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Actuant Corporation (NYSE:ATU)
Q4 2018 Earnings Conference Call
Sept. 26, 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 fourth quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the 1, followed by the number 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, September 26, 2018.

It is now my pleasure to turn the conference over to Mr. Fabrizio Rasetti, EVP, General Counsel. Please go ahead, Mr. Rasetti.

Fabrizio Rasetti -- Executive Vice President & General Counsel

Thank you, operator. Good morning, and thank you for joining us for Actuant's fourth quarter 2018 earnings conference call. On the call today to present the company's results are Randy Baker, Actuant's President and Chief Financial Officer, and Rick Dillion, Actuant's Chief Financial Officer.

Our earnings release and the slide presentation for today's call are available on our website at actuant.com in the investor section. We are also recording this call and will 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 mornings' release. 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 foundational securities law. Please see our SEC filings for the risks and other factors that may cause actual results to differ materially from anticipated results or other forward-looking statements.

Finally, consistent with how we have conducted our 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 address questions from as many participants as possible. Thank you in advance for your cooperation. I'll now turn the call over to Randy.

Randy Baker -- President and Chief Executive Officer

Thanks, Fab, and good morning, everybody. We're going to start today on Slide 3. As you read in today's press release, Actuant delivered a solid fourth quarter and full-year result. Our year-over-year performance improved in all areas. In the quarter, EPS grew by more than 100%. Core sales increased by 10% and we expanded margins by 65%. Cash flow was also very positive in the quarter and marked the 18th consecutive year of conversion of +100%.

So, now let's turn over to Slide 4. As we came into the fiscal year, we were in the early innings of creating a more efficient company, and reinvigorating our organic growth. Over the past two fiscal years, we have invested in our operations, restructured our commercial processes, and significantly stepped up our new product development activity.

We also have begun a strategic review of our portfolio and repositioned our businesses. We have made significant process, which led us to the results reported today. Our global teams have done an excellent job of focusing on our sales, our operations, and supporting our customers in the results followed.

Now turning over to Slide 5. I was also very pleased with our expansion in the continued introduction of new products. Enerpac introduced 12 new tools in the quarter, which brings our 2018 total to 30. This has been a primary area of investment and we are now seeing the fruits of our hard work. Secondly, Hydratight increased sales by 7% in the quarter, which was the first positive result in many months. Finally, our engineered components business launched an additional 6 new product platforms, which was a direct result of our efforts to improve OEM support.

Our ultimate goal of achieving a 10% contribution from new products is now well within our grasp. Going forward, our ability to grow sales organically is a critical component of our strategy, and will continue to be a focus of our investment. From a portfolio perspective, we are moving forward with our focused strategy for Actuant.

Today, we announced the structured process of divesting the Cortland Fibron business in movement to assets held for sale. We have improved the results of Cortland Fibron, but strategically, it does not fit our growth plans for both tools and service segments. Very importantly, this minimizes our exposure to upstream oil, gas, and offshore exploration. We believe this is one more step toward refocusing our investment capital and our management resources.

Additionally, 2019 marks the start of the two-segment reporting structure for Actuant. We have structured the company to concentrate on our outstanding tools and service business, and expanded our engineered components and systems segment to include all OEM-related companies. This will enhance our growth plans, while providing better focus on our strategy. Overall, we're achieving our objectives laid out in the strategy, and we have moved into fiscal '19 with the organic growth initiatives continuing to be a driving force for Actuant. I'll turn the call over now to Rick for the details on the quarter, and I'll come back with the outlook on 2019 and guidance.

Rick Dillon -- Executive Vice President and Chief Financial Officer

Thanks, Randy. Good morning, everyone. First, let's go through the one-timers that are excluded from the adjusted operating results this quarter on Slide 6. As Randy noted, we're actively pursuing the divestiture of Cortland Fibron and, as a result, we've taken an impairment charge based on our expectations of the fair value of the business today.

The $45 million charge includes the following: the non-cash charge is related to the writedown of the assets to their estimated realizable value, and the $35 million accounting charge to recognize the cumulative translation adjustments from currency since the date of the acquisition. We will update these estimates when we finalize the divestiture. On the balance sheet, you'll see both current assets held for sale and current liabilities held for sale.

We also took an impairment charge on our concrete tensioning business of approximately $24 million. Prolonged operating inefficiencies and a resulting loss of margin share drove the writedown of good will and other intangible assets of the business as part of our annual review process.

We recorded a tax benefit this quarter from the unanticipated release of evaluation reserve on net operating losses, given our improved profitability. This benefit was partially offset by a $2 million adjustment for tax reform. The adjustment for tax reflects the legislative clarifications received during the quarter. 2018 was really about adjusting our balance sheet for the impacts of reform, though evaluation of our deferred tax liabilities resulted in a gain that essentially offset the estimated impact of the tow charge writedown deferred assets based on what we know today.

The real impact of reform on our financial statement tax provision and cash taxes will be in 2019, as we will discuss later. While we don't anticipate significant balance sheet adjustments, we will obviously respond as further guidance and clarification is provided by the IRS. Restructuring charges in the quarter were more than offset by year-to-date tax benefits on restructuring actions.

On to our adjusted fourth quarter results. Turning to Slide 7. Fiscal 2018 fourth quarter sales increased by 9%. The impact of foreign currency partially offset the ne benefit from acquisitions and divestiture and provided a headwind of 1%. Core sales, therefore, increased 10%. Adjusted operating profit improved for the fourth consecutive quarter, up almost 360 basis points, reflecting [audio cuts out] and flow through on our core sales.

Our effective income tax rate was approximately 7% for the quarter, and 10% for the full year, both in line with our expectations. The adjusted EPS for the quarter was $0.39, compared to $0.19 last year, and $0.02 over our guidance.

If you turn to Slide 8. Strong core sales of 10% were well above the top end of our guidance range, with all segments exceeding our expectations. Industrial segment sales continue to be strong, driven by solid tool demand across all regions, an increase in the standard heavy-lift product sales.

Engineered solutions sales also exceeded expectations across all product lines, with the exception being China truck sales. Energy core sales also rebounded with solid single-digit sales growth in Hydratight.

On Slide 9, as we noted earlier, we saw substantial increase in year-over-year margins. This was largely due to strong incrementals on the improved energy results, solid improvement in engineered solution margins, and roughly flattish margins in our industrial segment.

Let's review some of the segment details, starting with the industrial segment on Slide 10. Core sales for industrial increased 10% year-over-year. We continue to see growth in industrial tools of high single digits, despite very tough comps in the fourth quarter of last year. The growth remains widespread throughout geographies and markets. We continue to be that this growth outpaces the market by a couple hundred basis points, driven by our commercial efforts and continued focus on new products. We experienced a 32% increase in our heavy lifting business, reflecting the lumpy nature of the business, and we're focused on our standard lifting products.

We saw modest growth in our tensioning business after four quarters of decline, as we anniversaried the plant consolidation issues and resulting loss of share which began in the fourth quarter of last year. Profit margins within this segment were flat when compared to prior year. The year-over-year comparison is impacted by mix and an increase in compensation expense on strong operating performance.

Incrementals on the industrial tools portion of the business, including the incentive comp true-up in the quarter continued to fall in the range of 35% to 45%, in line with our long-term expectations. Going forward, as we ramp up our new product launches, we may see some pressure of quarterly margins associated with launch costs before they achieve their long-term margin expectation.

Our heavy lifting business has a profitable quarter due to restructuring actions and the elimination of the profit drag associated with large custom products. Despite top line growth in concrete tensioning business, it remains a drag on operating margins due to the inefficiencies resulting from the loss in sales volume.

Now, let's turn to the energy segment results on Slide 7. Overall, core sales increased by 15% from last year, down only 1% sequentially in the quarter, which is the strongest seasonal quarter for the segment. We are very pleased to see the turnaround in Hydratight, with its first quarter of growth in 8 quarters. Increase in maintenance activity was particularly strong in the Middle East and North Sea. North America continued to show declines; again, as a direct result of our shift away from commodity-type service work.

Cortland saw strong double-digit core sales, led by increased activity in our oil-and-gas market, as well as our medical business. Quoting activity remains brisk in our primary energy and non-energy verticals. Profit margins for the segment were up 970 basis points from the bottom experienced in the fourth quarter of last year, including the Viking losses, which accounted for 340 points of the expansion.

The segment saw flow-through for incremental sales, as our service excellence initiatives and restructuring activities continued to drive improvements. We also benefited by a prior-year, one-time charge for the write-off of a nuclear customer that did not repeat in the current year.

Turning to our engineered solutions slide on Slide 12, segment sales were solid, delivering a 6% core sales growth off of a difficult comparison in Q4 of last year. The sales growth is broad-based and off highway markets, including agriculture, mining, and forestry. European truck production levels also continue to be solid, fueling strong performance. Channel was down 40% on very tough comps from the prior year, as production levels continue to drop higher than our expectations coming into the quarter.

This brings our overall decline for the year to 15%, a little bit better than our expectation going into the year. We do, however, expect to see year-over-year sales declines for the majority of 2019, and the comparison will get easier in the back half of the year, as production levels move back to historical norm.

Profit margins in this segment improved at a strong rate. Incremental profitability was solid on pricing, favorable mix of products sold, and reduced warranty costs year-over-year. The favorability more than offset the impact of higher commodity, labor, and other manufacturing costs, including tariffs in the back half of the year.

If we turn now to Slide 13 on liquidity. Our cash flow for the quarter was robust. Strong quarterly profitability combined with solid working capital management drove growth in cash balances. Working capital improvements came from strong collections and strong inventory management. Although inventory is up from the prior year, a focus on earning the right inventory or products in the appropriate regions to support demand, aided our core sales growth, and resulted in a $10 million reduction in inventories from our third quarter.

Our net debt to pro forma EBITDA leverage was down significantly in the quarter, and now stands at 1.9x, versus 2.6x at the end of May, and 2.7x at the end of August. This positions us well to execute our capital allocation priorities well within our comfort zone of 1.5x to 2.5x. With that, Randy, I'll turn the call back over to you.

Randy Baker -- President and Chief Executive Officer

Thanks, Rick. Turning over to Slide 14. We believe 2018 was a turning point for Actuant. As you can see, our core sales grew by 8%, exceeding our 2018 original guide. EBITDA improved by 19%, and EPS increased by 31%. Overall, our operating leverage increased to 26%, which is in the range of our objectives. The bottom line, the backdrop of positive market conditions coupled with our organic growth have set a positive trajectory for sales and earnings.

Turning over to Slide 15. As I discussed earlier, the fourth quarter was very dynamic in terms of new product launches. Enerpac introductions included a major improvement in our bolting product line, and new line of handheld, electric tools. The new pumps included in advancement and pressure control and operating range, which gives Enerpac a distinct competitive advantage. Product development, coupled with our recent acquisitions, has expanded our product line by more than 100 tools.

Engineered components and systems also introduced many new products in the year, which played a very important role in our [audio cuts out]. Our success in developing new product applications for OEMs has resulted in sustained growth above market rates.

Now, turning over to Slide 16. The macro-economic factors affecting our business continue to be positive. General economic lead indicators such as GDP, commercial and general construction, industrial productivity continue to strengthen. On the tool and services front, our dealers are reporting good retail activity and almost all vertical markets are reporting growth. Additionally, service maintenance is improving in oil and gas, renewable energy, and in nuclear.

Oil prices have fluctuated between $60 and $70 a barrel, which is fueling a more positive maintenance spending environment. Off-highway mobile equipment is also strengthening, and all of our major OEM customers are experiencing good growth dynamics and retail activity. Finally, on-highway truck sales have declined significantly in China, and we expect some slowing in European truck sales as we advance through 2019.

Turning over to Slide 17. The positive market conditions provide confidence in the continued growth rate for Actuant. We are projecting consolidated core sales growth for the company of between 3% and 5%. Industrial tools and services are projecting a healthy 3% to 5% core sales growth, with contributions from both new product introductions and market expansion. Finally, engineered components and systems is projecting core sales growth of between 2% and 5%, helped by strong dynamics in highway equipment, new platform wins, but [inaudible] on-highway sector.

Turning over to Slide 18. Our projections for 2019 are reflecting our positive view of the market, and our continuing advantage of the strategy. Sales will be in the range of $1.210 billion to $1.240 billion. EBITDA will increase to $155 to $165 million. ES will be in the range of $1.09 to $1.20 per share, which is impacted by the increased tax rate and the effects of exchange.

Cash flow is expected to be in the range of $80 to $85 million. Our first quarter sales will be in the range of $295 to $305 million, with an EPS of $0.20 to $0.25 per share. Our expectations for operating leverage will continue to be in the range of 25% to 30%.

I'm going to turn it back over to Rick now to provide a detailed bridge to cover the impact of the new tariffs, tax rate, currency impact, and define what is the true performance improvement for Actuant. Rick?

Rick Dillon -- Executive Vice President and Chief Financial Officer

Starting with tariffs on Slide 19. We've already felt the impact of the Section 232 tariffs, and the first wave of Section 301. We have been proactively working with our customers on pricing actions, but those actions come through differently in each of our segments, given the nature of each business. Price increases initiated to date have been part of what we would call our normal pricing rhythm in response to rising commodity, labor, freight, and tariffs announced in fiscal 2018.

In the tools businesses, we have implemented two price increases, one in January and one effective September 1. In the ECS business, our price actions are negotiated on a contract-by-contract basis, and the process was substantially complete for all of our large OEMs during our fiscal 2018.

The new tariffs, which went into effect on September 24, will create a significant headwind. Based on our initial assessment, without consideration of any pricing or surcharge action, the impact could be in the range of $3 to $4 million. This includes the implemented 10% and the expected 25% hikes. We will continue to refine our estimates and work through our mitigation actions and will provide an update on our first full-quarter call in December.

If we turn to taxes on Slide 20. As Randy noted, we expect the 2019 effective tax rate to be approximately 20% for the fiscal year. This is also the rate that we should be using for modeling purposes in the near term. The increase in the rate is directly attributable to the incremental minimum tax on foreign earnings, and limiting of foreign tax credit usage as a result of reform. We will continue to evaluate the new tax rules and future guidance as received. We will also continue to execute tax planning strategies within the new landscape that align with our business activities to reduce the effective tax rate.

Turning now to Slide 21 and the EPS bridge. First, just note that the projections for core growth that Randy mentioned is provided in our two-segment structure, industrial tool service and engineered components and systems. We will be providing the restated financial statements in the new segments shortly after we wrap-up our year-end activities. We will restate 2018, 2017, and 2016 for comparability purposes. Those financial statements will be filed in an 8-K and made available on our website in the coming weeks. Our 10-K will also be cast in the two-segment format.

Now, let's walk through the guidance bridge, which highlights the major drivers of our full-year guidance. Starting with the 2018 adjusted EPS of $1.09 at a 10% tax rate. We expect the base business growth will add $0.09 to $0.12 per share this year from continued market growth, new products, and share capture. Portfolio actions from acquisitions of Mirage and Equalizer, and the Viking divestiture are expected to improve EPS by $0.03 to $0.05.

The restructuring done to improve our operational efficiencies is expected to add $0.04 to $0.06. Note, this is the incremental benefit from actions taken in 2018. As you can see, we expect the strategic actions we have taken, along with market growth, will add, rounding these numbers out, about $0.15 to $0.25 per share in 2019. We expect a headwind from foreign exchange from $0.01 to $0.02 per share. And lastly, our tax rate increase from 10% to 20% in fiscal 2019 will result in $0.10 to $0.12 reduction in EPS. This brings our net guidance to $1.09 to $1.20 per share for fiscal 2019. I'll turn the call back over to Randy for concluding remarks.

Randy Baker -- President and Chief Executive Officer

Thanks, Rick. As you can see, we remain optimistic about 2019 and beyond. We have taken actions to position the company for success and, as we progress through 2019, our priorities remain consistent. We intend to grow at a rate greater than market. We drive incremental profitability at our stated range: 35% to 45% for industrial tools and services, and 20% to 30% on engineered components and systems, lastly, our disciplined capital allocation to drive superior returns to our shareholders.

We believe we are on the right path, and we appreciate the support of our employees, our shareholders, our customers, and our suppliers. With that, operator, we'll turn it back over to you for Q&A.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, as a reminder, if you'd like to register for a question, please press the 1 followed by the 4 on your telephone. You will hear a 3-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, you press the 1 followed by the 3. If you're using a speakerphone, we encourage you to lift your handset before entering your request.

One moment, please, for our first question. Our first question comes from the line of Jeff Hammond with KeyBanc Capital. Please go ahead.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Good morning, guys.

Randy Baker -- President and Chief Executive Officer

Good morning, Jeff.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Just on the bridge, it seems like if I'm doing the math correct, the base business incrementals are 20% to 25%, versus what you were talking about. Then you had a number of headwinds, heavy lift, concrete tensioning, some warranty that would seemingly go away. I don't see that as an offset. I just wanted to see how you're thinking about those within the context of incrementals. Thanks.

Randy Baker -- President and Chief Executive Officer

Jeff, if you go back to our EBITDA targets of $155 to $165 million and you do the math based on those, incrementals would be an implied plus 30%. So, we've pegged it a little higher than our stated range of 25% to 30% for the consolidated [audio cuts out]. The reason for that is those one-timers you just mentioned are not going to repeat. Particularly, if you recall our first quarter of last year, we had significant costs, and those costs carried through the second quarter. That's why we're pushing the business to have a little higher incremental operating leverage going into '19, because we think it can handle it.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay. Then I know you said you're going to give the segment detail here upcoming, but can you just give us what the EBITDA margins are of the two segments for fiscal '18? Then kind of how you're thinking about what the long-term EBITDA margin opportunities are for each of those segments? Thanks.

Rick Dillon -- Executive Vice President and Chief Financial Officer

When you look at EBITDA margins for year-over-year onto the new segments, we're looking at those margins in that industrial tools and services in the low-to-mid 50s plan to 18, or top end of the guide to 18 and low to mid, or mid 20s to high or low 30s for EC&S. Those are the blended margins.

Keep in mind, as Randy mentioned, the margin profile of these two segments shifts, and the inclusion of Cortland and PHI for the legacy engineered solutions brings that incremental margin or the EBITDA actual margin up. And then similar, but to a lesser degree for industrial tools and services, it's a little bit of creep in the margin. So, when you think about the incrementals, it's in the 20% to 25% range for ITS, and incrementals for EC&S in the 9% to 10% range.

Operator

Our next question comes from the line of Scott Graham with BMO Capital Markets. Please go ahead.

Scott Graham -- BMO Capital Markets -- Analyst

Good morning. Several questions for you all. The first one is maybe just more accounting than anything, Rick. The sizes of the charges taken this quarter relative to the sizes of the business is kind of outsized. Could you just sketch a couple things out there for us?

Rick Dillon -- Executive Vice President and Chief Financial Officer

Sure. On the Fibron piece, it all ties back to the purchase price at the time we acquired the business. The good will and the intangibles are reflective of what was a purchase almost at the peak, which makes it a much higher purchase price. So, I think that's what the $30-some million of CTA that is, I call it accounting noise, but it is the cumulative translation of the results, the balance sheet of the operation since the date and time.

But in terms of the PHI impairment and the Fibron impairment, the size of the impairment is really reflective of the -- Fibron is purely how much we paid for the operation, given current fair value, and it was at a much higher price. PHI similar scenario. But does not include the accounting piece.

Scott Graham -- BMO Capital Markets -- Analyst

Yeah, got it. Randy, I'm sure you're shaking your head at those two. Anyway, the tariffs, the $3 to $4 million, is that a grossed up number or is that net of pricing?

Rick Dillon -- Executive Vice President and Chief Financial Officer

That's gross. That assumes no pricing. If you think about our pricing we took in 2018 and September 1 here for industrial, all of that pricing was to cover known tariffs and commodity, freight, and labor activity. This new announcement here mid-September, we've taken no price to directly cover that. So while our guidance does have some price reading through, it doesn't reflect this $3 to $4 million, which would be a gross, call it worst case scenario.

Randy Baker -- President and Chief Executive Officer

Right, and that's the number that we've calculated to figure out what type of pricing we do need to push through the market to cover it.

Scott Graham -- BMO Capital Markets -- Analyst

That's helpful. How do you exit this fiscal year? Are you pricing +1%, 1.5%? What's the exit rate for the company?

Randy Baker -- President and Chief Executive Officer

Our price realization?

Scott Graham -- BMO Capital Markets -- Analyst

Yeah.

Rick Dillon -- Executive Vice President and Chief Financial Officer

Realization in that 1%, 1.5% range as we exit. When you think about the majority of our pricing, certainly on the engineered solutions business and really this September 1 pricing for industrial, the vast majority of that pricing was to cover known cost increases. So, that puts us, like I said, back into a normal 1 to 2% pricing rhythm we would get on an annual basis.

Operator

Our next question comes from the line of Charlie Brady with SunTrust Robinson Humphrey. Please go ahead.

Patrick Wu -- SunTrust Robinson Humphrey -- Analyst

Good morning, guys. This is actually Patrick Wu standing in for Charlie. Thanks for taking my question. I just wanted to follow up on the previous question on pricing. As I look at engineered solutions, can you bucket the year-over-year margin improvements for us in terms of volume, mix, and price? It sounds like you guys were able to successfully push through most of the pricing that you guys wanted to, for the normal pricing. But are you hearing, are you putting in any escalation clauses that use different expectations with your customers in case the tariff situation worsens a little bit more, or if insulation continues to ramp up? Can you give us color on that?

Rick Dillon -- Executive Vice President and Chief Financial Officer

When you think about the OEM context, each context, each platform is different. Some have escalating clauses. Others have very complicated cost-out, inflationary clauses within the contract. So, from an ECS perspective, you're really going contract-by-contract. Our ability on events like this, surcharge, tariffs, to go back, in some cases they're still subject to a negotiation. So, when you look at year-over-year for ECS, it's really a story of volume [audio cuts out] favorable for us. We've got several new product launches coming out that will assist volumes. We've got market improvement as well across all of those verticals. All of that is really driving our activity.

We have significant productivity baked into the plan. That's some of the one-timers you saw last year with warranty issues, labor efficiencies, as we had the flood of volume. Those things leveling out from a profitability perspective. Pricing is really offsetting tariffs, known tariffs as of the end of 2018.

Patrick Wu -- SunTrust Robinson Humphrey -- Analyst

Okay. That's helpful. Just quickly on new products. You guys have done a solid job at rolling those out in fiscal '18. It sounds like there's going to be some ramp-up costs in the near term for that. How should we think about new product development going into the next fiscal year? Are you guys going to continue to accelerate that? Or should that be moderating somewhat versus '18 levels?

Randy Baker -- President and Chief Executive Officer

We have a base level of SAE expense associated with our [inaudible]. If we do add any incremental costs in there, it'll be an opportunity to bring in a new product idea. What we have budgeted right now and what we have on our new product development streams are covered in terms of our outlook for next year and reflected in our guidance. We're not saying another incremental ramp-up.

Rick and I are watching of the new products or new platform launches, what are the incremental revenues coming off it because there's a justification process that has to continue to happen, so that we [audio cuts out] how much we're getting back from that investment. We're managing it quite tightly. I think our engineers are feeling the freedom to be creative now. But we also want to have a controlled ramp-up and launch pattern for our new products.

Operator

Our next question comes from the line of Ann Duignan with J.P. Morgan. Please go ahead.

Ann Duignan -- J.P. Morgan -- Analyst

Good morning. Randy, could you talk a little bit about your revenue guidance? First in the context for each of our segments, core revenues came in better than expected in Q4, but your guide going forward seems very consecutive, particularly in industrial tools and service where you say you're going to outgrow the end markets and yet the guidance is for 3% to 5%. That doesn't seem like that's outgrowth of anything we're seeing out there. Can you talk about where was the surprise in Q4 and how consecutive is the guide you're giving today?

Randy Baker -- President and Chief Executive Officer

Well, Ann, you can well imagine, I look at all of our 14 vertical markets that we serve for industrial tools. I look at each individual growth rate and how fast did they grow last year and at what point do we anniversary those growth rates? On the 3% to 5% consolidated and the 3% to 5% for industrial tool, particularly, we feel that is an estimate that's realistic, and it's supported by all the major vertical markets. What we saw was a heavy ramp-up over the last couple of years.

As we anniversary, particularly in the first and second quarters of last year, when we came to full stride, there was a double-digit growth rate. So, to compound that again and say again that we would either have high single digits or low double-digit growth rate on industrial tool sales I think would be somewhat too optimistic. We're trying to be consecutive relative to what will pricing do with the tariffs, and will there be any tempering in the marketplace. So, I personally believe a 3% to 5% ramp-up on a year-over-year basis is in a range that's not extraordinarily aggressive, but it's realistic given the market conditions.

Ann Duignan -- J.P. Morgan -- Analyst

What would have to happen for it to be at the 3% and what would have to happen to be at the 5%?

Randy Baker -- President and Chief Executive Officer

To jump to the higher of the range? Largely, I think if you look at the various vertical markets we do participate in, some of them are getting to a mature level. So, if you look backwards in time, aerospace really started going double-digit growth all the way back into '17. That's a very mature market. Then certainly mining is still on a major mend. I think there's a lot of tools and equipment being taken into the mines, and that certainly has some upside to it. But it's only one market of the 14 that we sell in.

So, I think if we were going to come to the very top end or be at the very top end of our guide, we'd have to see some fundamental changes in the commercial construction, residential construction markets, and particularly in Europe. Europe has definitely tempered a bit over time, where we were in the high double digits to the mid double-digit growth rates. It has tempered back, and the same with Asia-Pacific. So, you need to see the European market and the Asian market really continue to hit on a double-digit market growth to support that level. But we're watching them very closely in terms of what type of revenue and what type of growth we're getting every single month.

Operator

Our next question comes from the line of Ming Dobry with Baird. Please go ahead.

Joseph Grabowski -- Robert W. Baird & Co. -- Analyst

Joe Grabowski on for Ming this morning. I wanted to start out asking about incremental margins in industrial. They were about 23% for the second quarter in a row. If industrial tools are 35% to 45%, obviously the smaller businesses are continuing to provide a drag on incremental margins. What's the outlook for the next few quarters? When do those drags start to normalize and maybe even turn to tailwinds?

Randy Baker -- President and Chief Executive Officer

If we just talk about you have heavy lift, which we believe the majority of that is behind us. In fact, the impact of large projects was negligible in the quarter. So, standard projects go lower than our standard tools still keep us from a segment perspective in that incremental zone that we like to see. When you look at Cortland, the other -- I'm sorry, from a tools perspective, that is what we expect to see going forward in those incrementals. Now, getting into the new segment structure, when you look at 2019, similar product-related margins for energy products, as we have in our legacy Enerpac segment-type products. And then on the service, we do see service growth, and some improving market conditions. So, those margins will blend nicely into what Randy has given as our normal incrementals, we'll be right there in the midpoint of that range.

The drags in the energy segment, slightly lower margin would be Cortland. That's on lower volume, but you see that improving. We saw significant improvement in the fourth quarter. When you think about going forward ex-Fibron, even with Fibron, because of the rebound in the market, those sales come with large margins. So, that is actually part of the view again of the standard view of ECS going forward. It helps lift that ECS margin from the low-to-mid teens, up into the 20s when you add in the Cortland business and the PHI business.

PHI lost in share. We do expect some of those to regain some share and a little bit of market growth in 2019. The margins will be still in that low-to-mid-teen zone if we're able to get back some share as forecasted.

Joseph Grabowski -- Robert W. Baird & Co. -- Analyst

Got it. Okay, thank you for the color on that. Then my follow-up question would be on first quarter guidance. The EBITDA guidance is pretty consistent with our expectations, but the EPS guidance was a little bit below where we were. Looking just at the midpoints, it looks like EBITDA guidance is up 50%, but EPS guidance is only up about 20%. It looks like the tax rates are comparable year-over-year, so is there something below EBITDA that's impacting EPS in the first quarter?

Rick Dillon -- Executive Vice President and Chief Financial Officer

Nothing below EBITDA impacting it. The year-over-year should be driven -- you have a little bit of mix impacting overall EBITDA margins, but the guide is driven off of the tax rate, and the flow. So, I don't know the disconnect with your model, actually.

Operator

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

Justin Bergner -- Gabelli & Co. -- Analyst

Good morning, Randy. Good morning, Rick.

Rick Dillon -- Executive Vice President and Chief Financial Officer

Good morning.

Justin Bergner -- Gabelli & Co. -- Analyst

First off, on the subject of capital allocation, is the goal to still focus both on acquisitions going forward? Would you buy back shares if you don't find such deals? Is there any benefit from balance sheet in your guidance?

Randy Baker -- President and Chief Executive Officer

Our primary objective is still to find good acquisitions. Now, whether it's a bolt-on, or a larger, more meaningful acquisition, we believe in the tools sector. That is well within the bandwidth of the company. We've spent the last two years preparing ourselves to handle larger acquisitions if they were available.

From the perspective of share buybacks, we track that. That's certainly within our capital allocation strategy and priority. When the opportunistic price is there, we will get into the market and buy shares. But the priority has always been pretty clear. No. 1 is invest in ourselves, which we've been doing. No. 2 is making good acquisitions that support the tool and service strategy. No. 3, share buybacks and debt reduction. Now, from the balance sheet perspective, I'll let Rick cover that.

Rick Dillon -- Executive Vice President and Chief Financial Officer

Sure. There's no plan at this point to buy back shares. When you look at what we have before us, the debt structure is in good shape. We will likely just as normal course, given the maturities, restructure our debt, but it'll come out with a similar fixed versus variable. So, from a balance sheet perspective, certainly at this leverage, we feel pretty good. It does give us the capital to really focus on acquisitions. Those acquisitions could be bolt-on, could be larger and more meaningful. We obviously have a strategy that says 50% of our growth will come from M&A. As we sit here today, we think we can execute that strategy, which does not include a share buyback.

Justin Bergner -- Gabelli & Co. -- Analyst

Got it. Just to follow up there then. The EPS guide assumes that the $80 to $85 million of free cash flow either pays down debt or builds up as cash?

Rick Dillon -- Executive Vice President and Chief Financial Officer

Yes.

Operator

Our next question comes from the line of Seth Weber with RBC Capital Markets. One moment please. Please go ahead.

Seth Weber -- RBC Capital Markets -- Analyst

Good morning, guys. I have actually a few clarifications, if I could. Rick, on the free cash flow guidance for the year, can you just tell us what that $10 million of other positive contribution of free cash flow guidance is meant to be?

Rick Dillon -- Executive Vice President and Chief Financial Officer

Sure, you're referring to the walk back to GAAP?

Seth Weber -- RBC Capital Markets -- Analyst

It's on the last page of the press release, I think.

Rick Dillon -- Executive Vice President and Chief Financial Officer

Right. What we typically do is we note EBITDA, we note capex, and there usually are a bunch of other items that come through impacting cash flow from operations. Things like taxes, incentive comp, interest expense, all of those things come through. And so the $10 million is kind of our other that we know will have an impact on cash flows. The overall number, we do the bottoms up build and we try to reconcile to the GAAP number, which shows cash flow from operations as a stand-alone item. So, it's just our walk back.

Seth Weber -- RBC Capital Markets -- Analyst

Okay, all right. Thanks. Then in the prepared remarks, I don't know if it was Randy, you mentioned launch costs could be a headwind going forward. Is that an incremental headwind or that's just normal cost of doing business? I'm just trying to understand if you think these launch costs are going to get to be a bigger headwind going forward versus what we've seen?

Rick Dillon -- Executive Vice President and Chief Financial Officer

Two things. In 2019, we have more new product coming, certainly than we did in '18. As Randy's described, it's more than we've historically had. But launch costs are consistent with all new product kickoffs, similar to what we saw both in IPS, and what was saw in prior years with engineered solutions as we brought on new platforms. I don't think they're incremental headwinds. I think when you look at the guidance and the volume of new product that's in our 3% to 5% growth, but NPD helps us outpace the market. Those costs will mean, as I think the comment was, the margins, incrementals on those specific items may not be exactly at that run rate, but certainly factored into our overall guidance.

Seth Weber -- RBC Capital Markets -- Analyst

Okay. I'm sorry if I missed this, but was there something in the energy mix this quarter? Fourth quarter margin versus the third quarter margin? I'm just trying to understand, is this a business that should do on a EBIT basis high single digits going forward? Or is this a mid-single-digit business in aggregate as you're thinking about next year?

Rick Dillon -- Executive Vice President and Chief Financial Officer

I think we view energy as it's presented historically would be in that low double, high single range going forward. Absent large projects. There was no significant mix, if you will, in Q4. It was more so just the rebound and the efficiencies created by our service organization and our product sales. But no real mix contributor to those numbers.

Operator

Next we have a follow-up from the line of Scott Graham with BMO Capital Markets. Please go ahead.

Scott Graham -- BMO Capital Markets -- Analyst

I had questions on mix through all three segments. You answered several of them. But I did want to maybe revisit industrial, where on a sales basis, how does heavy lifting end up in 2018 as percent of the total in the old segment format here?

Randy Baker -- President and Chief Executive Officer

It would be about a 10% or 12% of the total. It's roughly about a $40 million business. It would track in -- you can see in our fourth quarter, we got the business profitable and then our objective is to get that as a normalized heavy equipment-type company, which would be operating profits in the teens. It's not a big contributor. We think that a lot of the standardized products can be even more profitable as we go forward, but we've don't a lot in the third quarter, and started in the second quarter to completely restructure that business, and to make it a profitable entity.

Scott Graham -- BMO Capital Markets -- Analyst

Understood. At that level of percent of sales, I guess I'm wondering why mix was negative in the segment? Does that suggest that the tools sales were mix negative?

Rick Dillon -- Executive Vice President and Chief Financial Officer

There's two things going on. The percent of sales is lumpy on a quarterly basis. And so there's the jolt of heavy lift in the quarter. We also have significant bolting year-over-year [audio cuts out] growth, and that comes in, again, at a slightly lower gross margin than at the normal set of tools. Those two combined are really the mix issue within the industrial piece.

Scott Graham -- BMO Capital Markets -- Analyst

Got it. Thanks, Rick. That's all I had.

Operator

Our next question is a follow-up as well, coming from the line of Justin Bergner with Gabelli & Co. Please go ahead.

Justin Bergner -- Gabelli & Co. -- Analyst

Thanks. A couple quick ones here. So, the $3 to $4 million tariff impact per Section 301, List 3, that assumes that the 10% kicks up to 25% at January 1 and there's no pricing vis-à-vis any of those tariffs for the 12-month period?

Rick Dillon -- Executive Vice President and Chief Financial Officer

Yes.

Justin Bergner -- Gabelli & Co. -- Analyst

Okay. Second clarification. On the tax side, is the 20% also sort of an indication of cash tax rate going forward more or less?

Rick Dillon -- Executive Vice President and Chief Financial Officer

Assuming no change, yes. But keep in mind there's a lag on the rate in cash impact. So, payments this year won't equal the 20% rate, but it'll be a blend, if you will, of the prior rate and the current rate.

Justin Bergner -- Gabelli & Co. -- Analyst

Okay, great. Then just lastly, on the M&A side of things, I realize concrete tensioning wasn't an acquisition done by the current management team, but there were higher hopes for how it would perform. Any lessons learned from that deal in terms of what went wrong, and how that informs future M&A decisions?

Randy Baker -- President and Chief Executive Officer

Well, I'm not going to critique prior management, but I will say that our strategy going forward on any M&A activity has to be clarity on trying to dominant share space within the tool and/or service sector. So, as we build out the 5 vertical markets that are associated with our targeted tool companies, that's where our M&A dollar is doing. It'll be broken into two buckets: large, transformational style acquisitions, and smaller, more tuck-in, which are really a supplemental activity to R&D.

We saw that in some of my prepared comments that the smaller acquisitions, although they don't move the revenue needle as much as we would like, but you get an injection of tools into your catalog that are then marketed through the vast number of Enerpac dealers globally. And so you can take a regional, small company and give them the breadth of our entire distribution channel, and it is a great supplement to the R&D. In fact, it's a very efficient way to bring new products to the market quickly, and get a nice revenue pop.

So, that's the things to be thinking about from our end on M&A activity. If we've made an acquisition, you can be very assured that it was in the tool space.

Justin Bergner -- Gabelli & Co. -- Analyst

Got it. Thanks.

Operator

Our next question is also a follow-up from the line of Ming Dabori with Baird. Please go ahead.

Joseph Grabowski -- Robert W. Baird & Co. -- Analyst

Hi, guys. Joe Grabowski again. Thanks for taking my follow-up. Just a quick question on the tax rate. If it's 10% to 15% in Q1 and 20% for the full-year, any initial thoughts on cadence Q2, Q3, Q4? Is it sort of a calendar year issue why the tax rate is lower in Q1 or how that flows through for the year?

Rick Dillon -- Executive Vice President and Chief Financial Officer

It is quite lumpy throughout the year, as it has been in the past. It's more of a function of how some of the planning items come through, and less of taking the 20% and [audio cuts out]. So, there will be this movement, if you will, throughout the year. We also have in the front half of the year, lower earnings, so that's going to give you naturally a higher percentage [audio cuts out] at the end of it will be 20%. Then we again have back half of the year, that's our highest year, so you have a lower rate in the back half. But there is no specific cadence. It's definitely going to be as lumpy as it has been historically.

Joseph Grabowski -- Robert W. Baird & Co. -- Analyst

Got it. Thank you.

Operator

There are no additional questions at this time, gentlemen. I'll turn the presentation back to you.

Randy Baker -- President and Chief Executive Officer

Okay. Thank you very much, and thank you, everybody, for your interest in the company. We'll talk to you at our first quarter earnings call. Thank you very much.

Operator

Ladies and gentlemen, that does conclude today's presentation. We thank you all for your participation and ask that you please disconnect your line.

Duration: 57 minutes

Call participants:

Randy Baker -- President and Chief Executive Officer

Rick Dillon -- Executive Vice President and Chief Financial Officer

Fabrizio Rasetti -- Executive Vice President & General Counsel

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Scott Graham -- BMO Capital Markets -- Analyst

Patrick Wu -- SunTrust Robinson Humphrey -- Analyst

Ann Duignan -- J.P. Morgan -- Analyst

Joseph Grabowski -- Robert W. Baird & Co. -- Analyst

Justin Bergner -- Gabelli & Co. -- Analyst

Seth Weber -- RBC Capital Markets -- Analyst

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