Enerpac Tool Group Corp (EPAC) 2003 Q1 法說會逐字稿

Good day ladies and gentleman and welcome to the Actuant First Quarter Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. As a remainder, this conference call is being recorded. At this time, Actuant has asked me to read the following statements.

Certain of the above comments represent forward-looking statements made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Management cautions that these projections are based on current estimates of future performance and are highly dependent upon a variety of factors, which could cause actual results to differ from these estimates. Actuant's results are also subject to general economic conditions, variation in demand for customers, the impact on the economy of terrorist attacks and threats of war, the length of the current recession in the Company's markets, continued market acceptance of the Company's new product introductions, the successful integration of business unit acquisitions and related restructuring, operating margin risk due to competitive pricing and operating efficiencies, supply chain risk, material and labor cost increases, foreign currency fluctuations and interest rate risk. See the Company's registration statements filed with the Securities and Exchange Commission for further information regarding risk factors.

I would now like to introduce your host for today's conference Mr. Robert Arzbaecher. Mr. Arzbaecher is President and CEO. Mr. Arzbaecher, please begin.

Thank you and good morning. We appreciate your participation on this call. This morning we will go through about 20 minutes of prepared remarks and then open it up for your questions. Andy is going to start off with financial review of the first quarter, and then I am going to come back on and give you an update on few of our markets. Our progress on the Kopp acquisition and integration and lastly conclude with update of our guidance for 2003. Now, I will turn it over to Andy to go through the numbers.

Thanks Bob. Good morning everyone. Our results for the quarter were as follows: Sales were about a $148m up 31% from last year. The increase was due to the inclusion of Kopp, which we acquired in the early September as well as increased demand in number of our markets especially those served by Engineered Solutions.

Excluding the Kopp acquisition, our sales were up 7%, about 3% of that came from currency rate changes. Our EBITDA for the quarter was $21.5m excluding special charges or 14.5% of sales. This compares to $20.1m or 17.8% of sales last year. Most of the reduction in the margin is due to the impact of adding Kopp to the mix, which I will address in more detail in my prepared comments.

Our diluted earnings per share for the quarter all in, including the special charges as $0.15 a share, compared to a loss of $0.31 a year ago. However, both this year and last year includes some special charges. Last year if we recall, we adapted a new goodwill accounting standard and took an impairment charge. This year we have a 2m charge related to the early extinguish kind of debt and a -- $3m charge for divested units. Both of these were disclosed in last week's press release. Excluding these charges, this year and last year diluted EPS for the quarter was $0.64 a share, up from 54% last year to 19% improvement.

I am just going to spend a few minutes reviewing the special charges before moving on to talk about operating results from our continuing businesses. The first item is a $2m charge for early extinguishments. We talked about this on our year-end call but we also bought back additional bonds late in the quarter. In the total for the quarter, we bought back about $10m of our 13% notes. So that the charge represented the premium on that as well as the prorata write-off of the the remaining capitalized debt issuance and debt discount cost. Due to the new accounting rule, you'll notice in this quarter, this is not reported as an extraordinary item but as a separate item in non-operating activities.

The second special charge we took during the quarter was the $7m increase in resource related to litigation identification provision for prior business divestitures. New information surfaced late in the quarter on a few cases that necessitated the need for a larger reserve. We are actively in the middle of these discussing these contingencies with the other side and don't want to say a lot more - much more about them publicly.

Most investors had called in shortly after the press release wanted to know if there are any other contingencies of this pipe that we are aware of. The response is there is one other very minor item in the range of couple hundred thousand dollars that we have reserved. The only other contingency is beyond these then that we're aware of related to APW, which we covered in detail in past conference calls, and we believe, we are adequately reserved. Overall for the quarter, we are satisfied with the results other than these special charges.

Our sales and profits were better than our expectations. We saw improved sales from some markets. There was really no change from other market and I will go through that in a few minutes. Most of the improvement came from the additional market share wins that we talked about in comp, with the underlying economy still flat to down slightly. Our cash flow and debt were pretty much in line with our expectations. On the progress side, we are very happy with the sales growth and believe it demonstrates our ability to grow sales two times GDP.

We are also very happy with the progress date on comp, which Bob is going to cover in more detail later on today. The negative from the quarter from our perspective was certainly the litigation or the divested businesses, the charges there in the lower Engineered Solutions margins. Nonetheless we are after a good start with a 19% improvement in EPS, which is a pretty good deposit on our $2.75-3.00range, which represents a 15-25% growth in diluted EPS. We are right smack in the middle of our range.

Now I am going to provide a little bit of color and results by segments starting first with our tools and supplies sales. The sales were up 44% for the quarter, which included Kopp. If we pull Kopp out, sales were up about 1%. Sequentially, this is an improvement over the fourth quarter when tools and supplies were down about 1% from the prior year. Digging down further Enerpac (ph) sales were up in the low-single digits due to growth in Asia and Europe with shipments under them [Inaudible] order that we announced last year starting to go into France. Our North America Enerpac (ph) sales were still slightly negative on the top line year-over-year. [Inaudible] sales excluding Kopp were down low single digits in the prior year with the retail being flat and wholesale distribution, the OEM sales volume in negative territory.

We believe this is due to the continued softness and commercial construction, which these two markets primarily service. Kopp sales for the quarter were very encouraging up 2% over what Kopp generated in same three months last year, which of course was prior to us owning it. Given the overall weak conditions in the Germany economy, we are pleased with the Kopp's performance.

Turning now to our Engineered solutions segment. Its sales in the quarter were up with strong 14% over last year that 10% excluding currency. ES sales, our Engineered solutions sales have increased year-over-year in each of the last five quarters due to the improved demand from RV automotive and then truck market. One very encouraging item for the quarter was the fact that all of our Engineered Solutions businesses should include Power-packer or Power Gear, Milwaukee Cylinder and Nielson sessions reported year-over-year sales growth in the first quarter. This is the first time we are seeing that in the long time.

RV market sales for the quarter were up 17% over the prior year. This strong showing is partly due to the weak first quarter last year, which included September 11th, and I think a lot of pensiveness coming out of that and leading into the RV show in December of last year. Demand really jumped after that December show, so we want to caution you, we are not expecting this kind of growth in our second quarter.

However, we are very happy with the RV business' performance, despite the loss of some business over the last six months, sales have been strong. We also feel good about the industry, fleet where this morning had a good press release out on a 25% order growth at the RV show and its most recent quarter at 31% sales growth. Winnebago also an industry player up 30% in this morning's press release as well. Bob is going to provide more color in our takeaways in the RV show in his comments. Moving on to the truck market, we were up 8% truck versus the first quarter of last year, which is good news. This is a second quarter in the row with top line growth. European truck customers are increasing their production levels. I think it is partly due to some of the success of new platforms that they have rolled out in the last year. Our domestic truck volume is still negative on the top line year-over-year.

Turning now to convertible tops, we have some interesting situations. Our sales were up 1% in terms of revenues on a constant dollar basis, but they were up double digit in terms of systems shift. While there are points to the fact that we had a number of our lower price systems coming into production this quarter and really ramping up volume, the VW Beetle in particular. And conversely that we had fewer of our higher of all to higher price point systems with more futures shipping during the quarter such as the Mercedes CLK.

I will discuss shortly that certainly impacted our margins during the quarter. We will remain bullish on auto for the balance of 2003 and beyond. Our coding activity is still very high and we believe that several models will be awarded over the next six months. Turning away from sales, looking at operating profit on EBITDA, before special charges for the quarter both were up over the prior year on account of the higher sales volume. Margins, however, were down as I commented because the business mix both from the addition of Kopp at a lower of profit margin level and Engineered Solution sales becoming a larger percentage of the over all pie excluding Kopp.

In addition, there is another factor then I will review here that influence the EBITDA margin. Specifically for the quarter our EBITDA excluding the one-time items were $21.5m up from about $20m last year. EBITDA margin 17.8% this quarter versus 14.5% last year. Kopp really influenced the quarter from a margin standpoint because it historically has generated single digit -- mid single digit EBITDA margin. So overall you add this in the mix that have an impact of about 200 basis points on our overall margins. Excluding special charges and Kopp, our EBITDA margins were down during the quarter.

Tools and Supplies margins were down slightly but nothing. We got too concerned about. In this climate, it was a little bit concerning with Engineered Solutions will be at 14.5% margins versus 17.8 year ago and what I am going to do here is walk through our reconciliations, some of the bigger items that impacted our margins during this quarter.

First, as I commented earlier, we saw a lot of volume from a new convertible tops that came into productions during the quarter and items or systems that were launched in the last few quarters. The Beetle, the Opel Astra, the Audi A4 are some examples of these. Couple that from some other more mature lines Mercedes CLK, the Saab, the [Inaudible]. As you’d expect the margins are lower when we start new platforms due to the learning curves we are only focused on getting the volumes out for customers.

Couple this with lower volumes and some of more mature lines were cost reduction focus has been literally more intensive and you have a margin squeeze. In total we look at this, we probably see it impacted our margins about 75 basis points the mix issue. Secondly, we have got a situation when we brought up a staff in the US up for the convertible tops because we are going to start producing convertible tops in the third quarter of this fiscal year.

So we have got engineers in place purchasing people joined a quality people and putting in a system as well. We have got no revenues to cover this overhead. So the impact of the extra cost here brought down our overall profitability as well in ES, Engineered Solutions by about 25 basis points. We also as we have said in the past about lot of engineering activity going on today, both in Europe and in the US appearing from model that aren't generating any income today.

This is the investment we estimate today for the revenues that have come later this year into the future. Two other items that impacted on combined basis our margins by 100 basis points with severance cost in the quarter and Engineered Solutions and the start up costs in our convertible top launching joint venture in Germany between the two with the 100 basis points hit to EBITDA margins for Engineered Solutions.

The last item and we have discussed this in the last couple of quarter is [Inaudible] joining with the RV slide-out market and we intend to be using place as a tool to compete in this market. We have seen some impact from this as selected accounts this quarter but expected cost reduction programs being implemented and it should be taking hold in at late second and third quarter will offset this in the future.

So as you can see, if you take all these items I just discussed and you add them together, you have got about 300 basis points are self drag on the Engineered Solutions EBITDA margins during the quarter. We have looked at this pretty hard. You looked at the margins for the balance of the year and later what we saw in the first quarter. We are comfortable. We are going to hit the EBITDA for the Engineered Solutions through a combination of cost reduction, elimination of some of these one-time items such severance and the learning curves and this overall improved mix within the segment.

I think one other item to point out as well as, I did feel we are not happy with the slip here, but if you look at the trend from the last year, we also had down EBITDA quarter margin wise in the second quarter and it did bounce back after that as well. Moving away from the income statement now on to cash flow. I'd like to just say our cash flow with debt was pretty much in line with our expectations going into the quarter. While our debt did increase about 15m up to roughly 208m at the end of the quarter essentially all of this came from a Kopp acquisition. In addition to the Kopp, we had cash payments during the quarter, where semi-annual high yield bond interest as you recall, that happens first quarter and third quarter of each year. In addition, we had a couple of million dollar premiums for the bond buyback.

We paid out annual incentive comp for last year and a higher capital expenditure this quarter. Excluding the Kopp acquisition working capital management for the quarter was pretty good. Our metric here is primary working capital as a percentage of trailing 90 days annualized sales. We are just under 20% excluding Kopp, which as the second best quarter we've seen since the spin-off. Despite the working capital management, we definitely did use cash in the quarter, as our receivables grew $8m and about $7m of that 8 came from Kopp, because it just went through it's highest sales, seasonal sales quarter of the year.

We expect to get this cash back over the next couple of quarters as the seasonal sales trends come into play. Pro forma for Kopp inventories and payables both declined modestly during the quarter.

As Bob's going to comment on later in our prepared discussion here, we are pretty confident we'll be able to get some working capital out of Kopp during the balance of 2003 and beyond. Our capital expenditures for the quarter were $3.3m again below but our depreciation and amortization was for the quarter a little bit higher than last year. The higher capital expenditures correlate with all the automotive activity we've got going on. We are in the process of building a number of production lines for uses over the next - for use launches in the next 12-18 months. We still believe our capex for the full year will be in the $10m range.

Leverage for the quarter ended about 2.7, that is up from 2.3 times trailing EBITDA. That's because we've included the one-time charge for the divested business is in here, but we're still comfortably in our zone if you will in 2-3 times EBITDA. We expect that certainly to move down by the end of the year. Our total borrowing availability at the end of November was still a very strong $75m. With that I'm going to turn it over to Bob.

Thank you Andy. Now I'd like to update you on a number of other businesses and initiatives that we've been working on. The National RV Show was in Louisville, the first week in December. For those of you who don't follow the RV industry, this is their big show, where the dealers are committing to deliveries from the RV manufacturers for the next calendar year.

From an industry perspective, attendance was up about 10% and most of the OEMs stayed at that order-taking activity, was also up from last year. Both industry experts feel the RV markets growth in 2002, which is up in the mid teens from 2001 will moderate as we go into 2003 to mid single digits, somewhere in the low 300,000 units on a national basis including both travel trailers and motor homes.

From Power Gears point of view, the show confirmed a number of important items. First the slide-out phenomena is not over. We saw several quad slides at the show, which a quad slide is four slides on a single unit. We even saw a quint slide, if that's a word five slide outs on a single unit. This thing obviously increases Power Gears content per vehicle. Second, we came out with a number of lightweight products in both slide-out and leveling product lines. This addresses the industry's focus to remove weight out of the frames, the chasses and by doing that you are allowed to put more amenities into the RV.

Power Gears lightweight products were displayed in our booths at the show. They were very well received. We had already booked orders prior to the show from both Monaco and Dieman (ph) to use these products for the balance of the year. When you take a look at our RV sales for -- our forecast for 2003, we anticipate about an $8m fall off from the loss of key stone and forest river business during the last nine months of this year. This will be partially offset by the $4m of new business and industry growth that I just described above with Monaco and Dieman (ph) plus the industry itself and all that together will result in a net sales decline of about $4m and that should put our RV revenues in the $80-85m range for this year.

Our litigation against Lipper, which is a subsidiary of Drew Industries, an American stock exchange company for patent infringement is continuing. I can't give you much guidance about this litigation other than that I tell you, we remain confident in both our legal and patent position regarding this litigation. Moving from the RV business to Kopp, it has been three months since we owned, we completed the Kopp acquisition. The news so far has been very good. The business is tracking to our expectation.

Sales have been a little stronger than we expected. This is the result of two new line sales at several home centers in Europe and also the fact that the fall is seasonably Kopp's strongest quarter. From an operating front, the big news is that we have been able to use the Actuant LEAD process. LEAD stands for `Lean Enterprise Across Discipline`. It is our old world-class performance program. We have been able to use this significantly during the Kopp integration process. A group of the German Kopp employees have been trained on this process, the LEAD process and they have been embracing these new tools and most of the changes that we have proposed.

Some key highlights of this are as follows: 2000 SKU's have been identified for elimination out of a total of about 8000 SKU's in the Kopp product line. 5S and calm down activities have been started. This has helped us reduce Kopp inventories by $2m alone during the first quarter and allowed us to shutdown certain sales and production lines and wait for the volume to actually come in from the marketplace, rather than building inventory. By moving the Kanban, we see lots of opportunities to free up additional square footage, warehouse stakes and all of this result in less square footage needed.

We have already identified a plant to close in Germany, which is expected to yield annual savings of about $2m a year. This closure is going to take place in the third quarter. Our headcount is 100 people less than a year ago and increased sales volumes, so our productivity has been improving, and lastly, we are investigating the possible sale lease back of the main Kopp facility in Cole, Germany, which if successful will free up about $10-12m that we will be able to use to reduce debt and we expect that we can accomplish this in the second half of this year. So, we remain very excited about this acquisition. I am very excited about the management team, the employees that we got from the Kopp acquisition.

I think we see significant synergies and having our electrical business in Europe, and I think we can achieve EBITDA and margin expansion in Kopp similar to what we experienced in Gardner Bender in the late 1990s and early 2000. We only ask that Wall Street recognize that these cost reductions in Germany take a while to realize. So much of the margin expansion is going to be in 2004. Moving from there to the convertible top business, we have continued to have great success in this product line. As we announced last week, we have won two additional programs, the Corvette and one another program that we can't disclose due to the customers request.

Since the spin-off, we have won 12 out of 15 new programs. Those are new models that have come out and we have also won all the replacement programs, which were incumbent. These new programs include the Chevy SSR, the Cadillac XLR, the Audi A4, the Volkswagen Beetle, PT Cruiser and the [Inaudible] just to name a few. As I stated many times, we are confident with our ability to triple our unit's volume and double our revenue volume by our model year 2006.

You will be able to experience this first hand in three weeks as we are having an investors conference, which is at the Detroit Auto Show on Wednesday, January 8th. If you need more information about this, or would like to attend, contact [Inaudible] at Actuant and she can fill you in on the details.

Lastly, I would like to cover our guidance for fiscal 2003 and the news is quite simple. We are reaffirming our prior guidance. This calls for sales of 545-575, EBITDA of 90-95m and EPS of $2.75-3.00 a share, again excluding the special charges Andrew referred to that happened in the first quarter. This represents EPS improvement of 15-25% over last year's 2.39.

Diving a little deeper, the second quarter is always our weakest - is always Actuant's weakest quarter. That's due to the fact that you got the holidays in December and then a short work months in February. Coupled with the winter season, which affects several of our businesses that is all under the construction industry. We expect the second quarter EPS to be in the $0.50-0.55 range on a diluted basis with sales of about a 135m. If you look at this against last year, it represents EPS improvement of 15-25% over the $0.44 a share we reported last year and last year's 44 included about $1m of pre tax, fire gain, and currency gains that went through the numbers.

We are sticking to our prior free cash flow targets of 40-45m. This excludes additional acquisitions and the Kopp acquisition excludes one-time litigation, settlements that Andy referred to and it excludes the offsetting effect of the sale-leaseback transaction at Kopp if we completed it. All things included we expect our debt to be in a $160-180m neighborhood by August and our leverage below two times trailing EBITDA. Obviously, this does not include additional acquisitions.

So, in summary we feel we are tracking very nicely. Our EPS was up 19% for the quarter excluding the special charges, in line with the 15-25% EPS growth we are expecting for the year. The economy doesn't appear to be shrinking or growing than last year, this was basically our assumption when we came up with our guidance for the year. As we predicted, our 7% base sales growth is being driven by market share gains and demographic trends and I believe it is out pacing most industrial companies. In addition, cash flow trends in the Kopp integration are progressing as expected. So, in summary, we are quite happy with the quarter as reported. Operator now I will turn it over to you for the questions.

Thank you Mr. Arzbaecher. If you have any question at this time please press the one key on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue please press the pound key. Again, if you have a question please press the one key on your touchtone telephone. One moment for questions. Our first question is from David Grove (ph) of T. Rowe Price. Please go ahead sir.

Hi, congratulations on a very nice quarter in a very tough environment.

Thanks Dave.

Just a couple of, sort of, smaller questions, one, what is the timing on the 2000 SKU thing moved out of or being eliminated at Kopp and also if you could -- is the severance cost in Engineered brought into the systems? Is that a one quarter phenomenon will that drag into Q2 or that's sort of go away, and the same question with regard to the start up cost that impacted the German joint venture?

Okay, we will try to hit these questions the first one related -- let me hit the severance question first. The severance that we are discussing, we think it is pretty much a one-time event. We always have a little bit of severance, but this was a higher quarter we have a number of terminations in Europe, and we also as you know reorganize the US, RV business and these are the two that are common for the majority of that severance change. The other question related to the SKUs, we are in the process of removing those SKUs as we speak. Our guess is we probably lose a couple of million of revenue associated with this, but these are the low profit SKUs, they’ll probably be out by, say March, April timeframe and we are in the process in notifying customers etc. on -- this is, David, this is classic lead process for Actuant. It is the 80/20 role that ITW's [Inaudible] and that was very well in our distribution intensive businesses with a lot of SKUs and Kopp that clearly had never looked at their product line in that kind of an SKU format.

Let me take last part of your question German start up cost with a Joint Venture we had over there, we expect to have a very minor drag in the second quarter production. Pre-production really starts in February on this [Inaudible] . It won't be with us much longer. I think it would be definitely less than the first quarter.

Okay, great. If I guess there is one other question. Can you talk a little bit strength you are seeing in the truck market in Europe. If memory serves it is still flat to down maybe little bit -- maybe up little bit depending on the customer mix and I know you had some new wins there. Can you may be elaborate just a little bit further what you are just being on the truck side that's some that's -- that's very positive?

Yeah, two factors, David, the first is our mix of customers. Today we do not do much Mercedes and Mann, the two big German car companies -- truck companies. We have most of the other Europeans, that's a vehicle Volvo, Renault, and Dawes (ph) these kind of customers. So, what happened is Mercedes and Mann have lost market share against these people. So, our mix has moved towards the customers we have in the stable today. The second factor is a system cell we sell to Volvo. Volvo is a -- we have developed our full complete system to basically take labor out of the factory by supplying housing and electronics, almost that kind of a convertible top system environment. First customer ever to do that was Volvo, and we started that in Ernst late last year, so, when you comparing this year's first quarter it was not in last year and that's probably a couple of percent of that growth that Andy talked about.

I actually have one follow up question to that, as you had the success, I guess with Volvo with that system cell, the other customers that you serve in European truck market, are they willing to go, are they -- on your discussion have you talked to them about potential to do more of a system cell with them as well?

Yeah, we always push that because I think, it is of real value to take labor out of these shops, and we have seen that in convertible. I wouldn't -- I would tell you we don't have much evidence than anyone else is following Volvo at this point.

Okay. I will get back in the queue, thanks.

Our next question is from Robert McCarthy of R.W. Baird. Please go ahead sir.

Hi, good morning guys.

Hi Rob, how are you?

Hi, Rob.

I am fine, thanks. Andy, could you give us a little more detail on how the currency impact affected the numbers? Lets see, we know engineered solutions was up 10 excluding “fx”. What was the comparable impact at tools and supplies?

Give me one second to follow-up that.

Sure.

Tools was up probably about 4% -- 3.5% excluding it. I feel the 3.5% with the benefit of currency about 1% without.

Okay, the plus one ex-Kopp was also excluding…

Yes, that is excluding Kopp as well.

Okay, and then I am trying to -- well, the comp itself, I should have had also a currency impact on its numbers?

What I did when I [Inaudible] about the 2% growth. That is in Euros, it’s Euros to Euros.

Okay, so, then Kopp compared with what last year's numbers would have been translated at. You also got to benefit there as well, right?

We would have had we owned them last year --

I understand.

What I think, what Andy just said was that the growth in Kopp was in Euro. So, it’s an absolute number.

I understand, my question ultimately is what would have been - I don't know if you have this Andy, can you tell us what a average Euro rate would have been in the year prior quarter?

We probably would have picked up another 3 -- 3 points in Kopp, it probably would have been in the 5% range.

All right, that's helpful, thanks. Bob your RV outlook roughly $80m plus business, industry growth up mid-single digits and you are only talking about mid-single digit growth from new products. I am ignoring the lost business piece of it?

That's correct.

Why wouldn't you be growing faster?

Due to the slide-out phenomena?

Yeah.

We probably are, I mean I don't have it down to the minute detail that you are talking about. I think as you see that I think we will be discussed in the fact that were may be at the higher and not 85 more than the 80 range, but you know I think, I am just trying to be over concern there.

One of the items in there Rob, is pricing on some of this lighter weight products that versus the heavier products that influencing a bit, if you have, you know, 4-inch slides versus 3-inch slides that's going to be impacted. The margins should not really be impacted by that, but top line a bit.

That's a good point.

All right, you anticipated my follow-up. And how do you feel, I mean I didn't really hear anything from you Bob qualitatively about how you feel about the -- one of the issues has been that business as an integrated unit hasn't been performing like you have expected it to. Can you talk a little bit about what kind of progress is being made there?

Sure, as Rob knows and others might not, I made a management change in the RV leadership in the middle of the summer or late summer of this year timeframe, put Bill Blackmoore (ph) in charge of that business unit, and I have been very impressed. We have used a number of corporate resources; Ralph Keller (ph), [Inaudible] has played a big role there. Some of the sourcing people have played a big role. I think Bill brought an incredible amount of focus to what are the key issues. Our delivery performance was not up to standards. The big push of new RV's that came on in early January, February of last year. We built a big backlog, we are delivering well on time. That is largely behind us, we are in the mid 90s, 95, 96 on time delivery. And this is an industry where they give you kind of 24 hours notice that they are dropping an order on you. So, I think Bill had done a great job on that. Met with all the customers, I got to meet most of them at Louisville. I think, the customers have recognized the change in power here. The customers have lot more confidence that we can bring the new products out, the lightweight products after seeing new product development, which wasn’t getting done, while we are trying to integrate these businesses. So, while the bottom line performance is not exactly where I would like to see it. Bill has really passed my expectation to where he would be at this point. Given he’s only been on the job for 3 or 4 months.

Allowing for seasonality, shouldn't we expect ongoing progress quarter upon quarter?

Yes, and I think when you and Andy, discussed the second half EBITDA margins one is that it gives us a little bit of confidence just that - that you are going to see quarter-over-quarter improvements. We continue to get the focus and knock off some of these projects that Bill has been working on.

Lastly, just a couple of details on cash flow, Andy, what was D&A in the quarter?

D&A was about 3.7m.

3.7, and forgive me, but you gave us great detail on what's going on with working capital, more than I could assimilate, when we see a cash flow statement what would we see for a net investment and working capital in the quarter?

I believe it's going to be in the range of -- use of $7m or so.

About 10?

No seven.

Seven, okay, all right, thank you.

Our next question is from Wendy Caplan of Wachovia Securities. Please go ahead Ms. Caplan.

Thank you. Hi, it is Wendy Caplan from Wachovia. Can you tease out for us in the RV sector, how much of the gain with strength and how much was greater penetration?

You mean this quarter?

Yes.

I think it's all strength. There was no penetration. We, in fact the 17 would have, in the first quarter of last year, we still would have had the majority of the keystone business from the prior year. So, my guess is you have got a probably $1.5-2m of keystone fighting against the headwind that had one you just described. There have been new wins at Monaco and Damin, are future events, second and third quarter. We did win some additional Class C business with Fleetwood that helped this current quarter, but I am not sure that would have move the needle that much.

Okay. And I am not sure, as I heard you correctly, the new lighter weight slide out that you have introduced, can you talk about them relative to pricing because intuitively I would have thought they would have added value and been stronger in terms of pricing. Did you say they were?

A lot of the slide-out system is supposed to rail the slide-out rides on and it's the square tubing with the [Inaudible] that have been in it. We have moved from our 3-inch or 4-inch tank. We have got some applications that are down to 2 inches. So that steal Wendy, you tend to just past through to the customers -- they can price that they understand what the profit of steel is. So, that's the piece that lowers the price of some of these light weight systems.

They are certainly are aluminum slides that we saw at the show as prototypes. That sort of things that we issued earlier that takes up the pricing, which is the problem for the OEM file. You are seeing them just squeeze down on the material.

I think you will see some high aluminum slides and what happens in the RV industry? Is that -- they had a class weight that they are allowed to carry on the road. On the same, it depends on what kind of license you have and these weights obviously if you have been to at the show, Wendy. If people are adding more and more gadgets on the inside bigger TV's, bigger refrigeration, Jacuzzi tubs, fire places all kinds of stuff being added and what's happening is they are running up against the limits on what they can put on a frame. So obviously, we can take weight out, I find it very attractive to the RV industry because they can then road it up with more gadgets on the inside rather than spending the weight on the slide-out and leveling systems. So it is a very important trend that I think you are going to see us talk about going forward and is it the crux of our ability to design an engineer additional systems that takes this into account and it has been a big move in the last six months for power gear, and I expect this to be a major differentiation between us and the lower-end competitors.

Okay. Thanks Bob and one last question quickly Andy, the corporate expense line seems to little low to me. Is that sustainable?

Our variability in that line and have to do with what legal costs are what special projects are that's have been. It's a touch lighter than and probably what we expect to see, but nothing that dramatic.

Thank you very much.

Again, if anyone of you have a question please press the one key on your touch-tone telephone. One moment for additional question. Our next question is from Deane Dray of Goldman Sachs. Please go ahead, Sir.

Good Morning, Bob and Andy.

Deane, how are you?

Doing real well, thank you. First question relates to the home center business for GB. Just give us an update line reviews, what source level, then, any new SKUs, order patterns very recently and so on?

You know, the delivery has been in the high '90s. If you are not in this area, Deane, you don't have the business.

That's for sure.

So, no change there. Lowe's, Home Depot, both had reasonable quarters. I would say, Lowe's was a bit stronger than Depot. Line reviews, we really didn't have any full line reviews. We set a number of about 40 of our products at Lowe's, took out about 40, replaced it with about 60 other ones. That was a proactive move, it wasn’t asked by for the customer. We went to the customer and said, you know, we really ought to prune these out and put these in. You know, that's the kind of things we do well, because we are a category captain. Moving over to Depot, there were a couple of on-line auctions. That was the first ever that they completed in bending and fishing. We don't have much of that category today and came out about the same as we went in. Don't see any other kind of line reviews per se, like that. The last thing I would add this to the home center issue, you will start seeing some of our ergo-srippers in the market place as we get into early this year. These are the colored staples, another new product that [Inaudible] bringing out in the market there. So, we do have a number of promotional and new product offerings, that you are going to see flooding in both Depot and Lowe's.

Will these online auctions would there be any risk to other product lines?

There is always risk Deane but, you know, one thing that what I certainly sleep well at night on is I think, GB is a low-cost provider in the industry today. The category that we’re strong and we are strong in because we’re low cost. It will bring about 40% of product in from China. We have been doing that for a decade and, I think, we got a big leg up. So, I obviously, these are brutal industries for pricing, they are always looking for a cheaper unit. But I think we demonstrated a long-term success and we have been able to navigate that and continue to keep up our average margin.

What percent of that product line would you say, is sourced from China?

40%.

And what is going to be, you know, in two years?

I think, GB will still be around 40%, 40-50%, that the big opportunity for us is, quite frankly, Kopp where we are probably at 95% German source right now. I think, we are going to probably move that towards more of the GB model.

Terrific. Then if I could ask about acquisitions, you spoke about the past couple of quarters of Actuant entering its next phase of maturity where you are able to look at acquisitions, you have done Kopp. What else might be in the pipeline? What do you see in terms of assets for sale, what is the pricing like, what are sellers expecting, and so forth?

We got 4 or 5 things in the hopper. One of them is a little further along than the others, I don't think you are going to see a great deal get completed by August, maybe one or two transactions. The pricing out there is quite reasonable. You know, we bought Kopp at four times EBITDA. I think, that was the low standard. I think, we see things in the 5-6 times. If we saw synergy, we might go a little bit higher than that times EBITDA. Against the backdrop of two years ago, where , you know, we didn't have that kind of a ten handle, it wasn't going to be probably fly, I think, sellers are a lot more reasonable now. Most of the stuff we are seeing is stuff we targeted. It is not coming out of banks or other things. I don't think, unless there is a crisis, I don't think people are selling their business through traditional channels. I think, you got to get out there and find them yourselves. So, that's where we are finding activity. Brian Kopilinksi has been running our business development for about 6 months and we are gaining a little bit of traction but it's not something you are going to see us, you know, reporting 5 deals before August or something. I don't see it coming, in any kind of strength like that.

Good. Thank you.

The next question is from Tom Clampa (ph) of Credit Suisse First Boston. Please go ahead sir.

Good Morning.

It is nice to know there is still a bond guy out there.

Here you go. There is not a whole lot of risk here.

[Laughter] I hope --

A couple of cash flow questions anyway. The 7.3m charge for this potential litigation impact, I am assuming is that that gross number could approximate a cash payment we made sometime this year?

Yeah, I would expect some kind of calendar '03 that allow flush out in net of tax that you are talking 4.5, 5m somewhere in that kind of range.

Because that the payment would be tax deductible?

Correct.

Okay. In the APW cash, that you guys, I guess you took it in sort of out of escrow and page revolver down with it. That is still at some point has to get pay back to APW -- may get pay back to APW, what is the status in that?

There is about 18m or 19m that will have to be drawn out at some point in the future, it will go either to APW or if the IRS finds some issue with taxes, some of it will go there but that will happen at some point in the future -- we are thinking based on what we see right now. It is still a few years out.

Okay.

It is probably a 2005 activity, but you need to model that there will be an $18m cash flow and we got to look at it almost like insurance policy. It is going to APW unless is other concern.

Okay. The receivables balance still around 25m?

Yeah, that in that kind of vicinity.

It went up about a million for a quarter.

Okay, and then D&A, will that be going up into the second quarter since Kopp is there for full quarters, so what's your D&A run rate as going forward?

I think, what you just saw is a pretty good run rate, 3.7. We are on top row about 2 days in the quarter. So, it is essentially for a full 90 days.

Okay and then the number you quoted for working capital use in the quarter of 7m is that excluding Kopp or putting Kopp down below?

No, that is inclusive.

Inclusive? Okay. So, sort of excluding the acquisition, what are you talking about as far as working capital used in the quarter, or is all that Kopp essentially?

It is essentially all Kopp. We are pretty, I think we might have used a million excluding Kopp.

Okay. That’s it guys, thanks.

Yep.

Our next question is from Scott Graham of Bear Sterns. Please go ahead.

Hi guys, how are you doing?

Good morning Scott, how are you?

Good morning, thank you. I was wondering, I was hoping to take you back on that last question and maybe Andy you gave us the Kopp receivables. Would you mind giving us the Kopp inventory, payable, and operating income?

No, we are not going to get into that level as far as laying out operating profit and that sort of thing. The inventory at Kopp was down $2m for the quarter. Their payables were up. Because we’re starting to work with vendors and stretching out terms, that sort of thing. But as directionally as the metrics we use primarily working capital as a percentage of sales when you take all those together, Kopp is in the low 30s on a percentage of sales basis, certainly higher than the overall average but not wildly out of line [indiscernible] business that has higher primary working capital than our OEM businesses.

Scott, the reason for that, we are not trying to be cute. The reality is Kopp is part of Gardner Bender and we’re pulling these businesses together. Got a number of products when we start sourcing from China, will be very hard to tell if that is Kopp or Gardner Bender product. You have got somestaples and some cable ties other things that have been GP Hallmarks starting to flow into Europe, probably the meter programs is a good opportunity. The Ergo-Stripper is a good opportunity and it should not - it's not a metric that we think is going to be fair to look at. It is going to be polluted and quite frankly, it is just more - we get abused that we give mind-numbing detail already, we just don't want to go to that level.

That's no problem. Would you mind Andy, if you have this handy tracking through the first quarter last year sales comps for each of the businesses that predated me. So…?

Why don't you give me a call? Will that be okay?

That will be okay, that’ll do. Last question is from, I guess I am wondering why we had flat sales in the retail portion of the Gardner Bender business?

If you look at both Depot and Lowe’s, I think they are both saying same store sales are actually down year-over-year.

Depot was slightly positive.

So, we’ve tracked that very closely to what's happening in the stores and, you know, the electrical aisle, we get data that is a little different, broken down differently than what you see in the same store sales. But if you follow these guys, both of them are doing more with big-ticket items, refrigerators, and other items that skew their numbers. So when they say the same store sales are up when they added refrigeration over the last year and obviously probably means the electrical and others are down. So, you know, we have looked at that very hard. I think I answered the question already. We really, our market share is probably modestly up at these accounts due to the additional SKUs we put into Lowe’s.

The other piece there Scott is the fact that these sales are coming from somewhere. They are coming from other accounts of ours that might be losing volume or smaller amount offset (ph) sliding over, so it's kind of a right pocket, left pocket.

Okay. That's fine. That is what I was trying to get because, you know, same-store sales while it is certainly important for you guys, you guys are more influenced as every supplier is by total sales.

Yes, I agree.

So what would be the proportion of sort of the market share winning big boxes versus the -- the market share losing smaller more conventional traditional retailers within the retail portion of Gardner Bender?

I would guess half of our growth is being cannibalized by -- smaller players or you’re getting to a point where, you know, Home Depot is cannibalizing their own stores when they opened a new store in Milwaukee that is happening. So, you know, I would say half of what you see is cannibalization of what we would have already got.

Okay. My last question relates to the ---

This your last question too, Scott. Go ahead.

My last question, though, I guess, I have said it a couple of times. The margin impact from the sales mix of lower priced convertible top systems, when did that start and perhaps may be better when do we start to lap that?

Really, I mean, this is the core that we noticed it the most by far because the Beetle came on and the Beetle was quite a bit lower price point than the rest of our... We have always said in the past that our average price point on a convertible top is in the range of $350 and the Beetle is - although they are less than, a little bit more than a third of that. I am sorry, it has really had an impact on this quarter. The couple of the other platforms that came on that impacted it a bit, came on in the last six months, but I think you are going to see that and hear that to some extent all four quarters this year.

It is exactly what we have been telling you that volumes are going to triple and revenue is going to double and we just saw that in spades this quarter. The Beetle, I think, we shipped something like a 11,000 systems so it was, I mean that's a lot for a specific quarter and startup mode. You are not going to that efficiently in a startup mode, so I am pretty comfortable, I think we have got a few more months of that in the second quarter and you are going to see, you are going to see much more stabilized activity in the second half.

That was my last question.

Thank you.

All right.

See you.

Our next question is from Dana Walker of Kalmar Investments. Please go ahead.

I just received an e-mail to ask a few more of his questions.

[Laughter] Good morning Dane, how are you?

Good morning. What elements of higher mix in convertibles which you perhaps -- looking at some of the more recent wins would you consider some those to be higher mix?

When you say higher mix, you mean a multiple [Inaudible]. What we do see is, we have had a number of the wins like the PT Cruiser, the Volkswagen Beetle or low-end systems. The minute you go to the retractable hard top roof you start getting into the more complex systems, okay. So, that would be the XLR and the Renault Megan (ph) would be good examples of ones that are coming online. I think we see – that while retractable hard is definitely a popular design element that a lot of people are using, I don't think the cloth convertible is going away either. You are going to see a mix of both of these programs.

Is there some, pardon me, is there something about the CLK that is making volumes of it diminish?

They are moving to a new line of CLKs called the 209 versus 208. It's a facelift type program. We've got the other one. But whenever you have that, you have a stop-start relationship. If you look at the Audi 84, which just came out, and a year and a half where we went from the Audi 80 to the Audi 84. So, Mercedes is doing a better job other than that, but that's what is happening which causes that mix.

[Inaudible]

Two RV questions. Would you perhaps better elaborate on Mr. Blackmoore's action plans aside from deliver performance and then would you better frame what your goals are with the litigation with [inaudible]?

The second one, I don't know how to answer given the sensitive nature discussions. So, my goal is to not have them compete with my patented technologies. It's a fairly simple statement I guess. So, you know, I don't know how much more guidance to give you than just add that, we've been damaged. We believe we've been damaged by them infringing on our patents. Moving to Blackmoore's goals, I think this light-weight phenomena bringing new products out in a continuous stream and having more development intimacy with customers solving their customer needs is something Bill’s reinvigorating the business. That was the hallmark of the Power Gear business for a long time. We've brought out the first major slide out with [Inaudible] and others way back in the late 90's. And I think Bill has got an engineering background and I think an engineering focus on that. I think he is very much into OEM issues, quality, the fact that pricing will be tight, the fact you got to continually price reduce your product, look for low cost sourcing, have perfect, quality perfect delivery, I think Bill comes from an OEM background and these are the things that he is focusing on. Warranty in the RV industry at the OEM level’s a big issue and the relationship between that OEM and offs relating to warranty is a fairly big issue. So that's on his radar screen and just getting the plant to be a world-class plant is something he has spends time on. He has upgraded the management team down there at Mishawaka. His goal is just to stabilize a situation that given the mix integration to [Inaudible] didn't go well, he is just getting things back as to study progress.

Very well, thank you.

Our next question is from Jeffrey Brown of Credit Suisse First Boston. Please go ahead sir.

Hi. Just a couple of quick questions. I guess to start off, what is the draw on the revolver and the AR facility?

We had 17m of our revolver drawn at the end of November. Receivable facility as worth 25, 26 to mark, that kind of range at the end of November.

Well, I guess the difference with the 75 available, does that just helps the ease or something?

That's correct.

That's correct. Yes, Yes. That's absolutely correct.

Also, I just have one last quick question. Second quarter, you gave kind of a sales and EPS guidance. Is EBITDA essentially, I know last year you posted about $18.5m, and you are looking for a couple of million higher than that essentially?

Well. We are looking for, just one second.

You are spot on.

Sounds good. Couple of million higher?

Yeah. Well, mid 19, between 19 and 20 probably.

And I guess that is better, thanks a lot.

Hang on, Andy is waving us in.

Yeah. That is correct. I am looking at the wrong line. It is not a good thing to look at operating, mix up operating profit and EBITA

Not in this business.

Yeah. You will be telling us off a little short there. Thanks a lot.

Thanks.

We have a follow up question from Robert McCarthy. Please go ahead.

Hi. Actually a couple. One, I really, to try and clarify think a little bit. When we were talking about mix issues with convertible top business, what you really, I think you have explained the issue in the quarter and an issue that will be continue being in a issue for a while is a greater proportion of new programs relative to old. It's been my understanding that the absolute unit price has very little to do with, program profitability.

I think what you are saying is the high-end system versus low-end system any difference in profit. I think we have been pretty steady on the fact that no, there is no difference between the actual profit, margin profitability obviously we are making absolutely to making less dollars ---

Right and as you started up you will make lower have than average margins for the program.

Efficiency and what you are planning to is the efficiency which is absolutely correct with this learning curves in the front end of this thing we are trying to focus on fill rates and getting it out on time in the quality side of it. As you get into it, it is stabilized, you just really start attacking cost squeezing, squeezing more and more becoming more efficient so that that--.

Normal OEM stuff

Okay on some level we all hope that it will be ongoing issue in every quarter just over time overwhelmed by the shear volume of more mature programs--.

Precisely.

Actually, a third of our volume was, as Bob said, was the Beetle.

All right, your comment Bob about is, I can’t remember the word was , several new programs could be awarded in the next six months.

Yes.

But the two you just announced you had an average unit volume associated with them of around 10,000 units.

Yeah, they were smaller.

Yeah, can you characterize these other programs in any fashion?

You have got some that are of low volume and it's 5-10,000 range. You have got a couple that our replacement programs that we have already had in the past that run in the 40,000 systems. So, if you recollect we have been telling the people we are going to triple our unit volume from something like a 130,000 systems to 450,000 and we need, by about 2006 -- we need by about another 50,000 systems to fill in that quota. So, one major program would do, a couple of minor, I would hope that I’m sitting with you guys six months from now saying, we are going have to, move that -- that up a little bit depending what's going on in the, it might be more like to 2007, but there is an incredible amount of activity out there. The time-- the time scale from, from a car company making a decision on a convertible when they want them in the market, used to be three and half to four years, I think it is one and two now and in some cases PT Cruiser is a good example they are moving it to less than a year. So, it is incredible what's happening in velocity of these programs.

It is that, I mean, should I infer from that on some of the programs that you have already landed, you are under pressure to move up--?

Yeah, but unfortunate it's not the convertible top that's slowing it down. We could actually this kind of system in the production quickly. It's the fact that the car is built from the ground up as a convertible and there’s other issues with the frame and other parts of the car, not necessarily the convertible tops now.

Okay, all right, got it, thanks a lot.

There are no further questions at this time Mr. Arzbeacher, please continue with any closing remarks.

Very good. Well, I appreciate the call. I hope everyone has a happy and safe holiday season. I would love to entertain all you people at the Detroit Auto Show. We have a great line-up you’re going to be able to see our vehicles, competitor vehicles, get an update on some of the nonconvertible businesses. I have got a customer who is going to speak about the industry. Some of the board members are going to be there. So, we would love to have a great attendance from the shareholder base and talk to Anne about that, if you want to do that. Otherwise, thanks for listening in today. Bye, bye.

Thank you, Mr. Arzbaecher. Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may disconnect at this time and have a good day.