Actuant Corporation (ATU) Q3 2018 Earnings Conference Call Transcript

Actuant Corporation (EPAC -0.94%)
Q3 2018 Earnings Conference Call
June 20, 2018, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Actuant Corporation's third quarter earnings conference call. During the 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 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press *0. As a reminder, this conference is being recorded Wednesday, June 20th, 2016.

It is now my pleasure to turn the conference over to Karen Bauer, Communications and Investor Relations Leader. Pleasure go ahead, Miss. Bauer.

Karen Bauer -- Communications & Investor Relations Leader 

Thank you. Good morning and welcome to Actuant's third quarter earnings conference call. On the call with me today are Randy Baker, Actuant's CEO and Rick Dillion, CFO. Our earnings release and the slide presentation for today's call are available in the investor section in our website. During today's call, we will reference non-GAAP metrics, such as adjusted profit margins or adjusted earnings per share. You can find a reconciliation of GAAP to non-GAAP metrics within the schedules attached to this mornings' press release.

I also wanted to remind everyone that any forward-looking statements made during this call are subject to risks and uncertainties, the most important of which are described in our press release and SEC filings. Finally, consistent with prior quarters, we'll utilize the one question, one follow-up rule in order to keep today's call to an hour. Thank you in advance for following this and with that, I'll turn the call over to Randy.

Randy Baker -- President and Chief Executive Officer

Thanks, Karen and good morning, everybody. Thanks for joining our third quarter earnings call. I'm going to start today on slide three. I'm pleased to report that we delivered both sales and earnings above our guidance range for the third quarter, along with strong cashflow. Total sales were $317 million with continued strong double-digit core sales growth in Enerpac industrial tools, solid OEM demand in engineered solutions, and stabilization in energy maintenance.

Adjusted diluted EPS was $0.39 a share at the high end of our range with margins up 130 basis points year over year. While we still have some net uncovered inflation, HLT project cost, and investment spending, the 28% overall consolidated incremental margins were a big step function improvement for the company. Our cashflow was robust and reflected an uptick in earnings, working capital reductions, and cash tax benefit and planning actions.

Our leverage improved 2.6, which gives us ample liquidity to fund capital allocation priorities. In summary, this was a good quarter for our teams and a great basis for the balance for the year. I'll turn the call through the details on the quarter and then I'll come back with some additional updates, including guidance.

Rick Dillion -- Chief Financial Officer

Thanks, Randy, and good morning, everyone. First, let's walk through the one-time items that are excluded from the adjusted results for the quarter as shown on slide four. Starting with taxes, we record an adjustment to last quarter's initial estimate of income tax US reform with the issuance of further guidance by the IRS in the third quarter. We had to adjust our original estimates relates to repatriation of foreign earnings and a revaluation of certain deferred tax assets and liabilities.

This results in a net $5 million tax benefit recorded in the third quarter. The new law is very complex and as the details are further clarified, we may see additional adjustments in future quarters. Our restructuring charges in the quarter totaling $1.2 million were offset by the realization of tax benefits from our year to date restructuring actions.

On to our adjusted third quarter, turning to slide five -- Fiscal 2018 third quarter sales increased 7%. We had a 4% currency benefit. The net impact of Viking and Mirage resulted in a 1% sales reduction. Core sales therefore increased 4%. Adjusted operating profit improved for the third consecutive quarter, up 130 basis points. Our effective income tax rate was approximately 9%, just slightly above our expectations. The adjusted EPS for the second quarter was $0.39 compared to $0.32 last year.

Turning to slide six, our core sales of 4% were just above the top of our guidance ways of 1% to 3%. Total industrial segment sales were above expectations with continued strong tool demand despite tougher comparisons. This more than offset a 35% decline in heavy lift sales and a modest reduction of our concrete tensioning product sales. Engineering solution sales also exceeded expectations with strong demand across substantially all product lines and a bit better than expected China truck sales in the quarter. Energy core sales stabilized as anticipated.

On slide seven, you can see the nice increase in year over year margins. This was largely due to the significant improvement in energy results, as the other two segments had roughly flat margins. I will talk through the components of the second margin shortly but let me point out here the corporate expenses were unusually high when compared to the prior year. This increase is largely related to incentive compensation, board transition, legal and other external service costs.

Now, let's get into some of the segment details starting with the industrial segment on slide eight. Core sales for industrial increased by 4% year over year. Industrial tool sales remained robust -- again, up low double-digits, despite tougher comps. We continue to see very broad-based growth across geographies and in markets. We believe we are outperforming the overall market by a couple hundred basis points due to our continued focus on sales coverage and new product launches.

We did experience about a 35% decline in heavy lift sales. This reflects the lump nature of its sales and our decision to move away from specialty project work. Concrete tensioning sales declined modestly as we stabilized the operations and worked to claw back lost shares resulting from poor delivery. From a profitability standpoint, industrials margins were about level with our prior year. However, if you peel back the onion, the standard industrial tools portion of the business had incrementals in the 40% range. That was double of what we had been running due to stronger volumes, pricing, and anniversary in the investment spending that began a year ago.

While we expect incrementals will vary based on mix, we fell right in the middle of the range of what we would call the normalized incremental margins for tools between 35% and 45%. Within heavy lifting, we did see the impact of cost overruns on the custom solutions portion of the business, but to a much lesser extent. We have successful executed the restructuring actions that we outlined last quarter and we will see the benefit in our fourth quarter.

Similarly, the volume and inefficiency issues with concrete tensioning did lesson but remain a drag on margins in the quarter. In total, between the heavy lift and concrete tensioning items, we experience approximately $1 million in margin headwind. This is down substantially from the $3 million in the second quarter and we expect continued improvement in the fourth quarter.

Now, let's turn to the energy segment results on slide nine. Overall, core sales declined just 1% and sequentially improved from the minus 8% last quarter. Hydratight's core sales rate of change was about flat compared to down low-double-digits in the prior quarter.

As we noted last quarter, the Middle East continues to have the most stability in terms of maintenance activity levels and we saw a nice increase in demand ahead of their normal seasonal slowdown. The North Sea and Brazil also saw nice improvement. The US was the weakest region from a topline standpoint, which also reflects our reduced focus on commodity-type service work. Cortland saw a modest increase in core sales on improvement in both oil and gas as well as medical in-markets. Quoting activity in offshore energy continues to come up off the bottom.

Adjusted operating margins improved substantially both year over year and sequentially, obviously a portion that is associated with the elimination of Viking losses. However, we saw the benefit of our restructuring actions across a number of regions as well as more favorable mix by both region and product line.

Turning to engineer solutions on slide ten -- we saw strong performance again from a topline standpoint, delivering 7% core sales growth despite difficult year over year comparisons. Our OEM customers are experiencing solid in-market fundamentals and have been reestablishing inventory in their channels. The sales growth continues to be broad-based across off-highway markets including agricultural, construction, forestry, mining, among others.

Europe truck production levels remain solid, while our China-based production, which was down about 10% benefited from the market share shifts in the quarter. So, it was better than we anticipated. We expect to continue to be lumpy, however, with the fourth quarter down closer to 30%.

Profit margins in engineering solution were about level with prior year, hitting our 10% EBITDA short-term bogey. We did have the benefit of higher volumes but continued to experience some pressures from inflation, higher wages, and other inefficiencies in order to keep customer service levels high. We have some price increases already in effect and are in the midst of negotiations with additional customers.

So, while we continue to see net inflation headwinds, we believe this is temporary in nature, as more pricing is expected to layer in over time. We did see higher pre-production, engineering investment in support of new launches along with an unfavorable product line mix.

Turning now to liquidity on slide 11 -- cashflow was strong in the quarter reflective of the seasonably strong earnings, a modest improvement in working capital and the cash benefit of certain prior tax-claiming actions. While we saw working capital reductions, we were not happy with the current levels, especially relating to inventory and we are targeting meaningful reductions as we move through the fourth quarter.

Our net debt to pro forma EBITDA leverage stands at 2.6 times, pretty down pretty meaningfully as a result of the cash generation and improvement in EBITDA. While we would expect improvement in the fourth quarter, and as Randy noted the positions as well to execute our capital allocation priorities in the future.

With that, Randy, I will turn the call back over to you.

Randy Baker -- President and Chief Executive Officer

Thanks, Rick. Let's turn over to slide 12. I want to spend a few minutes on a new tool company acquisition we completed in the quarter and summarize our new product launches. We acquired a specialized tool company called Equalizer in the quarter. Based in the UK, this $5 million product line, some of which are already privately labeled within the Enerpac catalog. This acquisition accelerates our product development plans and specialty tools, injects new engineering talent, and leverages our great distribution channel. This is a good example of the type of product line acquisitions we intend to make within the tool space.

During the quarter we launched a few new tools in Enerpac, including a refresh of the Bottle Jack line and a series of robust chain cutters. Our distributors are pleased with the focus on new products, including related marketing materials and training. Reinvigorating new product development has led to stronger dealership relationships and aiding in new tool concepts.

Engineered solutions also continues to see customer adoption of innovative new product categories. For example, CrossControl has expanded its display technology line within John Deere's construction equipment models. I'm pleased with the progress but recognize we still have a lot of work to do in optimizing the product development process and launch velocity.

Moving over to slide 13, the macroeconomic factors driving our end markets continue to remain positive. We see tougher comparisons and we anniversary some of the big upswings in the band, but the end markets appear to be favorable. Oil and gas prices have fluctuated between the $60.00 and $70.00 range with some variability largely associated with geopolitical factors.

As noted in the last quarter, we see improved quote activity associated with CapEx projects and managed activity levels have stabilized. Off-highway mobile equipment continues to experience strong demand in agriculture and construction markets globally.

The general industrial market continues to see good demand and distributors are reporting good retail activity and pricing dynamics. Finally, the European on-highway truck market remains strong, with the latest registration data reflecting a 12% increase in heavy trucks and is up 6% year to date. China truck sales have declined on average and we expect calendar year to run about 25% off last year at peak levels.

Turning over to slide 14 -- core sales have been a bit better than expected all year. We see a similar trend for the final quarter. We expect Q4 core sales to increase 3% to 5%, which will bring the full-year number to approximately 5%.

A few reminders related to the sales trend -- first, we've now fully anniversaried the recovery of the majority of our end markets, so the comparisons are expected to become more difficult. Secondly, energy has now stabilized and should see easier comparisons as we move forward. Finally, we are proactively reducing specialty project activity within industrials, heavy lifting business to improve long-term profitability.

Moving over to slide 15, with one quarter to go in the fiscal year, our current view of the underlying demand in profit trends we have experienced will not change meaningfully for the fourth quarter. As such, we're anticipating the fourth quarter sales to be in the $290 million to $300 million range down seasonally from Q3 with European OEM shut downs, Middle East, energy maintenance activity, and we expect to see negative impact from foreign currency exchange.

This results in EPS of $0.32 to $0.37 per share for the fourth quarter and $1.03 to $1.08 for the full year. 2018 sales guidance will be in the range of $1.70 billion to $1.80 billion. Finally, as noted in the press release, we continue to expect a full-year free cashflow of approximately $70 million to $75 million with greater than 100% conversion rate.

Turning over to slide 16 -- finally, before we move to Q&A, I want to take a minute to walk through how we are thinking about the operating segments and leadership. As you recall, we added Jeff Schmaling to our team in February as the combined Industrial and Energy Segment President. He has been working to identify and leverage the strengths of the tool companies and service companies within Actuant. As part of this process, we've started combining the Enerpac industrial tools and the Hydratight businesses from an operating standpoint.

As many of you have heard me discuss, our intent is to leverage the Hydratight maintenance centers in order to sell a broader array of tools and services. We have also combined the product development groups in both businesses and launched tool centers of excellence globally. Our objective is the formation of a powerful and growing tool company with one of the finest distribution channels in the world.

Roger Roundhouse, President of the Engineered Solution business will lead the newly expanded component and system-related businesses. This is essentially a mini-diversified industrial component business with broad exposure to on and off-highway vehicles, mechanical, aerospace, and civil construction. This will bring the standardization of component manufacturing, development, and sales to all of our customers and further improve the results.

We are building out our Fiscal 2019 plans with these newly defined segments and we will provide our 2019 fiscal guidance with that framework. We will also restate quarterly information for comparability. This will be done in conjunction with our fourth quarter earnings currently scheduled for September 26th.

With that, Operator, let's open it up for questions.

Questions and Answers:

Operator

Ladies and gentlemen, if you would like to register a question, press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw you're your registration, press the 1 followed by the 3. Once again, for a question, it's 1-4 on your telephone.

We have a few questions. The first one is coming the line of Jeff Hammond with KeyBanc Capital Markets. Please proceed with your question.

Jeff Hammond -- KeyBanc Capital Markets -- Managing Director

Hi, good morning, guys. So, just on energy, just trying to get a sense of how much of the margin improvement you think was self-help and how sustainable that is. Any real signs in North America or Asia where things are stabilizing or starting to get better there? Thanks.

Randy Baker -- President and Chief Executive Officer

So, the margin expansion in energy is partially due to the divestiture of Viking. That's helped us, as Rick mentioned. But I think most importantly in Hydratight, we made some serious changes to the structure. Our North American business has essentially doubled its profitability and sequentially it's improved dramatically from where we were in the first couple of quarters. That's helped us a great deal.

The second element is the Mideast operations continue to grow. In fact, they're probably up 15% to 20% on a revenue basis. So, that extra volume on one of our higher margin regions plus fixing one of our stressed regions have contributed to turning around the profitability of Hydratight and improving it.

Then lastly, Cortland has also improved in profitability. We made some major restructuring actions. In a couple of the businesses, we shut down some of the un-performing businesses, which has resulted in a much better profile for Cortland. So, all in all, we're very, very pleased with the progress in the energy segment, which is compromised of Hydratight and Cortland.

Jeff Hammond -- KeyBanc Capital Markets -- Managing Director

Okay. And then just Randy, you've got the two new segments you're talking about, maybe the one that seems more core and then the other businesses. Maybe just speak about where are you in evaluating divestitures and when might we see a little more portfolio action out of the new engineered components and systems segment? Thanks.

Randy Baker -- President and Chief Executive Officer

I'll refer back to what we said in October of last year is we had identified about $100 million of targeted revenue that was falling into those two buckets we discussed -- bucket one being businesses that were far outside of our strategy and were struggling to be fixed and that was the example of Viking. The other side of businesses that Roger and his team have done an excellent job of turning around and making them profitable but in the long-run don't have a good core fit, that's roughly $100 million.

I think the structure we've laid out, the important element of that is we're combining the best tool businesses into one very, very powerful group from the standpoint of R&D, of M&A activity, and performance, I have no doubt that Jeff and the team are going to do a great job growing the tool company. On the other side, Roger is running a very good diversified industrial business. We have good market exposure. We've improved our core sales across the board and we're capturing more platforms with end users. That's turning into a better and better business. I think bringing focus and clarity to that structure is the important part.

Jeff Hammond -- KeyBanc Capital Markets -- Managing Director

Thanks, guys.

Operator

Our next question is from the line of Mig Dobre with Baird. Please go ahead with your question.

Mig Dobre -- Baird -- Managing Director

Good morning everyone. Sticking with energy, maybe a little bit of color in your view as to the cadence of Hydratight recovery. I understand that you're probably not a position you want to comment on next year, but things have been rough here for a while. I guess your view as to whether or not we're going to see a gradual recovery or more of a hockey stick and what does that mean in terms of your capacity? I'm thinking about labor specifically. Will you need to ramp up employment? Do you have the right people in place?

Randy Baker -- President and Chief Executive Officer

We believe it's going to be more of a gradual recovery. As we've improved the operating profit profiles of all of our regions, that's the biggest impact. Volume is playing a piece of it. As I said, our Mideast operations is growing and we see some nice expansion there, but we're not expecting a huge and hockey stick-style expansion in North Sea, in the US operations, Latin America, or Asia.

We have some nice projects that are kicking now, though we're being very measured on our forward view on things. You've seen the volatility in oil. I think anything in that $60.00 to $70.00 range is healthy and it's certainly driving better quota activity, but I think we all have to be very cautious about how we view the energy maintenance markets going forward. That's why we're putting a lot of focus on selling our tool platforms within Hydratight. Our rental facilities as well as our tool sales have to be a top priority so that as service levels recover or don't recover, it has less impact. That's, in fact, what we've done.

Mig Dobre -- Baird -- Managing Director

On the labor front and capacity?

Randy Baker -- President and Chief Executive Officer

Our current view on labor utilization is we would like to keep it around 70% utilized. Now, Jeff and I have very long-term views on labor utilization. As we creep above that 70% mark based on our geographies, we're going to have to scramble to get additional labor in. We haven't had that issue yet, but I don't think in the short-term labor is going to be a constraint of revenue increase.

Rick Dillion -- Chief Financial Officer

Keep in mind we talked about before restructuring activity. Part of that was ensuring that we had the right service techs, right level to achieve this 70% utilization. We strike a balance with the trained service techs that are part of us and then industrywide, there's a flexible labor force that we use to balance our demand levels. So, we feel pretty good about our ability to kind of respond to any increase in demand.

Mig Dobre -- Baird -- Managing Director

Okay. Then maybe one on industrial margin specifically -- maybe Rick, walk us back a little bit through the prior three quarters. What were some of the one-time items and maybe stack them up in terms of dollar impact or percentage hit to margin that you think will not repeat in the upcoming fiscal year? I'm trying to get a better sense of what normal incrementals will look like going forward.

Rick Dillion -- Chief Financial Officer

I think we've talked about the two major items and that's heavy lift, putting aside the lumpy nature of it. We've talked specifically about anywhere between somewhere between $2 million and $3 million of headwind this past year from heavy lift and $1 million to $2 million from PHI. Those are the things that we see lessening going forward in terms of a margin drag.

Then as we said in the quarter, we're anniversaring the investment spend, so you don't have to digest that, if you will, going forward. I think with those two things, you should be reverting back to the mean. There will be a mix impact there on a quarterly basis, but you should see closer to the normalized performance.

Mig Dobre -- Baird -- Managing Director

I appreciate it. Thank you.

Operator

Our next question is from the line of Ann Duignan with J.P. Morgan. Please proceed with your question.

Ann Duignan -- J.P. Morgan -- Analyst

Yeah, hi. Good morning. I'm wondering if you could dig a little deeper in your comments on working capital. We did note that your data on hand remains quite elevated. So, maybe you can talk a little bit about what's going on in working capital and what the plans are there. Thanks.

Rick Dillion -- Chief Financial Officer

Sure. As I said in my comments, inventory levels are really the driver in the increase in primary working capital. A lot of that was intentional ahead of the increased demand and ahead of new platforms. We do, however, feel like we have an opportunity as we work through the fourth quarter, started in the third quarter to get those inventory levels down. Obviously, if you look at the end of fiscal 2017 versus where we are now, primary working capital is up, but we will see a meaningful reduction here in the fourth quarter.

Ann Duignan -- J.P. Morgan -- Analyst

And is that going to weigh on margins then because you don't get the absorption or you're going to underproduce?

Rick Dillion -- Chief Financial Officer

No. Keep in mind that we're largely an assembly. So, the inventory that we're talking about, the reductions we're talking about will not be as a result of us curtailing production levels and some of those were raw material coming in that would also support demand. So, no anticipated impact on production and absorption as a result of us bringing down the inventory levels. Engineered solutions is the majority of that, but also industrial, which also facilitates not having a meaningful impact production-wise.

Ann Duignan -- J.P. Morgan -- Analyst

Okay. As a follow-up, could you just discuss in more detail price-cost? I know you alluded to it in engineering solutions, but a little deeper dive into whether it was a positive or negative segment and what the outlook is.

Rick Dillion -- Chief Financial Officer

So, separating the two, pricing, we've talked about both segments going out and doing price increases. Some regions are further along and we continue and it's by customer and so, we continue that process and will continue that process through the end of the year. The good news is we've got the pricing we've gone after and we will continue to negotiate by customer, by business, by region. That negotiation takes on different timing and a different process.

From a cost perspective, obviously you see the normal steel and other commodity cost increases we've seen all year long. Between our sourcing efforts and the pricing efforts we believe on an overall basis we begin to over anticipated inflation. That's obviously before any impact of tariffs or 232 301, that's just normal pricing impact.

Ann Duignan -- J.P. Morgan -- Analyst

Okay. Just a quick follow-up -- are you importing any components that will be impacted beyond the steel and aluminum?

Rick Dillion -- Chief Financial Officer

The tariffs that were in play were far-reaching and extremely broad. The obvious answer is we have products that are covered on the list, which basically includes all, but what that will land at, what it will be, how it will impact us, that seems to change every day. So, I don't really have a good answer with regard to 301.

Ann Duignan -- J.P. Morgan -- Analyst

Okay. I'll leave it there in the interest of time. Thank you. I appreciate the color.

Operator

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

Charley Brady -- SunTrust Robinson Humphrey -- Managing Director

Thanks. Good morning. Just a question on Cortland, how you de-emphasized some unprofitable product lines -- is that coming out of the energy segment or is there still going to be an energy piece to Cortland now that it's going to be in this new engineered components segment?

Then also on the Hydratight business, in combination with Enerpac, does the distribution of those products, have they always been very similar or separate? My understanding was the customer base is obviously a bit separate, particularly on the energy side. How are you marrying that together and is the sales mix of that going to change materially from a third rental, a third, service, a third, tool sales to something a little bit different with one of those being deemphasized?

Randy Baker -- President and Chief Executive Officer

Question one, then, on the Cortland energy exposure -- what we've said about Cortland is we intend to eliminate or minimize our exposure to energy. That is in process right now. The remaining business that will be Cortland is going to be primarily a material sciences company which makes high-strength material fibers for use within all sorts of applications, whether it's mining off-shore, medical, all those areas and it creates a more profitable business.

So, we focused on regional locations that were primarily energy-related that were not making money and we simply shut them down and took those centers back to a primary location which had a nice effect on the profitability, and obviously, there was no effect on the revenue because most of that had gone away. That's the Cortland energy story. As it sits in our ES business, it should be thought of as a material science company that has a fairly nice growing med piece.

Then on the Hydratight distribution, this is something that Jeff and I are pretty passionate about because historically, Hydratight did have a third, a third, a third, model, which was rental, product sales, and service. What you have to remember is that Hydratight only sold a very narrow line of torque-intentioned products manufactured by Hydratight and then we did carry a few complementary lines, but not widely distributed and mostly placed in the rental fleet for our own use.

Now, how we're going to operate going forward, of the 24 service branches we have globally, the idea is that we need to be pushing the entire tool product line through those locations. The only caveat that I would put on that is that we will not damage any successful, local Enerpac distributor. We intend to cover uncovered space with full distribution.

Jeff and I have done this for years together, looking at distribution and how do you close up uncovered areas and then most importantly, how do you have strong store sales and start measuring it like all the other OEMs do, which is same-store growth. The way you do that is get a very strong mix of product sales, service rentals, and service sales. That's the strategy going forward. I could tell you we're hot after it right now.

Charley Brady -- SunTrust Robinson Humphrey -- Managing Director

Thanks.

Operator

Our next question is from the line of Seth Weber with RBC. Go ahead.

Seth Weber -- RBC Capital -- Analyst

Hey, good morning. A few follow-up questions here -- thinking through the pricing commentary, it sounds like what I expect to hear is you expect to be neutralish this year, but you're continuing to push price increases here at the end of the year. Is there a scenario where you can actually be positive on price costs this year? Is that a fair way to think about it?

Rick Dillion -- Chief Financial Officer

There's the scenario. Our intent is to cover known inflation and in some instances do normal pricing increases. When we say we're covered, it's kind of as we exit the year, we're somewhat neutral. When we go into 2019, we'll revisit that as we look at our 2019 guidance and as we get further along with our pricing.

Seth Weber -- RBC Capital -- Analyst

Right, Rick. What I think I heard was you're kind of in negotiations on the ES business and so it sounds like there could be some additional surcharges or increases coming through there. Is that fair?

Rick Dillion -- Chief Financial Officer

That's fair.

Randy Baker -- President and Chief Executive Officer

Typically, the way it works with a large OEM is you would notify your intent to trigger price increases as per their contracts and then that goes into a negotiation of the actual amount they are going to take. There's a negotiation with large OEMs. That's what Roger and the team are working through right now.

Seth Weber -- RBC Capital -- Analyst

Okay.

Rick Dillion -- Chief Financial Officer

Just to be clear, it's not for the fiscal year. It's for the pricing that you get on, as Randy described, normal pricing escalators that aren't in the existing contract. So, not limited to Fiscal 2019 and certainly not Fiscal 2018.

Seth Weber -- RBC Capital -- Analyst

Sorry, Rick. I didn't catch the first part of what you said.

Karen Bauer -- Communications & Investor Relations Leader 

I think when Rick initially said we'll be neutral, it wasn't a commentary about the full fiscal year. We've certainly seen headwinds. As we exit the year, we'll be in a neutral state assuming whatever happens with new tariffs. But that is not a commentary on the full fiscal year. We exit given the pricing, we're still negotiating to get that covered.

Seth Weber -- RBC Capital -- Analyst

That's helpful, Karen. Thanks. Just going back to the energy margin point, low to mid-8s here in the third quarter, you said mix was a little bit positive, but should we think about this mid to high single digits as the run rate going into this year at this point or was mix unusually strong in the third quarter?

Randy Baker -- President and Chief Executive Officer

No. I think going forward, if you break Hydratight down into what is the normalized run rate. Rick, if you want to give some commentary on what we think going forward, but what we've done to that business to improve it to bring it off the bottom and get it in the operating range we've talked about publicly.

Rick Dillion -- Chief Financial Officer

So, Q4, just to back up a bit, you will see year over year some improvement because Q4 last year was kind of the bottom. So, certainly year over year you'll see improvement and you don't have Viking in those numbers. So, coming off of Q3 to Q4, there's the seasonal dip, but you're going to see year over year improvement, not relative to 2019, Randy's comments are probably as much as we have today relative to 2019 performance.

Seth Weber -- RBC Capital -- Analyst

Maybe if I can squeeze one more -- I think I heard you say on the ES business there was an unfavorable mix there. Do you expect that mix to continue or is there something that could flip back in your favor?

Rick Dillion -- Chief Financial Officer

What we talked about was China, which is obviously down. We expect that to be worse than we saw in Q3, but continue to be lumpy. That's really the mix, the most part of the mix we were speaking of. So, if China was worse, Q4 versus Q3, how does that swing the margin?

Karen Bauer -- Communications & Investor Relations Leader 

It's just a little bit. If you remember, China, we expected it to be down calendar year like 25%. It was only down 10% in Q3, so it was a little bit of a headwind, but Q4, we expect China to be down about 30%, but these are relatively small volumes given China's overall volumes run about $35 million. So, it's on the margin a little bit negative, but it's not a huge swing.

Seth Weber -- RBC Capital -- Analyst

Okay. Thanks.

Operator

Ladies and gentlemen, as a reminder, to ask a question, press the 1 followed by the 4 on your telephone. Our next question is from the line of Justin Bergner with Gabelli & Company. Please go ahead.

Justin Bergner -- Gabelli & Company -- Analyst

Good morning, Randy. Good morning, Rick.

Rick Dillion -- Chief Financial Officer

Good morning.

Randy Baker -- President and Chief Executive Officer

Good morning.

Justin Bergner -- Gabelli & Company -- Analyst

I have a couple of cleanup-oriented questions here. The increase in the sales guidance, I guess, not being accompanied by an increase in the earnings guidance relative to management expectations, is that a function of higher inflation than had been expected a quarter ago or what's inhibiting earnings guidance from going up with sales guidance?

Karen Bauer -- Communications & Investor Relations Leader 

I would say if I looked back at Q3 and where I had pegged that sales guidance, I probably wasn't accurately reflecting where we were from an FX standpoint and kind of the low and high ends of the range. To be honest, last quarter, I should have had the sales guidance on the full-year basis higher. This is matching up here's what Q4 is in line with generally what most people had added to nine months here to date. That's what the math comes out to be. The margin to sales is similar to what we've seen all year. I would tell you my full-year sales was too low when we guided last quarter.

Justin Bergner -- Gabelli & Company -- Analyst

Okay. That's helpful. Then on the energy side, should we think about anything unusual in the 3Q mix as it relates to the mix within the different parts of Hydratight? I guess as a corollary to that I assume the mix of Hydratight relative to Cortland may decline non-3Q quarters?

Rick Dillion -- Chief Financial Officer

Within Hydratight, I think the big thing you'll see happening is the shift from product and service. I think we talked about getting away from the commodity-type service. When you have a quarter that's weighted toward product, you're going to get a favorable mix out of that. Then as we scale down commodity tax service in general, we should see a little bit of margin uptick mix aside.

Justin Bergner -- Gabelli & Company -- Analyst

That's helpful. Was there any additional restructuring that occurred with energy in the third quarter as it relates to Hydratight that allowed the business to exceed expectations or your expectations or was it more that it delivered against your expectations following prior restructuring actions?

Rick Dillion -- Chief Financial Officer

I think it's the latter. The restructuring energy segment recent is more Cortland-focused. The energy restructuring was baked into our guidance.

Justin Bergner -- Gabelli & Company -- Analyst

Okay. Thank you.

Operator

Our next question is from the line of Mig Dobre with Baird. Please go ahead.

Mig Dobre -- Baird -- Managing Director

Thanks for taking my follow-up. Just a small cleanup item -- on the corporate expenses, can you maybe sort of delineate what was one-time in nature in the quarter here. I'm also wondering on incentive comp, where are you running right now versus when you would consider to be a normalized incentive comp level?

Rick Dillion -- Chief Financial Officer

In terms of corporate expenses, I think we've historically said normal is about $7 million-ish. So, for the quarter, when you think about one-time in nature, we certainly higher board transition costs and legal costs in the quarter than we would normally have. No other activity, those are going to be non-recurring items. Incentive comps, without getting into the details, based on performance, it's higher this year than where we were a year ago, but I don't know that there's a normalized incentive comp number that I can give you.

Randy Baker -- President and Chief Executive Officer

As you know, our incentive comp program is based on three elements the topline sales growth or core sales growth or performance on margins and then the cashflow. So, if you look at those elements, you can imagine our first and second quarter had a significant drag on those incentive comp items as the teams did a great job of clawing back and performing better in Q3, that reset it and helped them get back to a normalized rate. The self-inflected wounds in Q1 and Q2 certainly had an IC or incentive comp impact that we felt.

Rick Dillion -- Chief Financial Officer

Normalized meaning increased. There is no normalized bonus, but it resulted in some of the increase getting closer.

Mig Dobre -- Baird -- Managing Director

What I'm just trying to figure out as I'm thinking about next year if I need to account for some kind of a catch-up of any sort that I don't know about in incentive comp within this line item.

Randy Baker -- President and Chief Executive Officer

No.

Mig Dobre -- Baird -- Managing Director

Okay. Thanks. Thank you. That's it.

Operator

There are no further questions at this time. I'm going to turn the call back to the presenters for their closing remarks.

Karen Bauer -- Communications & Investor Relations Leader 

Great. Thanks, everyone, for joining our call today. I'll be around all day to take any follow-up questions you may have. As Randy noted when we were talking about the segments, we intend to release our year-end results on September 26th. You can mark your calendar for that Q4 call. Have a great day.

Operator

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

Duration: 45 minutes

Call participants:

Karen Bauer -- Communications & Investor Relations Leader 

Randy Baker -- President and Chief Executive Officer

Rick Dillion -- Chief Financial Officer

Jeff Hammond -- KeyBanc Capital Markets -- Managing Director

Mig Dobre -- Baird -- Managing Director

Ann Duignan -- J.P. Morgan -- Analyst

Charley Brady -- SunTrust Robinson Humphrey -- Managing Director

Seth Weber -- RBC Capital -- Analyst

Justin Bergner -- Gabelli & Company -- Analyst

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