30 million less cash from the ECS business during the year and $9 million in cash divestiture costs, drove the year-over-year cash flow reduction. ECS had lower EBITDA, increased working capital, and increased capital expenses. Primary working capital for the ECS business increased $15 million year-over-year. These balances are subject to a post-closing working capital true-up that could potentially result in an increase in the sales proceeds. Working capital management for our continuing operations will remain the area of focus. We ended the year with higher than anticipated levels, specifically in inventory. We anticipate cash flows for fiscal 2020 to be between $50 and $75 million. This guidance range assumes a ten to twenty million dollar reduction in working capital. The impact of lower cash taxes and interest will offset cash restructuring and other divestiture charges.

Yes, and had lower EBITDA increased working capital increased capital expenses primary working capital for the Dcs business increased 15 million year over year. These balances are subject to a post closing were working capital true up that could potentially roughly is all can increase and the sales proceeds.

Working capital management for our continuing operations will remain.

The area of focus we ended the year with higher than anticipated levels specifically in inventory.

We anticipate cash flows for fiscal 2020 to be between 50 and $75 million. This guidance range assumes a 20 attend to 20 million dollar reduction in working capital the impact of lower cash taxes, and interest offset cash restructuring and other divestiture charges capex for next year as expected.

Rick Dillon: CapEx for next year is expected to be approximately $10 million. We ended the quarter with $211 million of cash on hand after buying back just over 1 million shares of stock at a cost of $22 million and prepaying another $14 million on our term loan. In fiscal 2019, we paid down the term loan approximately $72 million. Both all in line with our capital allocation priorities as we manage our balance sheet and opportunistically return capital to our shareholders. Our leverage continues to trend down and now sits at 1.7 times versus 1.9 times in Q4 of 2018. Our balance sheet condition provides us with a lot of flexibility to continue to execute our growth strategy.

To be approximately $10 million.

So we ended the quarter with $211 million a cash on hand after buying back just over 1 million shares of stock at a cost of 22 million and prepaying, another 14 million on our term loan.

In fiscal 2019, we pay down the term loan approximately 72 million.

Both all inline with our capital allocation port priorities as we manage our balance sheet and Opportunistically return capital to our shareholders. Our leverage continues to trend down and now sits at 1.7 time versus 1.9 times in Q4 2018.

Our balance sheet condition provides us with a lot of flexibility to continue to execute our gross status.

Rick Dillon: Before I turn the call back over to Randy, I will walk through the key assumptions behind our fiscal 2020 guidance. With the EC&S divestiture, as well as some of the strategic exits we are planning in the fiscal year, we're providing a little more detail here. First, I'll look at our sales walk on slide 15. The strong dollar seems to be staying with us for the foreseeable future, so we will see a negative impact from the average rate from last year. In addition to the impact from strategic exit of our lower profitable service in North America, we have identified several other non-core product lines we will be exiting during the year. As we discussed last quarter, these product offerings are each relatively small, and they have a negative impact on our overall profit margins.

Before I turn the call back over to Randy I'll walk through the key assumptions behind our fiscal 2020 guidance with the easiest divestiture as well as some of the strategic exits we are planning and its fiscal year, we're fighting a little more detail here.

First I look at.

Our sales walk on slide 15.

The strong dollar seems to be staying with us for the foreseeable future. So we will see a negative impact from the average.

Great from last year.

In addition to the impact from strategic exit of our lower.

Profitable service in North America, we have identified several other noncore product lines, we will be exiting during the year as we discussed last quarter. These product offerings are each relatively small and they have a negative impact on our overall profit margins. These products include sub sea connector strands.

Rick Dillon: These products include subsea connectors, strand jacks, and tie rod cylinders. We expect to complete these divestitures in the H1 of the year and have completed one so far. Collectively, strategic service and product line exits will reduce sales by about $50 million for the year and have a positive impact on operating profit. Using these two changes to anchor the fiscal 2020 starting point, we will guide what we see core sales performance for the ongoing business for 2020. We are expecting the tools market environment to be flat to down low single digits with market performance similar to our Q4. Our NPD and commercial actions will continue to allow us to outperform the market by approximately 200 basis points. We also expect the service market environment to be flat to down low single digits.

And Tyra cylinders, we expect to complete these divestitures in the front half the year and have completed one so far.

Collectively strategic service and product line exits were reduced sales by about $50 million for the year and have a positive impact on operating profit.

Using these two changes to anchor fiscal 20, starting point, we will guy what we see core sales performance for the ongoing business for 2020 [noise].

We are expecting the tools market environment to be flat to down low single digits wood market performance similar to our fourth quarter.

Our NPD and commercial actions will continue to allow us to outperform the market by approximately 200 basis points.

We also expect the service market environment to be flat to down low single digits. The oversight service projects. We had in fiscal 19 are not expected in fiscal 2020, which be the primary driver of the overall decline this will get us to a sales range of $575 million to $600 million for the year.

Rick Dillon: The oversized service projects we had in fiscal 2019 are not expected in fiscal 2020, which will be the primary driver of the overall decline. This will get us to a sales range of $575 to 600 million for the year. If we move on to slide 16, we are expecting a 200 basis point improvement in EBITDA margin in fiscal 2020. The improvement reflects the impact of our strategic decisions on operating margins. We also are anticipating that approximately $9 million of the $13 million EC&S corporate costs remaining in continuing operations will either be reduced by recovery from the TSA or actions taken throughout the year as those services are no longer needed.

If we move on to slide 16.

We are expecting a 200 basis points improvement in EBITDA margin in fiscal 2020.

The approve it reflects the impact of our strategic decisions on operating margins. We also are anticipating that approximately 9 billion of 13 million SCS corporate costs remaining in continuing operations will either be reduced coverage from the tier say or actions taken throughout the year as those services I no longer need. So this is.

Rick Dillon: This assumes $4 million of costs will impact Q1, and the balance of the cost will be offset or eliminated through the balance of the year. From an EPS perspective, we have made the assumption that cash proceeds from the EC&S transaction will be used to pay down the term loan after closing the transaction, reducing interest expense for the year. With that, I'll turn the call back over to Randy.

Since 4 million of costs will impact the first quarter and the balance of the costs will be offset or eliminated through the balance had a year.

From an EPS perspective, we have maybe assumption that cash proceeds from the easiest transaction will be used to pay down the term loan after closing the transaction reducing interest expense for the year.

With that I'll turn the call back over to Randy Thanks, Rick.

Randy Baker: Thanks, Rick. Moving over to slide 17. The general economic drivers changed substantially in Q4. Growth rates in the major markets, including the US and Europe, have reached an inflection point. GDP and PMI indexes are shifting to lower growth rates, which is projected to continue through the near future. Additionally, industry surveys are reflecting a more conservative outlook, resulting in lower inventory and retail forecasts. Vertical industries impacted by these dynamics include industrial maintenance, on- and off-highway vehicle repair, and general manufacturing. Civil construction, aerospace, and oil and gas continue to be healthy, although at a lower growth rate. Rick's fully covered the core sales projections, so I'll move on to the guidance summary on slide 19. 2020 full year guidance is based on the new structure of the new Enerpac Tool Group.

So moving over to slide 17 general economic drivers changed substantially in the fourth quarter.

Growth rates in the major markets, including the U.S. in Europe have reached an inflection point GDP and PMI indexes are shifting to lower growth rates.

Which is projected to continue through the near future. Additionally, industry surveys are reflecting a more conservative outlook, resulting in lower inventory in retail forecasts.

Vertical industry is impacted by these dynamics include industrial maintenance on and off highway vehicle repair and general manufacturer civil construction aerospace and oil gas continue to be healthy, although at a lower growth rate.

[noise] Rick's fully covered the core sales projections, so I'll move on to the guidance summary on slide 19.

2024, your guidance is based on the new structure of the inner New Enerpac tool group has recovered our projections for 2020 include the strategic exits, which has an approximate 55 million dollar impact, but increases profitability, which I want to stress it increases profitability.

Randy Baker: As Rick covered, our projections for 2020 include the strategic exits, which has an approximate $55 million impact, but increases profitability, which I wanna stress. It increases profitability. As a result, the sales will be in the range of $575 to 600 million. Our projected EBITDA will be in the range of $94 to 104 million, and EPS will be in the range of $68 to 81 million. Cash flow is expected to be in the range of $50 to 75 million, and our Q1 range will be $135 to 144 million, with EPS of between $0.08 and $0.12 a share. Our objective in 2020 is clear.

As a result to sales will be in the range of 575 to 600 million our projected EBITDA will be in the range of 94 to 104 million EPS will be in the range of 60 881 million.

Cash flow is expected to be in the range of 50 to 75 million and our first quarter range will be in a 135 to 144 million with EPS of between eight cents and 12 cents a share.

Our objective in 2020 is clear we will continue to execute our tool company strategy, while systematically improving the operating performance of the Enerpac tool group with our ultimate goal of achieving a 20% plus EBITDA margin.

Randy Baker: We will continue to execute our tool company strategy while systematically improving the operating performance of the Enerpac Tool Group with our ultimate goal of achieving a 20%+ EBITDA margin. I'd also like to thank all of our employees and distributors worldwide for their continued commitment to delivering the highest quality tools and services in the industry. Operator Donna, let's open it up for questions.

I'd also like to thank all of our employees and distributors worldwide for their continued commitment to delivering the highest quality tools and services in the industry.

So operator, Donna let's open it up for questions.

Thank you at this time, we will be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad.

Operator: Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask that you limit yourself to one question and one follow-up. You may rejoin the queue if you do have additional questions. Once again, that's star one to register questions at this time. Our first question is coming from Jeffrey Hammond of KeyBanc Capital Markets. Please go ahead.

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First question is coming from Jeff Hammond of Keybanc capital markets. Please go ahead.

Jeffrey Hammond: Hey, good morning, everyone.

Hey, good morning, everyone.

Randy Baker: Good morning, Jeff.

Yes.

Rick Dillon: Good morning.

Jeffrey Hammond: I really wanted to just understand a little bit better the cadence of these $55 million of exits. How do they flow through? I think you mentioned it sounds like you're selling the product lines or you sold once. Maybe just clarify and then just also touch on the service comps, the down 5% to 9%, and I don't know if there's particular quarters where you have particularly tough comps. Just trying to flesh all that out. Thanks.

So I really wanted to just to understand a little bit better the cadence of these.

So 55 million of exits how do they flow through and I think you mentioned it sounds like you're selling the product lines are you sold wants and maybe just clarify and then.

Just also touch on the service comps the down five to nine and I don't know if there's particular quarters, where you have you know, particularly tough comps just trying to push all that out thanks.

Randy Baker: Okay. Well, Jeff, let me cover some of the broader strategic issues surrounding the exited product lines, 'cause as we predicted internally that this would result in many questions from investors. I'm gonna try to cover it from a strategic standpoint first, and then I'll hand it off to Rick to go through some details on the financials. As we structurally change the Enerpac Tool Group, as I mentioned in the prepared remarks, we sold two small businesses to prepare for the ECS sale. The remnants of the original energy sector and also some remnants of the original component manufacturing company needed to be dealt with as well.

Okay, well, Jeff let me cover some of the broader strategic issues surrounding the exited product lines because it was weak we predicted internally that this would result in many questions from investors. So I'm going to try to cover from a strategic step standpoint, first and then I'll hand, it off to Rick to go through some details on the financials.

As we structurally change the inner to the Enerpac tool group.

I mentioned in the prepared remarks, we sold two small businesses to prepare for the Dcs sale and then the rumor the remnants of the original energy sector and also some remnants of the original component manufacturing company needed to be dealt with as well and so as we talked through the.

Randy Baker: As we talked through the strategic decision to limit our service revenue, and particularly in very low margin aspects, and we talked about that in our Q3, and that has a very positive impact. You saw that out of $2 million of sales coming out in the quarter, the flow through was under 50%. We picked the right stuff not to do, and I think it's an important thing that we're running a business for profitability, not for fun. We intend to continue that. Secondly, when it comes to the divested product lines, the first one I'll talk about is the connector business.

The strategic decision to limit our service revenue and particularly at very low margin aspects and we talked about that in our third quarter.

And that has a very positive impact you saw that the other $2 million of sales coming out in the quarter to flow through was under 50%.

So we picked the right stuff not to do and I think is an important thing that we're running a business for profitability not for fun and we intend to continue that so secondly, when it comes to the divested product lines. The first one I will talk about is the connector business sub sea connectors.

Randy Baker: Subsea connectors was a remnant of the original energy company, and it is a business which provides repair systems for subsea pipelines. It inherently is a very complex business and one that is so far away from our tool strategy that it had to be dealt with. Unfortunately, over time, it had not been particularly profitable. That's one. Number two is our Milwaukee Cylinder Company, which goes back many years and is a component manufacturer in tie rod cylinder manufacturing. It has been part of the Actuant group for a long, long time, and has been part either of the EC&S business or in the industrial tool business due to the convenience of manufacturing.

As an remnant of the original energy company.

And it is a business, which provides repair systems for sub sea pipelines.

An inherently has a very complex business and one that is so far away from our tools strategy that it had to be dealt with and unfortunately overtime that had not been particularly profitable. So that's one number two is our Milwaukee cylinder company, which goes back many years and as a component manufacturer.

Entire rod mill.

I wonder manufacturing.

It has been part of.

Actually one group for a long long time and has been part either of the Dcs business or in the industrial tool business students convenient manufacturing.

Randy Baker: Largely, it's never made much money, and it had to be dealt with in terms of moving it out of the group and establishing it out of our revenue stream. The final one is really a company called Uni-Lift or a product line called Uni-Lift, which is simply an adaptation of a screw jack system and is a component. Again, that was also a part, its manufacturing location within the Milwaukee Cylinder. When you bundle all that together, it was the final steps that we needed to make to complete the formation of a really high-quality tool company. Although painful, it was the right thing to do. I'll turn it over to Rick to provide a little more insight into the financials that you had questions.

But largely it's never made much money.

And it had to be dealt with in terms of moving it out of the group and establishing it.

And out of our revenue stream the final one.

Is really a company called unit lift to our product line called unit, which is simply eight adaptation of the screw Jack system and is a component and again that was also part its manufacturing location within.

The Milwaukee cylinder and so when you bundle all that together it was the final steps that we needed to make.

To complete the formation of a really high quality tool company, although painful.

It was the right thing to do so I'll turn it or Rick to provide a little more insight into the financials, but she's got questions.

Rick Dillon: Sure. So for the $55 million, you said about $25 million of that is service. That activity is, in terms of exiting, largely behind us. We expect to see that starting right away in Q1. From a comps perspective, as you look at last year, Q2 and Q3, is where we had the large project revenue coming through. If you think about that as well as the North American service top line going down, that's where you're gonna particularly have the strongest impact in terms of tough comps. From a non-core product perspective, those products, I think we mentioned one was complete. We expect all of them to be completed in H1, either in our Q1 or early in our Q2.

Sure.

So for the 55 million said about 25 million to that is service.

The that activity is in terms of exiting is largely behind us.

And so we expect to see that starting right away in Q1 from a comps perspective, you look at last year Q2 in Q3.

Where we had a large.

Large project revenue coming through so if you think about that as well as the North American service topline going down, that's where you're going to particularly have the strongest.

Impact in terms of tough comps.

From a.

Noncore product perspective.

Those products I think we mentioned one was complete we expect them and we expect all of them to be completed in the front half a year.

Either in our Q1 early in our Q2.

Rick Dillon: That revenue comes with very low, and in some cases, no profitability, so there's little impact on EBITDA. From a top-line perspective, that's about $30 million, and that'll show itself mostly in the back half, but a little bit in Q2.

Note that revenue comes with very low and in some cases no profitability. So there's little impact on EBITDA.

The top line perspective, that's about $30 million and that'll.

Show itself, mostly in the back half.

But a little bit than in Q2.

Okay, Great and then I'm, just kind of getting back to that some of the slowing in the.

Jeffrey Hammond: Okay, great. Just kind of getting back to some of the slowing in the, you know, in the ITS business. It sounds like Europe's a little heavier, but maybe just talk about end markets and, you know, geographies where it, you know, feels a little bit heavier or conversely, you know, more resilient.

I T S business it sounds like Europe , so little heavier, but maybe just talk about end markets and geographies, where it feels a little bit heavier or Conversely, you know more resilient.

Jeff what we saw in the quarter was.

Randy Baker: Jeff, what we saw in the quarter was, in the early quarter, when the new tariffs were announced and some other issues had developed around the world, there was an almost immediate reaction with order rates. That wasn't just the US market, it was in parts of Southern Europe. As we progressed through the quarter, things improved, and we saw a distinct increase in order rates. The reality is that the market feels like it's slowing in parts of Southern Europe. We've seen some issues in some of the Northern European countries that have been slowing. During my last dealer visits just a few weeks ago, I was on multiple different job sites in Europe as well as several distributors.

In the early quarter, when the new tariffs were announced and some other at some other issues that developed around the world. There was a a almost immediate reaction with order rates and that wasn't just.

The U.S. market. It was in parts of southern Europe , and as we progress through the quarter things improved and we saw a distinct.

Increase in order rates so.

The reality is that the the market feels like it's slowing in parts of southern Europe , we've seen some issues in some of the northern European countries.

That have been slowing during my last dealer visits just a few weeks ago.

On multiple different job sites in Europe , as well as several distributors and from a civil wind energy step aside theres still a lot of activity out there. So the amount of new wind farms going off shore in Europe is significant which were playing a big part of.

Randy Baker: From a civil wind energy side, there's still a lot of activity out there. The amount of new wind farms going offshore in Europe is significant, which we're playing a big part of. But from a general manufacturing, if you look at vehicle repair and vehicle assembly, to the extent that we ship into those markets, those are definitely on the weaker side. In the US market, certainly we've seen fluctuation in onshore bolting, which is really surrounding some of the onshore oil gas. But on the good side, the power gen, nuclear, and wind energy has been fairly strong. Again, we see a little bit of a mixed bag.

But from a general manufacturing if you look at vehicle repair and vehicle assembly to the extent that we shipped into those markets. Those are definitely on the weaker side.

In the U.S. market.

Certainly we've seen fluctuation an onshore bolting, which is really surrounding somebody onshore oil gas, but on the good side the power Gen New killer and a wind energy has been fairly strong so.

Again, we see a little bit of a mixed bag and one of the things I wanted to continue to stress on the two major markets. The U.S. in Europe is that we do participate widely in 13 verticals, which really provides a lot of.

Randy Baker: One of the things I wanted to continue to stress on the two major markets, the US and Europe, is that we do participate widely in 13 verticals, which really provides a lot of potential customers and locations to sell to. The fact that we've improved our sales and marketing and coverage has helped that a great deal. Now, when you shift into Australia and into Latin America, where mining plays a bigger role, we've seen some slowing in mining, but obviously they still have a large fleet of equipment and processing mills that need to be maintained, and we've done fairly well in those markets. Now, China and Asia is another story. There have been a very distinct slowing effect in that part of the world, and we all know why that's occurring.

Potential customers and locations to sell too. So the fact that we've we've improved our sales and marketing in coverage has helped out a great deal now when you shipped into Australia in into Latin America, where we're mining.

It plays a bigger role we've seen some slowing in mining, but obviously they still have a large fleets of equipment and processing mills that need to be maintained and we've done fairly well.

In those markets now, China and Asia is another story.

There have been very.

Very distinct slowing effect in that part of the world.

And we all know why that's that's occurring so I think as we look forward into our forward projection.

Randy Baker: I think as we look forward into our forward projection, that we laid in there on the industrial tools side of the business, down 3% to up about 1%, I think is a forecast that feels right at the moment. I don't see an instance where we should be calling it down mid-single digits. I do think the potential for some decremental sales in 2020 is certainly there.

That we laid in there on that distinct tool side of the business the down three to about up about 1% I think is a forecast that feels right at the moment I don't see an instance, where we should be calling it down.

Mid single digits, but I do think.

Potential for some decremental sales in 2020 is certainly there.

Operator: Thank you. Our next question is coming from Allison Poliniak-Cusic of Wells Fargo. Please go ahead.

Thank you. Our next question is coming from Allison Poliniak of Wells Fargo. Please go ahead.

Allison Poliniak-Cusic: Hi, guys. Good morning.

Hi, good morning.

Randy Baker: Good morning, Allison.

Also.

Allison Poliniak-Cusic: Just on the sort of, I guess, expanding the sales commentary, it sounds like there had been a little bit of an inventory build. Any color, do you feel like the inventory system's bloated, or it's just the sort of overall macro concerns that's driving some of the weakness right now?

Just on that they sort I guess expanding the sales commentary it sounds like it there had been a little bit had been inventory build any color or do you feel like the inventories it since bloated or it's just the just sort of overall macro concerns that's driving some of the weakness right now.

Randy Baker: Well, the inventory side from our tools company is actually a number that is quite manageable. It's directly resulted from the wholesale miss in our Q3 or Q4, and a number that we can work through and we plan to work through in our Q1. One of the unique things about the Enerpac Tool Group, and I think we've probably discussed this with investors openly before, is that our wholesale to retail chain is actually quite short. Many of our distributors do not stock large quantities of our product because our catalog is quite extensive, and there are products that they do inventory that turn quite quickly.

Well the inventory side from from our tools company.

Is actually a number that is quite manageable. It's directly resulted from the wholesale miss in our third or fourth quarter and his number that we can we can work through we plan to work through in our first quarter one of the unique things about the Enerpac tool group and I think we've probably discussed this with investors openly before is that.

Our wholesale to retail chain is actually quite short many of our distributors do not stock large quantities of our product because our catalog is quite extensive and there are products that they do inventory that turned quite quickly. So if you looked at the average turn ratio of the dealers I'm very familiar with.

Randy Baker: If you looked at the average turn ratio of the dealers I'm very familiar with, they're gonna have a turn rate of between 6 and as high as 10 in some cases. In that context, the items that they're stocking, they're turning quickly. The things that they're not stocking, we're able to supply from our warehouses, either in Europe or in the US, quite quickly. You see that immediate inventory build in our part, but we can respond and work it through quite effectively over the next quarter. That's the plan right now. Certainly it's a thing to watch as we go through Q1, making sure we align with that. We throw off significant cash associated with the inventory drawdown, and it's something we'll definitely report on in Q1.

Fair enough return rate of between six and as high as 10 in some cases, so in that in that context that there the items that they are stocking, they're turning quickly the things that they're not stocking, we're able to supply from our warehouses either in Europe or in the U.S. quite quickly.

So you see that immediate inventory.

Build and ours are part, but we can respond and working through quite quite effectively over the next quarter. So that that's the plan right now certainly that's thing to watch as we go through our first quarter and making sure. We we aligned with that withdraw significant cash associated with the inventory drawdown and.

Something definitely report on in Q1, so just a little adding a little more there I think about our year, obviously, the fourth quarters the biggest quarter on the tools side.

Rick Dillon: Adding a little more there. When we think about our year, obviously the Q4 is the biggest quarter on the tools side. As we saw things decelerate quickly, really starting in July, we had inventory positioned for that, our actual estimate for the quarter. We ended up, we landed in August with more inventory, but we've already, to Randy's point, it's the inventory that is moving, and we've already kind of set the plan in place to drive that working capital back to levels that we would expect for the business. Don't have a whole lot of, or any, concern today on our ability to get the inventory under control, just the nature of the business. We did end high and have plans to drive that back to a normalized level.

And as we saw things decelerate quickly really starting in July .

We had inventory position and why that.

Our actual estimate for the quarter. So we ended up we've landed in August with more inventory, but we've already to randy's quite it's the inventory that is moving.

And we've already kind of set the plan in place to drive that working capital back to levels that we would expect for the business. So don't have a whole lot of or any concern today on our ability to get the inventory under control just the nature of the business, but we did and high and have clad.

To drive that back to a normalized level.

Allison Poliniak-Cusic: Great. Thanks. That's helpful. Just on your 2020 guidance, are you once again assuming sort of a net positive price impact in there as well?

Great. Thanks, that's helpful. And then just on your 2020 guidance are you once again, assuming three net positive price impact in there as well.

Yes.

Rick Dillon: Slightly positive.

Slightly positive.

Right.

Perfect. Thank you.

Allison Poliniak-Cusic: Perfect. Thank you.

Thanks Allison.

Randy Baker: Thanks, Allison.

Operator: Thank you. Our next question is coming from Mircea Dobre of Robert W. Baird. Please go ahead.

Thank you. Our next question is coming from Mig Dobre of Robert W. Baird. Please go ahead.

Joseph Grabowski: Good morning, everyone. This is Joseph Grabowski on for Mircea Dobre this morning.

Good morning, everyone. This is Joe Grabowski on for Mig This morning [laughter] more.

Rick Dillon: Morning.

Joseph Grabowski: Good morning. I guess just another question on Q4 demand trends. You mentioned in North America, product sales demand decelerated during the quarter. Could you just talk a little bit more about that rate of deceleration and if you've seen things stabilize here in September? You know, again, you said you're comfortable with your core sales guidance, but, you know, what is the risk if demand continues to decelerate?

Good morning, I guess, just another question on on a fourth quarter demand trends you mentioned in North America [laughter] product sales demand decelerated during the quarter could you just talk a little bit more about that greater deceleration and if you've seen things stabilize here in September and.

Yes.

You said, you're comfortable with your core sales guidance, but what is the risk if if demand continues to decelerate.

Well, we watch heard our daily order rates quite closely and it's one of the things, it's very well organized within Enerpac tool group as we got very tight visibility to our wholesale our backlog of.

Randy Baker: Well, we watch our daily order rates quite closely, and it's one of the things that's very well organized with the Enerpac Tool Group, is we have very tight visibility to our backlog of product and which plant it's scheduled to come from. As we watch those daily order rates, we're comfortable with what we're seeing early on. As I mentioned, as we walked through the quarter, there was a very strong reaction in the first two months of the quarter of our Q4, followed by a rebound in the final month of the quarter. I think as people got their mind around the fact that the new tariffs and a lot of the political environment that was going on in Europe was going to settle down, they went back to work.

Product and which planted scheduled to come from and so as we watch those daily order rates were comfortable what we're seeing early on and as I mentioned as we walked through the quarter. There was a very strong reaction in the first two months of the quarter.

Of our quarter four followed by a rebound in the final month for the quarter and I think as people got their mind around the fact that the the new tariffs and a lot of political environment that was going on in Europe .

Was going to settle down that they Dave went back to work and so we're watching it very closely but I do believe that there are forward forecast is correct as we know it today.

Randy Baker: We're watching it very closely, but I do believe that our forward forecast is correct as we know it today.

Got it okay. Thanks, and then kind of circling back again on the strategic exit.

Joseph Grabowski: Got it. Okay, thanks. Circling back again on the strategic exits, the $55 million of strategic exits, I'm just curious, will those actually be sort of backed out sort of like negative acquired sales out of the core sales calculation? Or will there sort of be a core sales calculation and then an adjusted core sales calculation like a, you know, an adjustment on the waterfall chart, but actually the reported core sales will be less than the guidance that was provided, if that makes sense?

55 million or strategic exits [laughter] I'm, just curious with those actually be sort of backed out sort of like negative.

Negative acquired sales out of our core sales calculation or will they were trying to be a core sales calculation and then an adjusted core sales calculation like a you know an adjustment on the waterfall chart, but actually the reported core sales will be.

Less than.

Less than the guidance I was provided if that makes sense.

Rick Dillon: Going forward, we'll show and report core sales on an equivalent basis to the guidance. The strategic exits, we will adjust out of our core sales number that we give you, and we'll try to be clear with that even in our reporting. Just like we did on these bridges, we'll start with the strategic exits, and then we'll go forward with what we call the go-forward business and the core activity there. Just a little more color on the strategic exits. When you look at product, that product number, which is $20 or 30 million, that will happen somewhat evenly over the quarters. The service number will be about the same, until Q3, with Q4 being the lowest piece of that.

So we'll always.

Well going forward will show a report core sales on an equivalent basis to the guide.

The strategic exits.

We will adjust out of our core sales number that would give you.

And we'll try to be clear with that even in our our reporting.

So just like we did on these bridges, we'll start with the strategic exits and then we'll go forward with but what we call that really the go forward business and the core activity there.

And then just a little more color on.

Dziedzic exits when you look at product that product number, which is 20 or $30 million that will happen.

Evenly over the quarters.

The service number will be.

About the same.

Until Q3 with Q4 being the lowest piece of that so that gives you some kind of spacing on how you'll see that was year over year drops.

Rick Dillon: You know, that gives you some kind of spacing on how you'll see those year-over-year drops.

Thank you. Our next question is coming from Deane Dray of RBC capital markets. Please go ahead.

Operator: Thank you. Our next question is coming from Deane Dray of RBC Capital Markets. Please go ahead.

Deane Dray: Thank you. Good morning, everyone.

Thank you good morning, everyone.

Rick Dillon: Good morning.

Good morning, and why it was hoping you go through the expectations regarding stranded costs up to the you cnsl yeah, the pace of ramping down.

Randy Baker: Good morning.

Deane Dray: I was hoping you could go through the expectations regarding stranded costs after the EC&S sale, you know, the pace of ramping down. Where's corporate cost today, and what should it look like on the exit, either mid-year next year or year-end?

Whereas corporate cost a day in and what should look like the exit either a mid year next year or yearend.

Sure so.

Rick Dillon: Sure. We started talking about last quarter this $13 million of quote-unquote EC&S stranded costs. What we've assumed in the guide is we'll have a Q4 close of the transaction. That means business as usual. We'll incur about $4 million of costs that would otherwise be allocated to the EC&S business. For the remainder of the year, we've assumed that $9 million we will either get direct reimbursement from through the transition services agreement. As those services are no longer required, the costs will either go down naturally or we'll take the actions to eliminate those costs. From a year perspective, where last year we reflected $13 million of those EC&S costs, we expect only to see $4 million for the year included in the continuing operations.

We started talking about last quarter. This 13 million of quote unquote Tcs stranded costs, what we've assumed in the Guy is we'll have a fourth quarter close at the transaction that means business as usual, we'll incur about 4 million of cost that would otherwise be allocated to the Dcs business.

For the remainder of the year, we've assumed that 9 million, we will either get direct reimbursement from through the transition services agreement.

And as those services I no longer required.

Costs will either go down naturally or will take the actions to eliminate those costs. So from a year perspective last where last year, we reflected 30 million of ldcs costs, we expect only to see 4 million for the year included in the continuing operations as far as core.

Rick Dillon: As far as corporate costs, as we talked last call, we've got restructuring activity, we're working through those for a standalone company. We still have opportunities from a corporate perspective, but you still see in our guide roughly $30 million of corporate costs, which is basically flat to last year. As we continue to migrate through the TSA, we'll be able to take some of those structural moves that align our corporate structure to a smaller business. It'll come out of the $13 million we expect. By the end of the year, it's fully gone. By the end of the year, we'll be in a position as those services stop to start to level set on our corporate structure. Should there be charges associated with that, we will announce them on a go-forward basis.

Separate costs.

As we talked last call.

We've got.

Restructuring activity.

We're working through those for a Standalone company, we still have opportunities from a corporate perspective, but you still see in our guide roughly 30 million of corporate costs, which is basically flat to last year as we continue to migrate to the Ts say, we'll be able to takes.

Some of those structural moves that align our corporate structure to a smaller business. So it will come out of the 13 million we expect.

We ended the year, it's fully gone.

And by the end of the year, we'll be in a position as that those services stop to start to level set on our corporate structure and should there be charges associated with that we will announce them on a go forward basis, but right now the guide assumes 30 million and 4 million of stranded gas costs.

Rick Dillon: Right now, the guide assumes $30 million and $4 million of stranded EC&S costs.

That's really helpful detail and then if we just circle back on the the 2020 look maybe next layer a detail on what you're basing the market growth on is this a bottom up by your your 13 verticals.

Deane Dray: That's really helpful detail. If we just circle back on the 2020 look, maybe next layer of detail on what you're basing the market growth on. Is this a bottom up by your 13 verticals? How did you land at that range? The basis for the 200 basis points of outgrowth that you're expecting.

How did your lead at that that range and then the basis for the 200 basis of outgrowth that you're expecting.

Randy Baker: What we always do, Deane, is we start with a bottom-up forecast to gauge from a country manager all the way to a region of what they believe the market's gonna look like. We also look sequentially at the run rates of orders and look at those trends of where those order rates have landed. Then third, I look at the macroeconomics. I spend a lot of time on the macros, coming out of the mining industry for a long time. You had to do that, and I've kinda carried that forward with this company. When you bring those all together, you start looking at it from a corporate standpoint, what we think it's gonna be from a macro.

So.

What we always do deals as we start with a bottom up forecasted to gauge from a country manager all the way to a a region of what they believe the market's going to look like.

We also look sequentially at the the run rates of orders and look at those trends of where those order rates have landed and a third I look at the macroeconomics I spent a lot of time on the macros coming out of the mineral industries industry for a long time, you've had to do that.

Kind of carry that forward with this company and when you bring those all together you start.

Looking at it from a from a corporate standpoint, what we think it's going to be from a macro and then as you build it up from the bottom you can see it from their level and then you come to the middle where we've landed.

Randy Baker: As you build it up from the bottom, you can see it from their level, and then you come to the middle where we've landed. You think about, okay, how do you beat the market by about 200 basis points? What are the elements of a company that's capable of doing that? Over the past 3 years, we've built a pretty effective sales force now. We have sales goals down to a salesman level all over the world. We know who achieves, we know where we have weak areas. For the first time ever, we've really started working through our distribution development and where we have blank spots.

So then just think about okay. How do you beat the market by about 200 basis points. What are the elements of a company that is capable of doing that.

And over the past three years, we build a pretty effective salesforce now we have.

Sales goals down to a salesman level all over the world, We know who achieves we know.

Where we have weak areas.

For the first time ever we really started working through our distribution development and where we have blank spots. So were our capability of dealer support dealer development channel expansion as well as sales is better as good as it's been a long long time.

Randy Baker: Our capability of dealer support, dealer development, channel expansion, as well as sales is better, as good as it's been in a long, long time. Then when you've got an array of new products coming out, and I can name a lot of companies that do extremely well in that regard, new products will help balance a soft market because it builds excitement and a desire from your customers that helps offset that. When you pull all that together, that's how we expect to outperform. We've shown that we can do that.

And then when you've got a.

Ray of new products coming out and I think name a lot of companies to do extremely well in that regard new products will help balance a soft market because it builds excitement and a desire from your customers that helps offset that so when you pull all that together that's how we expect outperform.

And we've shown that we can do that.

Thank you. Our next question is coming from and then of JP Morgan. Please go ahead.

Operator: Thank you. Our next question is coming from Ann Duignan of J.P. Morgan. Please go ahead.

Hi, good morning.

Ann Duignan: Hi, good morning.

Rick Dillon: Good morning, Ann.

Ann Duignan: If we went back to slide 13, where you have the breakdown of tools, heavy lifting, and service, if we put that into a pie chart looking into 2020, what is the mix of the ongoing business?

I'm wondering how do we went back to slide 13, where you have the breakdown of.

Two of a heavy lifting it sorry, but we put that into a pie chart looking into 20 trendy what what is the mix up the ongoing business.

[noise], the second and were flipping pages.

Randy Baker: Just a second, Anne. We're flipping pages.

[noise] I think it's about the same as retired two appendage.

Rick Dillon: I think it's about the same as we turn to the page.

Yep.

Ann Duignan: Yeah, but this is by quarter. Just, is it what, 20% service, 10% heavy lift, and the rest is tools? Is that about right?

By quarter, just what 20% service, 10% heavy lift than the rest that's true but right.

Rick Dillon: We talk about it in terms of products, and it's 75% products and 25% service roughly.

Well, we talk about in terms of.

Rick Dillon: We talk about it in terms of products, and it's 75% products and 25% service roughly.

Product and died 75% product and 25% ferrous scrap.

Randy Baker: If you refer to the chart on slide 4, which was really the profile of the business today. 73%, roughly, is all product sales including the Cortland business. 73% are generally high margin products. Now, there are certainly the rope product, which is within Cortland, is lower margin, but the medical side of that is definitely categorically a high margin product. The remainder is all high value, high margin tools. The other piece I wanna point out is that within our service revenue, we have this thing called rental, and we have a large tool rental fleet, which is quite profitable. We rent it in two ways.

And if you refer to the chart on slide four.

Which.

I was really the profile of those business today.

And so 73% roughly is all product sales.

Including the Cortland business. So 73% are generally high margin products now there are certainly the road product, which is which is within cortland is lower margin, but the medical side of that is definitely category is a high margin product at the remainder is all.

Hi, Hi value high margin tools. The other piece I want to point out is that within our service revenue. We have the same called rental and we have a large tool rental fleet, which is quite profitable and we rented in two ways. Its equipment that goes out with our service reps and it's a equipment that goes out to a customer.

Randy Baker: It's equipment that goes out with our service rep, and it's equipment that goes out to a customer that they're just simply gonna rent from us. That has a very attractive margin profile as well. My opening statement is very true that the 80% plus of our revenue comes from product and rental that is quite high margin. That's a very unique place to be, and it's something that one of the reasons why I believe our tool company now is well positioned.

That they're just simply going to rent from us that has a very very attractive margin profile as well. So my comments in my opening statement is very true that be 80, 80% plus of our revenue comes from from.

Product and rental that is quite high margin and that's a very unique place to be in or something that.

One of the reasons why we believe our tool company now is well positioned.

Yes, I wasn't any my point, Randy I'll put to bed remind us also because so many things have changed what presented the to the direct first says distribution is that all distribution.

Ann Duignan: Yeah, that wasn't really my point. Randy, of the tools business, remind us also, because so many things have changed, what percent of the tool business is direct versus distribution? Is it all distribution?

Randy Baker: Yeah. A high percentage is distribution. We have 2,000 dealers with over 4,000 points of sale. Of those, 2,000 dealers, they're gonna address many verticals of the 13 that we talked about. We have, essentially, I think we're between 15 and 20 company stores that will primarily be rental and service dispatch points. We did do a grand opening of our first full-blown retail center in Deer Park, Texas, where, we are actually running the entire Enerpac tool portfolio through that store. That's our test case of developing a true, retail center. The most important thing, it's not in competition with our distribution. It's filling in white space that not necessarily is covered well, and it also creates a very good, supplemental service to distributors that surround that contiguous trade area.

Yes, Hi high percentages distribution, we have 2000 dealers with over 4000 points of sales.

Of those 2000 dealers, they're going to address many many verticals of the 13 that we talked about.

We have.

Actually I think weve between 15 to 20 company stores that will primarily be rental and service dispatch points.

We did do a grand opening of our first full blown retail center and Deer Park taxes were.

We are actually running the entire enerpac tool portfolio through that store and that's our that's our test case of developing a true a retail center and the most important thing it's not in competition with our distribution, it's filling in white space that not necessarily is covered well and as all.

Also creates a very very good.

Supplemental service to distributors that surround that contiguous trade area, yes, I've I've seen it in my past with other companies very effectively done.

Randy Baker: Yeah. I've seen it in my past with other companies very effectively done. I think the strength of our company really is always it has been in our distribution channels. It's taken Enerpac 50+ years to develop that strength and that channel and something that gives us the ability to serve all those vertical industries.

But I think the strength of our company really is always want it has been in our distribution channels taken Enerpac 50, plus years to develop that strength in that channel and something that gives us the ability to serve all those vertical industries.

Okay. Thank you I know I remind us the knicks geographically Noah.

Ann Duignan: Okay. Thank you. Remind us, the mix geographically now of the tools business overall.

So does that.

Overall.

About.

Rick Dillon: About 50% North America, 30% Europe-ish.

50% North America.

30% Europe .

Yes, yes, and the remainder of Latin America Asia.

Randy Baker: Yeah. The remainder is Latin America, Asia. Certainly, we'll provide the new fact sheet that will give the regional breakdowns for the Investor Day, but directionally, that's about what it is.

It certainly will provide the new fact sheet that will give the the regional breakdowns.

For the Investor day, but Directionally, that's about what it is.

Thank you. Our next question is coming from Justin Bergner of Gabelli <unk> Company. Please go ahead with your question.

Operator: Thank you. Our next question is coming from Justin Bergner of Gabelli & Company. Please go ahead with your question.

Good morning, Randy Good morning, Rick.

Justin Bergner: Oh, good morning, Randy. Good morning, Rick.

Randy Baker: Good morning.

Good morning, good morning.

Justin Bergner: I wanted to just better understand the businesses you're exiting. Would it be possible for you to provide a specific EBITDA number or talk about, you know, what would be your expected margin improvement if you don't exclude the $55 million of exits, when looking at your fiscal year 2020 guide?

I wanted to just better understand the businesses, you're exiting would it be possible for you to provide a specific EBITDA number or talk about what would be your expected margin improvement. If you don't exclude <unk> 55 million of exits I'm looking at your 50 fiscal year 2000.

When you guide.

The.

Rick Dillon: We won't do margin by product. But the $55 million, as I mentioned, came with little to no profitability. So if you look at the bridge, I think we have given, on the operating profit bridge, we give the impact of the exits. And so the

We won't do margin by product.

But.

The 55 million as I mentioned came with little to no profitability.

So you look at the bridge I think we have given.

Okay op profit very rich weekend.

The impact on.

[noise] and so.

The.

Just bear with us to adjust we're trying to make sure we get to the right answer.

Randy Baker: Just bear with us, Justin. We're trying to make sure we get you the right answer.

Justin Bergner: Sure.

So theres very little profitability in there and as we said, there's a 200 basis points improvement and that's largely driven by.

Rick Dillon: There's very little profitability in there. As we said, there's a 200 basis point improvement, and that's largely driven by removing those sales, but no OP. That's really the basis without getting into EBITDA by product line. That combined with the $13 million of year-over-year EC&S costs really drive that improvement.

Moving.

So sales, but no no Pete.

So.

That's really the basis without getting into EBITDA by product line.

So that combined with the.

13 billion a year over year, if you ask costs really drive that.

Okay. So no Oh, p., maybe a little EBITDA sort of.

Justin Bergner: Okay. No OpEx, maybe a little EBITDA sort of

Randy Baker: Yeah.

Rick Dillon: Yeah.

Yeah exactly.

Randy Baker: Definitely.

Rick Dillon: Exactly.

Justin Bergner: Okay. My other question was on cash flow. I mean, I understand that, you know, free cash flow in 2020 is making up for some of the shortfall in 2019, and you can adjust for that for the working capital. How much cash restructuring was in 2019 and in your 2020 guide? Is the $10 million of CapEx a normal run rate, you know, sub 2% of sales CapEx, or should we think of something higher as we look out past this current fiscal year?

Okay and then my other question was on cash flow I mean, I understand that free cash flow in 2020 is making up for some of the shortfall in 2019 and you can adjust for that for the working capital, but how much cash restructuring was in 2019 year 2020 guide.

And then is the 10 million of Capex.

A normal run rate you know sub 2% of sales capex or is should we think of something higher as we look out past a this current fiscal year.

Rick Dillon: The CapEx number is definitely a normalized number, and we don't foresee in the short term any real drivers to get us anything but that. When you look at cash restructuring, we kind of assumed maybe approximately, you know, ten-ish $10 million for cash restructuring for the year. Then about $5 million was in 2019.

So.

Capex number is definitely a normalized number.

And we don't foresee in the short term any rail drivers to get us anything but that.

When you look at cash restructuring.

Kind of assuming maybe approximately.

Tenish.

10 million for cash restructuring.

For the year.

And then.

Now five was in 2009.

Thank you once again, ladies and gentlemen, if you do other question. He May press Star one on your telephone keypad at this time.

Operator: Thank you. Once again, ladies and gentlemen, if you do have a question, you may press star one on your telephone keypad at this time. Our next question is coming from the line of Mig Dobre of Robert W. Baird. Please proceed with your follow-up question.

Our next question is coming from the mine of make dobry of Robert W. Baird. Please proceed with your follow up question.

Joseph Grabowski: Good morning, guys. It's Joe again. Thanks for taking my follow-up. Wanted to ask about M&A thoughts on M&A for the upcoming fiscal year. What's the pipeline look like? Did you expect there'll be some M&A activity during the year or is fiscal year 2020 gonna be more a year of kind of internal organization after the business sale?

Good morning, guys. It's a it's Joe again, thanks for taking my follow up wanted to ask about M&A thoughts on M&A for a for the upcoming fiscal year, what's the pipeline look like and it did you expect there'll be some M&A activity during the year or.

Fiscal year 20 going to be more of a year or [laughter] kind of internal organization after the business sale.

Well, we've been working really hard to build the pipeline because what we wanted to do was to be able to look at our product families be really investing on on the organic growth side for the last couple of years to get products coming out but areas that we didnt feel we had the ability to time or or worthy.

Randy Baker: Well, we've been working really hard to build the pipeline because what we wanted to do was be able to look at our product families, be really investing on the organic growth side for the last couple of years to get products coming out. Areas that we didn't feel we had the ability, the time or the expense of doing it internally, we've been building a pretty significant pipeline of M&A. In 2020, you will see some M&A activity. I wanna stress we're gonna be very cautious about it.

The.

The expense of doing it internally, we've been building a pretty significant pipeline of M&A.

So in in 2028, you will see some M&A activity I want to stress, we're going to be very very cautious about it will make sure that the company is of the quality that we want to its fits firmly within the the verticals that we want and that we believe.

Randy Baker: We'll make sure that the company is of the quality that we want, that fits firmly within the verticals that we want, and that we believe really advance not only our technology, but in fact brings in some either distribution or another aspect that can advance the company. We're actively working on it right now. I don't want any investor to go away thinking that we're going to make a bad decision that would repeat something that they're worried about. I'm very disciplined on how we look at M&A, and I'm very picky on the types of companies, and quite honestly, if they're not on our worksheet of target businesses and product lines, I'm probably not interested. Just stick with us on this for a couple quarters.

Really advance not only our technology, but in fact brings in.

Some either distribution or another aspect to it can advance the company. So we were actively working on it right now.

I don't want any investor to go away thinking that we're going to make a a bad decision on that would repeat something that they are worried about and so I'm very disciplined on how we look at M&A and I'm very picky on the types of company and.

And quite honestly, if they're not on our worksheet of target businesses and product lines on probably not interested.

So just just stick with us on this for a couple of quarters, you'll see more on that later on.

Randy Baker: You'll see more on that later on.

Joseph Grabowski: Great. I'm sure everyone's glad to hear that. If I could maybe just sneak in one last one. I'm sure this is gonna be covered at the upcoming Investor Day, but I thought I'd just throw it out here. The 20% long-term EBITDA margin goal versus the 17% EBITDA margin guidance for fiscal year 2020, what does it take to capture those additional 300 basis points? And maybe kinda how long will it take to get there?

Great I'm sure everyone everyone's glad to hear that and then if I if I could maybe just sneak in one last one I'm sure. This is gonna be covered at the upcoming Investor day, but I thought I'd just throw it out here [laughter], the 20% long term EBITDAR margin goal versus a 17% to EBITDA margin guidance per for fiscal year two.

Morning, what does it take a trick capture those additional 300 basis points.

And maybe kind of how long how long will take to get there.

Well.

Randy Baker: Well, Rick's gonna give you is kind of a walk, and I'll just give you the top level view on that. We have felt and know very well that we can get to that 20%. We've operated there in the past. The Enerpac Tool Group, if you recall back to Q3, as just Enerpac was in the mid-20s. So we know as we go through the transition services agreement, we exit those costs, which as Rick mentioned, there's $9 million of billable. There's about $4 million worth of sunk costs because it'll be pre-closure. So that's a headwind that you can't really do much about in the short term, but in the long term, it's going with the transaction.

Rick is going to give you just kind of a walk and I'll just give you the top level view on that we have felt and know very well that we can get to that 20%.

We've operated there in the past the Enerpac tool group, if you recall back to Q3 as just enerpac.

Was in the mid Twentys. So we know as we go through the transition services agreement.

We exit those costs, which as Rick mentioned, there was $9 million of billable.

Theres about $4 million worth of sunk cost because it will be pre pre closure.

So that's that's a headwind that she can't really do much about in the short term, but in the long term, it's it's going with the transaction and then obviously, we look at the corporate expenses to align this company with the structure of a smaller business, which we're doing and then as we've also been working through.

Randy Baker: Obviously we look at the corporate expenses to align this company with the structure of a smaller business, which we're doing. As we've also been working through our actions in Q3, which was to take out unnecessary business functions in the tool company, was also prep work for that. I hope I haven't taken everything away from Rick's comments, but I'll flip it over to him.

Our actions in Q3, which was to take out unnecessary business functions in the tool company was also prep work for that so I hope I haven't taken everything away from Rick's comments, but I'll flip it over to him.

Rick Dillon: No, you know, it's a similar discussion, and you're right, we'll go into this in more detail. But if you just look at the incremental $4 million, if you take kind of the midpoint of our guide, look at the incremental $4 million of savings from EC&S. You look at full run rate savings of the $15 million of savings we talked about from the service restructuring. You look at what Randy talked about, you know, streamlining and improving the operation of the Cortland business, as well as exiting some of these non-core product lines. All of those things together will get us essentially to the 20%, but we're not done. That doesn't capture the taking a hard look at the corporate costs needed to run a business of our size and scale.

No.

Yes, it's a similar discussing your I will go into this in more detail, but if you just look at the incremental 4 million take kind of the midpoint of our guide look at the incremental 4 million of saving somebody's. Yes, you look at full run rate savings have the 15 million of savings we talked about.

The service restructuring you look at the Randy talked about you know.

Streamlining and improving the operation of the Cortland business.

As well as exiting some of these.

Noncore product line all of those things together will get us essentially to the 20%, but we're not done.

So that doesnt capture the taking a hard look at the corporate cost me to two to run a business of our size and scale. So we really clear line of sight to 20 found the goal is to exceed that and we're collecting all of the actions. We can you know stage here post sale to kind of rightsize the structure.

Rick Dillon: We believe clear line of sight to 2020. The goal is to exceed that, and we're collecting all of the actions we can, you know, stage here post-sale to kind of right-size the structure of the organization. More to come.

The organization.

More to come.

Thank you. Our next question is coming from Justin Bergner of Gabelli and company. Please proceed with your follow up question.

Operator: Thank you. Our next question is coming from Justin Bergner of Gabelli & Company. Please proceed with your follow-up question.

Oh, Thank you for the follow up.

Justin Bergner: Oh, thank you for the follow-up. Most of it was answered in the prior set of questions. In regards to the 20% target, it seems like you have confidence that you can do better than that because there was an expectation before that you could get Two or close to 20%, even inclusive of the $55 million of low profitability business that is being divested. Is that a fair conclusion?

And most of it was answered the prior set of questions, but in regards to the 20% target. It seems like you have confidence that you can do better than that because there was an expectation before that you could get to or close to 20% even inclusive of the 55 million of low.

Justin Bergner: Two or close to 20%, even inclusive of the $55 million of low profitability business that is being divested. Is that a fair conclusion?

Profitability business that is being divested is that a fair conclusion.

Randy Baker: Yes. I think the $55 million was not an action required to get to the 20%. It certainly helps accelerate that. As I said, maybe I'm being too blunt. We do not want businesses that don't make money. We will place them with strategic owners that can place them with similar businesses that can make money, and it's better for the employee, and it's certainly better for us. The $55 million was not a catalyst in order to get to the 20%. That $55 million helps us get beyond there and clearly sets the stage for the Enerpac Tool Group to be a truly high quality and pure play tool company. Subsea connectors are not tools.

Yes, I think to the the 55 million was not an action required to get to the 20% it's certainly.

It helps accelerate that but as I said, I mean, maybe of on being to blood.

We do not want businesses that don't make money.

We will place them with strategic owners that that can place them was similar businesses that can make money and it's better for the employee and it's certainly better for us. So the 55 million was not a catalyst in order to get to the 20%.

That 55 million helps us get beyond there and clearly sets the stage for the Enerpac tool group to be a truly high quality and pure play tool company and sub sea connectors are not tools screw Jack's for lifting systems for Oems is not tools and tie rod cylinders.

Randy Baker: Screw jacks for lifting systems for OEMs is not tools, and Tie Rod Cylinders are components that are sold to all sorts of suppliers all over the world. That is not tools. It takes management oversight, it takes cash, and it takes investment to run those types of businesses. As I said on the divestiture of the other companies, if you cannot or are unwilling to invest in it, you shouldn't own it. The monetization of those small businesses brings in some cash, and it helps make us a truly high-quality tool company.

Our components that are sold to all sorts of suppliers all of the world.

That is not tools. It takes a management oversight it takes cash and it takes investment to run those types of businesses and as I said on the divestiture of the other companies.

If you cannot or unwilling to invest in it you shouldn't own it and so the monetization of those small businesses brings in some cash.

And it helps make us a truly high quality tool company. So.

Rick Dillon: If you think back to Q3, similar questions on how we get to the 20%. At that point, fiscal 2019 includes, you know, three quarters and a couple of months of all $55 million, and we were able to walk you through the 20. The $55 million coming out doesn't, isn't needed to get to the 20. It is reflective of how you get over the 20, and there's more actions we can take to exceed the 20 as well. That walk I just did didn't change from Q3, with the caveat that we can get even better, just like we were at Q3.

I think back to Q3 similar questions on how we get to the 20% at that point.

Fiscal 2019 includes.

You know three quarters and a couple of months of off 55 million.

And we were able to walk you through the 20, so the 55 million coming out.

It doesn't isn't needed to get to the 20. It is reflective of how you get over the 20 and Theres more actions, we can take to exceed the 20 as well so that walk I just did didn't change from Q3.

With the caveat that we can get even better just like we were acute.

Okay and then.

Justin Bergner: Okay, lastly, on that service restructuring piece, I mean, you've spoken about the $4 million. We can obviously add that back to the EBITDA guide. The service restructuring piece, how much sort of flows over beyond fiscal year 2020, or you know, how much of run rate is not captured in fiscal year 2020?

Lastly on that service restructuring piece I mean, you're talking about the 4 million, we can obviously add that back to the the EBITDA.

Guide, but service restructuring piece, how much sort of flows over beyond fiscal year 2020, or so <unk> run rate is not captured in fiscal year 20 sure there's about.

Rick Dillon: Sure. There's about $8 million of it in our plan. We said $12 to 15 million, so you have $3 to 4 million incremental, that's not captured in 2020.

8 million of it in our plan we said.

12 to 15, so you got three to 4 million incremental that's not captured in 20.

Thank you. Our next question is coming from Ann Duignan of JP. Morgan. Please proceed with your follow up question.

Operator: Thank you. Our next question is coming from Ann Duignan of J.P. Morgan. Please proceed with your follow-up question.

Ann Duignan: Yeah, hi. I'm surprised that everybody is so focused on the 20% EBITDA margin. I mean, I know it's an important metric for us to look at, but Randy, you also committed to $600 million in free cash flow by 2021, and we're sitting there. If you make the 2020 numbers, we'll be at $127 million, roughly. I mean, what's the lesson learned there? I mean, to me, that's much more important because that's money you could have allocated to growth or share purchases, whatever. You know, 20% margin on a much lower number is maybe not what investors were expecting.

Yeah, Hi, I I'm surprised that everybody is so focused on the 20% a bit that margin I mean, I know, it's an important metric parts to look up but.

Andy you also committed to 600 million in free cash flow by 2021, then we sit there if you make the 2020 numbers would it be at 127 roughly.

I I mean, what's the lesson learned there I mean to me that's much more important because that's money you could that have.

Allocated to grow our favorite purchases or whatever and 20% margin on a much lower number is.

Maybe not investors were expecting.

Randy Baker: Let's try to frame up our strategy going forward. In our investor day that will come up, we will give the profile of cash generation going forward. Now, one point, very important thing to remember about the remainder of Actuant. Actuant in its original state, where did the cash come from? A large percentage of it came from our tool group. Very, very large percentage. If you think about the numbers that we reported today and the numbers reported last year in terms of free cash flow and what we've just guided today, between 50 and 75, the alignment of that is quite close.

So.

Let let's try to frame up our strategy going forward. So in our Investor day that will come up we will give the profile of cash generation going forward on one point very important thing to remember about the remainder of Actuant actuant in its original stayed the where did the cash come from.

A large percentage of it came from our tool group very very large percentage.

And so if you think about be.

The numbers that we reported today and the rough numbers reported last year in terms of free cash flow and what we've just guided today between 50 and 75.

The alignment of that is quite close now as I've said, if we were to keep the SCS business and keep flowing forward to try to execute to a diversified industrial strategy.

Randy Baker: Now, as I've said, if we were to keep the EC&S business and keep flowing forward to try to execute to a diversified industrial strategy, then we would have had to deploy significant amount of cash to those businesses that we retained. Which was fundamental to the separation of the company and going to a pure play tool business was that very fundamental strategy that we did not believe investing more in businesses that weren't going to have the same returns was unwise.

Then we would have had deploy significant amount of cash.

To those businesses that we retained which was fundamental to the separation of the company and going to a pure play tool business was that very fundamental strategy that we did not believe investing more in businesses that weren't going to have the same returns was on wise and so that's why when you think about.

Randy Baker: That's why when you think about the strategy going forward, and you do the modeling of the new Enerpac Tool Group, you wind up looking at a very compelling profile that says that you've now got a business, as we reported today, of liquidity of somewhere north of $200 million of cash on hand, a debt-to-EBITDA ratio of 1.7. Margin profiles that at the final run rate post-separation, that will be at or greater than 20%. Gross margin on all products that are extremely high. You can't say everything is above 50% because there's pieces of Cortland, but very high percentage of everything we sell is above 50%.

The strategy going forward and you do the modeling of the new Enerpac tool group.

You wind up looking at a very compelling profile. It says that you've now got a business.

As we reported today of liquidity of somewhere north of 200 million of cash on hand.

The EBITDA ratio of 1.7 margin profiles that the final run rate and post separation that we'll be at or greater than 20%.

Gross margin on all products that are extremely high you can't say everything is above 50% because there's pieces the cortland, but very high percentage of everything we sell is above 50%.

Randy Baker: There is very little that I can think about if you were gonna rate high-quality companies of great balance sheet, great margin profile, less cyclicality, and a strategy on how to bring in strategic acquisitions and then have started to build a track record for organic growth. That's exactly where you wanna run a company. Realize that it's a departure from the original strategy, but I think this strategy is going to deliver much better TSR over the next, 10-year profile.

There is very little that I can think about if you were going to rate high quality companies.

Great balance sheet, great margin profile, less cyclicality and a strategy on how to bring in strategic acquisitions, and then have started to build a track record for organic growth. That's exactly what you want to run a company. So.

Realize that is a departure from the original strategy, but I think this strategy is going to deliver much better TSR over the next tenure profile.

Thank you at this time I'd like to turn the floor back over to management for any additional for closing comments.

Operator: Thank you. At this time, I'd like to turn the floor back over to management for any additional or closing comments.

Thank you everybody for joining us today as we mentioned in the call we will be scheduling and Investor day. Later this year and we will be back in touch and send out the formula as it pertains once we have.

Barbara Bolens: Thank you, everybody for joining us today. As we mentioned in the call, we will be scheduling an investor day later this year, and we will be back in touch and send out the formal invitation once we have solidified that date. Thanks again for your interest in the Enerpac Tool Group.

Solidified that date, thanks again for your interest in the Enerpac Cooper.

Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect. Your lines at this time and have a wonderful day.

Operator: Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time and have a wonderful day.

<unk>.

Q4 2019 Earnings Call

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