Enerpac Tool Group Corp (EPAC) 2004 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Actuant Corporation first-quarter earnings results conference call. We are conducting an e-meeting to coincide with the audio conference. If you would like to view the e-presentation online, please log on to www.themeetingson.com, and go to Join as a Participant, and enter meeting number 718100806. (OPERATOR INSTRUCTIONS) During the presentation, all participants will be in a listen-only mode. Afterwards, we will be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS)

Please note 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 statements 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, variations in demand from customers, the impact on the economy of terrorist attacks and other geopolitical activity, 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 risks. See the company's registration statements filed with the Securities and Exchange Commission for further information regarding risk factors. I would now like to turn the conference over to Bob Arzbaecher, President and Chief Executive Officer of Actuant Corporation. Please go ahead, sir.

Thank you, George, and welcome to Actuant's first-quarter earnings call. I'm calling in from Europe from our Power-Packer location, while Andy is back in Milwaukee. So we are demonstrating the true global nature of Actuant today.

We were pleased with our first quarter's performance, a very solid start to what we expect to be our third year of 15 to 20 percent earnings growth. Andy will go through the numbers with you, and then I will come back and discuss a number of other topics prior to your questions. Now I'll turn it over to Andy for the numbers.

Thanks, Bob; good morning, everyone. As Bob said, we are off to a pretty good start. Our first-quarter sales were $167 million or 13 percent higher than the first quarter of last year due primarily to currency, convertible top growth, and the Kwikee acquisition. Sales exceeded our guidance as a result of the continued strengthening of the euro, which ended the quarter at one euro equal to $1.20, versus about a euro equal to $1.10 at the beginning of the quarter. On a constant dollar basis, and ignoring the onetime pop in sales that came with the Kwikee acquisition, our core sales were up 1 percent compared to a 1 percent decline last quarter, and a 3 percent decline in the third quarter. So things are heading in the right direction for us.

Our operating profit for the quarter was $20.7 million or 12.4 percent of sales, compared to $18.2 million or 12.3 percent of sales a year ago. This is down sequentially from the fourth quarter; but that is normal for our business. The first is usually not as strong as the second half of the year.

Financing costs declined 1.3 million year-over-year on account of lower debt, lower market interest rates, and the mix of our debt itself. Diluted EPS for the quarter was 1 cent, including a $15 million pretax charge for buying back bonds. Excluding this charge, earnings per share was 41 cents a share. Last year's diluted EPS was 8 cents a share; but that also included the bond buyback charge and a divested business litigation charge. Excluding these two items from last year, EPS in the first quarter was 32 cents. So on an apples-to-apples basis excluding special charges in each year, EPS increased 28 percent, from 32 cents a share to 41 cents a share.

The adjusted 41 cents a share of EPS for the quarter was our 10th consecutive quarter of year-over-year EPS growth including special items. We're working hard to maintain this consistent growth. The Kwikee acquisition and interest savings from the bond buyback will help us to continue this momentum as we go forward. Kwikee was accretive in the first quarter under Actuant's ownership and is doing very well. Bob will provide some color on that later on in our call. I am now going to spend a minute or two talking about operating results and then cover a few specific finance-related matters.

Sales for the quarter were up $19 million or 13 percent from last year. About 11 million of this came from the impact of the weaker dollar. The onetime impact of the Kwikee acquisition was another $6 million, leaving about 1 percent core growth. We generally saw sequential top-line improvement in those markets that have some sort of consumer touchpoint like RV or automotive or DIY retail.

From a segment standpoint, our Tools & Supplies sales for the quarter were up 5 percent, all of which was currency. Excluding the weaker dollar, sales were down 3 percent. As I mentioned earlier, GB retail improved sequentially. Kopp was down year-over-year due to a tough comp last year that included a line fill. Enerpac was also down due to the comp last year, including shipments under the big bridge order in France and Millau Viaduct. But the Americas in Enerpac showed some sequential improvement from last quarter.

Turning to Engineered Solutions, it saw 26 percent sale growth during the quarter over the prior year, most of it driven by currency, the Kwikee acquisition, and 36 percent growth in convertible top sales. That would be core growth with convertible tops. RV and truck sales were flat over last year.

In terms of profitability we're pretty happy to report that we saw increases in the operating profit and operating profit margins during the quarter compared to the prior year. Seasonally, again, we typically see our strongest margin and earnings quarters in the second half of the year, which explains why margins were down sequentially from our fourth quarter.

Both Tools & Supplies and Engineered Solutions margins improved during the quarter. Enerpac and Kopp made nice margin progress versus last year in the Tools segment; while Power Gear was up in Engineered Solutions. All of these improvements were driven by cost reductions. We took personnel out of each of the operations in late spring; and also have been driving material and cost component reductions very hard.

One specific highlight in the quarter was Kopp's margins. EBITDA margins were within a whisker of 10 percent this quarter, and the business is on track for a really nice year. On the Engineered Solutions front, we saw a nice margin expansion in RV, but we continue to experience OEM startup issues, as well as our own learning curve issues in the automotive business, which impacted margins. However, we do believe the worst is behind us.

Corporate expenses were up over last year and reduced our overall profit margins that the business units generated. In addition to the fact that we had unusually low corporate expenses in the first quarter of last year, we had higher legal, acquisition, bonus, tax consulting, insurance, internal audit, and SEC compliance costs this quarter. Our corporate expenses for this year will be somewhere in the 9 to $10 million range based on our current estimates.

Now, I would like to update you on the convertible bond offering that we completed in November. As you know, we issued 115 million of 20-year senior subordinated convertible bonds bearing a fixed 2 percent interest rate. The issuance was a good success, and was several times oversubscribed, which helped drive favorable terms for the company.

The accompanying slide that you see outlines some of the specifics of the deal. These are 20-year notes with a seven-year no-call feature. Bondholders can put the notes back to the company on the 7th, 10th, and 15th anniversary dates. The bonds are convertible into shares of Actuant stock at a 35 percent premium to the Actuant stock price at the time of issue; or equates to roughly a $40 conversion price.

Convertible bonds have a contingent conversion feature which impacts the earnings per share calculation. The reason I'm going to spend a few minutes on this today is that I have received a number of phone calls from investors just asking how these bonds are going to impact our EPS calculations on a go-forward basis. The bonds have a 20 percent contingent conversion feature, which means that the EPS calculation is not impacted by the bonds until Actuant's stock price exceeds the $40 conversion price by another 20 percent. So in our case, the shares to be issued on conversion will not impact EPS calculation until the price of Actuant's stock actually hits close to $48; 47.89 to be specific. As a result, the potential conversion shares are not dilutive to our earnings today.

What did we do with the proceeds? They were utilized to fund high-yield bond repurchases, retire senior borrowings that were used for the Kwikee acquisition, and for general corporate purposes including future acquisitions. You probably noticed that we had about $30 million of cash parked on our balance sheet at the end of the quarter, which is not the norm for us and should not be expected going forward. We will either put this cash to use in acquisitions, or retire additional senior debt over the course of the next few quarters.

Now, we think the convertible bond offering made a lot of sense in light of the amount of 13 percent high-yield bond that we were able to retire; and we were happy with the amount that we were able to repurchase. From an earnings standpoint, the 6.7 million annual savings from the bond buybacks exceeded the 3.7 million annual cost on the entire 150 million convertible bond issue as well. So it is a positive.

Turning now to cash flow, given all the activity during the quarter, cash flow definitely is not an easy thing to evaluate. We have included with our press release for the first time a full statement of cash flow, which you will see on a quarterly basis going forward. From a cash flow standpoint, I boiled down everything during the quarter into this one slide to draw some focus on some of the key drivers.

First, we used $29 million to fund the Kwikee acquisition in September, and an additional 5 million to buy the remaining 20 percent of Kopp, as well as a deferred purchase price payment on Kopp. We also incurred 5 million for convertible bond issuance costs; and paid about 13 million for the premiums on the high-yield bond repurchases. Finally, we had cash flow usage during the quarter of about $4 million which I will explain on the next slide.

Our free cash flow usage this quarter was driven by seasonality in our business, as well as the timing of interest and tax payments. We used about 10 million, 10 or $11 million for working capital buildup during the quarter. Most of this was at Kopp, with its seasonal sales spike. You will recall last year we had a $7 million increase in receivables at Kopp in the first quarter; we had a similar amount this quarter as well. We had receivables growing at Power-Packer, given the 36 percent increase in sales. If you look at the cash flow statement, you'll also notice last year that we built receivables overall for the first quarter.

Turning to interest this quarter, we pay interest on our high-yield bonds on November 1st and May 1st of each year. So we always show cash interest well in excess of book interest expense in the first and third quarters. For your information, we're also going to be making payments on the convertible bonds in these same months. So this not going to go away in the near term.

Cash taxes were higher than our book provision during the quarter. This is really a flip-flop of last quarter, when our tax provision on the books was higher than the cash taxes we paid (inaudible).

I wanted to quickly comment on working capital before I moved on to debt today. Our key working capital metric is primary working capital as a percentage of annualized trailing 90-day sales. Primary working capital at Actuant is receivables, excluding AR securitization, plus inventory, minus payables. Even though we saw a primary working capital build this quarter from year-end, again which is normal, we did reduce working capital as a percentage of sales from 21.9 percent in the first quarter of last year to 21.5 percent this year. So we continue to make year-over-year progress in bringing down primary working capital.

Now let me step back and evaluate the convertible bond issuance as well as the high-yield bond buybacks. We view the activity as a mini recapitalization of the company. As you can see on this slide, we have effectively added $150 million of new convertible subdebt in the form of bonds, convertible bonds, to replace $140 million of high-yield bonds that we either clawed back or bought back over the last 24 months.

We are in great shape from a senior borrowing standpoint as well. Our senior leverage is about a half a turn of trailing EBITDA. This provides us with a lot of flexibility for the future. Today we have no borrowings outstanding on our $100 million revolver, which gives us availability to fund future acquisitions as well as fund working capital needs. For the year, we expect to generate additional 45 million of free cash flow, which will add to this capacity.

One last item before I turn it back to Bob. We finally did close on the Kopp sale-leaseback transaction this past week, which generated an additional $14 million of cash flow that is not reflected in our first-quarter financial statements since it happened after the end of the quarter. So, what that, I will turn it back to Bob.

Thanks, Andy. As we said, we are quite pleased with our financial performance for the first quarter. It was a good start to the year and in an improving economy. A few things I want to update you on going through the rest of the businesses.

Automotive, on the last call I discussed with you that there were three big 50,000-unit programs that were going to be awarded sometime in the next six months, and that we needed to win one of them to meet our 2001 goal of doubling revenue and tripling volume by 2006. During the quarter, we were awarded one and our competition was awarded one. The only trouble is I cannot tell you which ones due to customer confidentiality. As soon as they allow us to announce it, we certainly will announce it. You will hear that one of the ones we could not tell you about in the past I will talk about briefly.

The last program of these three will probably not be awarded until the spring of next year, but we feel pretty good about that one also. So, for those of you keeping score, since the spin-off we have won 17 out of 22 programs that we bid on. This includes 12 new models and 5 replacement models. And 3 of the new models will actually be debuted at the Detroit Auto Show in early January. That is the PT Cruiser, the Chrysler Crossfire, which is one of the ones that we could not talk about before this. It was debuted a couple of weeks ago. And then the Chevy Corvette.

Obviously, all of these cars have to sell in the marketplace, but we feel very good about the convertible market, feel very good about the industry's analysis that says it moves from 2 percent of global automotive to 5 percent of global automotive during this decade. That is what we're seeing in development activity and that I think is an indication, by seeing these 12 new models in the last three years.

Moving to RVs, we participated in the Louisville RV Show first week in December. This is the major RV show each year in the U.S., where the OEMs show off their new products to the dealers and try to take orders from the dealers. The show had record attendance, both from the OEMs that were displaying and the dealers that were attending. For Actuant, we made the following observations from visiting the show.

We presented a combined Power Gear and Kwikee face to the customer, both in a single booth. At the show we were able to show our technology in slide-outs, leveling, slide-out locking systems, TV actuation which is a new product for us, and a number of new actuation opportunities. In discussing the market with many of the OEMs at the show, we came away pretty optimistic about the RV market, particularly motorhomes, which is where most of our content is. The motorhome market is ending 2003 quite strong, with many of the OEMs stating that they are running overtime and that their inventory levels at dealers are quite low. And at the interest rate and consumer confidence metrics that are out there, the baby boomers will continue to buy RVs at record levels.

Our view of the RV market is it is going to grow in the mid single digits for 2004 and that our sales should approximate market. We continue to see a shift in our business towards the higher value-added applications in motorhomes and away from travel trailers. Our sales are now about 75 percent motorhomes versus travel trailers. I think a good example that I saw at the show was the Country Coach. On this thing we had four slide-outs; we had a leveling system; a generator slide; a step system that came from Kwikee; step cover that came from Kwikee; and a luggage traveling system that came from Kwikee. Total content on that vehicle was about $4500 from Power Gear.

It's really a big indication of how the motorhome just dwarfs the travel trailer piece of the market. We came away certainly feeling that Kwikee accelerated our move towards motorhome. Their business is almost entirely a motorhome piece of the business. Our best estimate for RV is that it will do about 105 million in 2004. That is versus the 78 million it did last year without Kwikee.

In the press release, I announced an organizational structure change. I promoted Bill Blackmore to the global Engineered Solutions leader. Since arriving at Actuant 18 months ago, Bill has done a great job of improving the RV business and launching the automotive convertible top-line in the US. Increasingly, we have recognized the global needs of our customers in both automotive and trucks, and the fact that Actuant needs to be structured around these global product lines, versus the geography that we are today, to serve the customers better.

By promoting Bill to this new role, he will able to lead all of Engineered Solutions efforts on a global basis. We have worked a lot on organizational competencies over the last year, with investments in training, development, and upgrading our middle management. There is always more to do in this area, but I'm feeling like we're building a pretty strong foundation of experienced business leaders to take Actuant to the next level. And Bill certainly applies to this category.

Moving to acquisitions, we continue to be active in the M&A market, with a couple of transactions getting pretty close to the finish line. I would expect one of those to close in the second quarter. We continue to focus on smaller deals, 10 to 40 million in purchase price; businesses that fit our current profile of industrial tools, electric tools and supplies, and actuation systems.

As many as you can see from our industrial peers, the valuations for companies is starting to creep up. A year ago we told you deals were four to six times EBITDA, with no synergies. That has moved to kind of 6 to 7 time area, as buyers are getting comfortable that there is an economic recovery coming. And obviously in a very low interest rate environment, are willing to pay a little more. We continue to stay very disciplined in our approach and are focusing our cash flow return on investment as our primary valuation metric.

All of this leads to everybody's favorite topic, earnings guidance. As we stated in the press release, we're staying with our full-year EPS guidance of $1.60 to $1.75 a share. That excludes the charge for the onetime high-yield bond buyback that Andy discussed. Some color on this guidance is that we did have a strong first quarter with our EPS 3 cents higher than the top range of our previous guidance. This was driven by the weak dollar, a small recovery in North America, and our cost reduction efforts.

It's important for you to understand that currency does not have much leverage to the bottom line, since a big chunk of that currency comes from Kopp, our German business; and that has got our lowest EBITDA margins. We also had an FX loss below operating profit of about 450,000 related to some sourcing activities that worked against us.

We did buy back some bonds late in the first, and this should lead to ongoing interest savings as Andy already discussed. Although we did not raise our guidance incrementally for this, we do agree it is cushion and it moves us to the higher range as we see it today. We are deliberately communicating to you today that we're going to have a policy of not changing our annual guidance for small changes and events. That is the way we view the bond offering. Our goal will be to reassess the guidance at the end of the second quarter. By that time we will have a clear picture of economic activity, of what's going on with the dollar versus euro exchange rates, as well as be able to incorporate any acquisitions that might occur in the second quarter.

Our guidance for the second quarter is for sales of 155 to 160 million and an EPS range of 32 to 35 cents a share. This compares to 142 last year and EPS of 29; so it will continue the trend of another double-digit EPS growth quarter. For Actuant, the second quarter is seasonably our weakest quarter, with the December holidays falling in it, and the short month in February, both of which impact our second quarter and is different than the normal 12/31 filers. Now I will turn it over to George, the operator, for your questions.

(OPERATOR INSTRUCTIONS) Deane Dray, Goldman Sachs.

First question is the economic front. I would be very interested in hearing your observations. You said the pace of recovery on the consumer side, so do-it-yourself, RV, automotive, better. What about on the industrial side? In terms of Enerpac, what are you hearing from your customers in terms of CAPEX, interest, projects, and so forth? That is the first question.

A separate question, not to dwell on the negatives, but was there any thing you learned in the loss of that convertible top deal? Was it pricing? Was it previous relationship? Is there any sort of takeaways there?

You know, I think I have been on a theme with my investors talking about capital spending seems to come back slower than the things that are touching a consumer. So, the areas that we continue to see it be a little slow would be work holding in Enerpac, some of the industrial tools in Enerpac in an MRO (ph) environment has been coming back slow. We saw some news out on Grainger recently that was kind of confirming that. And we see that in our trends with those guys. In the electrical distribution, which is tied to some of the larger electrical construction projects, things like that.

So, the capital spending side has been slower. It is recovering. It is, but it is negative still and is coming back on a slower pace than some of the consumer businesses that Andy discussed earlier.

On the geographies front, when I look at it, North America is on a recovery, although it is still negative. Europe, if you pull out the Eiffel piece of business, is about flat for us across our businesses. China doing very well. East Asia is not that big for us but was actually down a little bit on the basis. So that gives you a little color by geography and by the kind of the markets.

The convertible top loss, we never expected to win all three of these. I think we communicated that we felt great, if we won one, we would meet our goal. That were probably optimistically thinking we could win two. Nothing is really changed here. I think we didn't think we would win, we didn't win. And we will just have to see where this goes.

It was customer relationship oriented. We delivered prototypes, we delivered pricing. You just get into a situation where you have to decide where you want to make your bets (ph).

Just a follow-up. I know it might be heresy to ask; but is the pace of restructuring or cost takeouts going to slow as we head into '04? And what sort of assumptions should we be expecting (technical difficulty) gets flowed through operating results?

Andy, why don't you cover that? I will just give a brief comment on the front end, and then we can go from there. I do believe it slows, Deane. Actuant has somewhat of a variable cost model. We don't have a lot of fixed assets. So for us, when you start getting the growth, you get growth in rebates and commissions and things like that. That is what some of the SAW growth is starting to happen.

We are still doing some restructuring. We're doing a little bit in Japan. We're doing some associated around the Kwikee acquisition. We had a small factory in Oregon that was a Power Gear factory that we are moving into the Oregon facility of Kwikee. So, there are a few things like that. I think I learned my lesson last year, talking about a little $2 million restructuring and everybody getting nervous about it. We're just running that stuff through the P&L. Andy can probably give you some color on the size, though, for the quarter.

For the quarter it is probably somewhere between three-quarters of a million and $1 million of those types of costs going through. The biggest piece of that, half of that, was Japan. And there will be some ongoing stuff going forward with this thing as we continue to take costs out of our business.

Great. Thank you.

Wendy Caplan, Wachovia Securities.

To get back to the industrial business for a minute, I remember in the old days we used to say, as goes Enerpac so goes Applied Power. Can you talk about the operating leverage in that business? I quickly looked back and saw roughly 18 percent operating margin in the segment. Can you comment on that, in terms of what we can expect, specifically in the operating leverage of that segment?

Enerpac is always a little higher piece than the total Tools & Supplies. It does not have goodwill, patent goodwill, things that BG had in it and the Kopp -- Kopp really didn't have much in it. But Enerpac clearly is better than that average. Wendy, I don't want to get into a situation where we're describing margins by business.

It is fair to say that Enerpac had one of its better quarters from a margin point of view. I think some of the cost reductions we did last year at our Columbus facility took some substantial hold. Some of the cost-down initiatives that are being driven by that management team are starting to take off. So, Enerpac had a good quarter. It is more of a variable business. It does not do a lot of vertical integration, so it will improve margins because the SAE cost is somewhat fixed. But it is a business, had a good quarter.

Is there any reason to assume that we cannot get back to those high teen margins for the segment?

No.

As we continue to go forward, Wendy, with the Kopp restructuring, the margin will naturally lift in that business over the next couple of years. So, we are pretty bullish on it.

One other question. You didn't talk about new products on the GB side, which you have been talking about. Can you give us some feel for the impact in the quarter and what you're seeing?

We did not talk about because there was quite a bit on this call to go through already. We are doing well on that. I think I have told people in the past we're going to get 14 percent new product; product that has been introduced in the last three years as a percentage of total GB sales. I think we are on track for that.

We had the major rollout of the ergonomic strippers at Lowe's. That started kind of in the summer, but is clearly on the shelves at this point. A number of new products that are coming in behind that. The fish tape, what is call the upper hand fish tape; and a number of other products. So it is going just as we expected. We just did not talk about it on the call.

Okay. Thank you very much.

Peter Lisnik (ph) with RW Baird.

Bob, I was just wondering on the convertible top program that is left, is that a replacement program? Or is that a new program? Can you address that question at least?

It is a replacement vehicle, but it is not a vehicle we had in the past.

In the past we've talked about some of the inefficiencies with getting that business up to speed; or production here at least to speed. Can you talk about where are at in terms of ramping up production here? How profitability is looking? And kind of what you are doing or how long it might take to get to peakish margins in that business?

We have two models that are running in the U.S. as we speak. The SSR and the PT Cruiser. The SSR is at its normalized production. That car has been issued, there has been a big line fill, and that's been going well. PT Cruiser is probably not quite to its running rate, but it was expanding during the quarter. Andy, maybe you can comment on the margins piece of it?

We definitely had a pickup during the quarter in terms of volume in the PT as Bob mentioned. But overall if we look at the U.S. automotive business, we still were not breaking even yet, because there is not enough revenue going through there yet. Once that thing is up and running, it will be making money. So, there was still a slight drag coming through this quarter that we were working against. In Europe, Bob, if you want to flip back to you.

I'm at the Power-Packer facility this week. We have had, like I said, a great quarter from a volume point of view. It did not come without a fair amount of pain. Our customers were launching six different vehicles, and mostly their own issues not our issues, but led to a lot of fits and starts. When I say that, I mean they will literally stop a line because of something else on the car. We will get stopped. We have people around. We have tried to deploy them elsewhere; and a week later it takes off again, and you're trying to keep up with all that. You're running overtime. It's a time, when you're launching that many different vehicles, it is very hard to get the efficiencies.

We have been talking to you guys about that for a while. This was probably the worst quarter for that doing it. But, I think we're starting to see some of these programs getting meaty, which is why the volume got up the way it did for the quarter.

Great. Thanks for the answer.

Scott Graham, Bear Stearns.

Andy, would you be able to be a little bit more specific on the sales growth in Tools & Supplies for each of the businesses, Gardner Bender, Kopp, and Enerpac? Typically you have done the sort of low single, mid single digit thing; up or down. Could you give us that type of granularity?

I think it's pretty easy. All three of them were -- overall, when you look at the overall businesses, all three of them were down in low single digits. Retail was positive within Gardner Bender. However, the wholesale piece, more the OEM and wholesale piece of that was negative which impacted the overall business. But the three of them were low single digits for the quarter.

Next question relates to the RV business. Earlier this week, Coachmen announced that they were having trouble getting some supplies. I think they mentioned ovens, which obviously has no impact on you directly. But indirectly I'm wondering if there are, because of the ramp up in demand on the RV side, is there a potential for other suppliers' inabilities to deliver product to the OEMs possibly backing up onto your doorstep?

It has not yet, Scott, but it is a very intelligent question. What the OEMs are doing right now is building out these units all the way to the finish line, and then parking them in their fields waiting for the ovens to (indiscernible) demand. They are not going to do that forever. Okay? I think if the oven situation declines or they get that capacity filled, it will not be a problem. If this thing lasts another six months I would probably view it pretty differently.

Fair enough. Last question is related to the cash-flow statement. Obviously, cash flow I think was a little bit disappointing this quarter, perhaps not as unexpectedly by you than versus me. But, one thing that you indicated here, Andy, was that there was maybe a $10 million working capital swing factor related to Kopp. Did I hear you correctly on that? If so, why would it have been such a large number? And does that maybe float us for the next couple of quarters?

The number that I had mentioned was 7 to 11 million of working capital. The majority of that was Kopp, but it was not all of Kopp. There was about 7 million of receivables billed at Kopp, and that is the same number as what we saw in the first quarter of last year as well. We also saw a couple million dollar increase in receivables in Power-Packer Europe given the big increase in volume with automotive. And we saw increase here in the States as well, with both inventory and receivables in the automotive business. So, that is really where it came from.

As far as when this thing runs through, what we saw last year with Kopp as far as when it comes back down is the Kopp receivables are going to come down in the third and fourth quarter. As you know, the first and second quarters are the go-go quarters for the retail business in Europe. So, we will get that back I would say in the May-June time frame of this fiscal year.

Just to give you more color, in the last year Kopp did 60 million in the first two quarters; and 45, about 47 in the back two. This is a business that has got a defined seasonality. The Europeans tend not to do a lot around their house in the summer. It affects the DIY market, and they have a big fall season. It has been in existence; it was there; we saw it when we did due diligence on Kopp. It is just a piece of the business.

It should not alarm you. The money is just sitting in receivables. High-quality companies like Praktiker and Bauhaus, Baumax. These are not things to worry about. It just due to the fact that the sales ramp up in that first quarter.

Just sort of an ancillary question on that. The $45 million in free cash flow the rest of the year, does that include the sale-leaseback?

That excludes it.

Very good. Thanks, guys.

Are there any other questions?

Charlie Brady.

Talk a little bit about what's going on with China this quarter. How are the sales ramping up there? Are you on track to get to your stated goal? Just on Europe, I know you said it was looking flattish, but is there any more color on that? Is it mostly Germany that you're talking about, given Kopp? Or are there other areas within Europe that look maybe different than flattish, either up or down?

China first. China had a great first quarter. It was up somewhere around 100 percent from the sales level against the prior year. Don't get that excited about that; it's only a 4 to $5 million starting point, but on an annual basis; so this is not a major thing. But it certainly is meeting our objectives.

We had Raymond Shaw (ph) in, who runs our China business last week. The combination of both the sourcing piece and the sales piece for Enerpac is what we're really focused on. Things feel pretty good.

Been over here, working with Jan Schmidt (ph) the head of truck. We continue to have the FAW opportunities that I've talked to a few of you guys about. FAW is the largest truck company in the world, and we're trying to get in there on some cab-tile systems. So I feel great about China. I think it is definitely a place in the world that we really are getting true core growth. We're seeing it in both Enerpac and the Power-Packer business.

When I move to Europe, clearly Kopp does affect the piece. It is $100 million. It is mostly Germany, with some going into Austria and Eastern Europe. When I get outside of Kopp and I look at Enerpac and Power-Packer, that is more of a European Union. We're selling cars and systems everywhere within Europe. Same is true with Enerpac. So, I think that one is more of an EU-centric thing. I would say Germany is a touch worse than the rest of Europe, but not materially so.

Great. Thanks very much.

George, are there any other questions?

Wendy Caplan, Wachovia Securities.

Just a quick clarification. Is there any reason for us to think that second quarter is weaker because it is penalized from the strength in the first quarter?

No, I don't think so, Wendy.

Thank you.

Mas Saddiqui, Jefferies & Co.

Actually it's Monica Maan (ph) for Mas. I just had a quick question in terms of the economic outlook and the trends you have been talking about. Can you give a sense or any other color as to whether or not -- did you see the same trends throughout the months of the first quarter and in December? Or have you seen more of the strength in consumer translate throughout the quarter?

I think we had a strong September. We had a mighty strong October; and November was not quite as strong. Not terrible but not quite as strong. I think the economy is recovering. I don't think it's going to recover pointblank across the board in every single business and for every single month. But in general, we saw each quarter, with each month of the quarter with some growth. September okay, strengthening; October, really strong; November, not as strong.

One last question. Can you remind us what you're assuming for the FX (inaudible) currencies in your guidance (inaudible) for the second quarter?

Our guidance for the full year, which is the same as the second quarter, it will be about one euro equals $1.15. We are above that today.

Great. Thanks very much.

Jeffrey Brown (ph), Credit Suisse First Boston.

In the quarter, what was the sales impact of Kwikee? And I guess maybe the operating earnings or the EBITDA if that is available?

Kwikee, year-over-year, impacted sales by about $6 million of onetime impact of adding Kwikee to it. In terms of profits, we don't make it a practice to indicate what specific earnings are. I think it's fair to say that Kwikee is probably in the middle of the pact from an EBITDA standpoint with our businesses. You can kind of take an idea from that.

Secondly, what does the cap table (ph) look like today, given the convert issue? Not today; as of the end of the quarter, given the convert issue and the buyback of the bonds and all that.

Maybe you can restate your question. I'm not sure what you're asking.

What is the bank term? Where are the subnotes? How much of the subnotes are outstanding?

The components, I'm sorry. At the end of the quarter, we had roughly $60 million of the 13 percent notes outstanding. We had 150 million of the converts outstanding. So in total we had $210 million of subordinated debt out there. We had nothing drawn under our revolver. We had 35 million under our bank term loan. And on top of that we had another 8 million or so, off the top of my head, of borrowings in Europe. A combination of overdrafts and term loans over there.

What is now drawn on the AR facility? Is that in the 20s?

AR securitization was about 26 million at the end of the quarter, up 2 million from the end of the year. That really reflected adding Kwikee to the program.

The converts, are they pari with the subnotes?

Yes, the converts and the subnotes are pari passu. They are both subordinated. Senior subordinated.

What do you think annual interest expense is? Is it going to be somewhere like 16, 17 million do you think going forward, based upon where things stand now?

You're in the zone at that number on an annual basis. This year again will be different, because we've got a quarter that included (indiscernible). But our run rate is somewhere in that kind of range.

What is the incremental interest, or the lease expense, whatever you want to call it, with the sale-leaseback that you did, the 15 million, running through the P&L? I guess at least part of it will.

The cash flow from that coming will be about 14 million. Really won't be paying off any subordinated debt. So we're looking at incremental borrowing rates on the stuff we pay off of like 3 percent, so it is 3, 3.5 percent. So it does not have a big impact.

I think that's about it. Thanks a lot.

(OPERATOR INSTRUCTIONS) Peter St. Denis, Advent.

I was just wondering what is the other accrued liabilities line? There was a big shift from the first quarter of '03 to the first quarter of '04 here.

I'm assuming you are in the other current liabilities?

Other accrued liabilities on the cash flow statement.

On the cash flow statement; sorry. I thought you meant right on the balance sheet.

It's going to be the interest, isn't it, Andy?

You have interest payable. Accrued interest is a different line.

Last year, if you recall, we booked the provision for the litigation associated with divested businesses. There was about a 7, $7.5 million charge associated with that. That would have all been booked in the quarter. So we would have seen an increase to other accrued liabilities. So that is the lion's share of it. This quarter there really wasn't a change.

When you guys say 45 million in free cash flow, I mean, just to make sure, you are defining free cash flow as operating cash flow less CAPEX?

In effect, yes. The way we look at it is EBITDA less cash taxes, cash debt, CAPEX, plus/minus changes in working capital. So we end up at the same (multiple speakers).

You guys are talking about growing earnings this year 15 to 20 percent, you said. And based upon that, your free cash flow last year was about 40 million. So, you are implying only free cash flow growth of 12 percent, versus earnings growth of 15 -- I'm on a conference call -- 15 and 20 percent. Kind of want to know where that shortfall is coming from?

The biggest piece is the Kopp restructuring, Andy, where we are paying out -- if you follow the company for a while, I'm guessing you have.

(multiple speakers) converged, so it is relatively new to me.

We are in the process of restructuring that business, taking out about 80 people, and the severance associated with that is going through this year's financials. It was accrued for, so it is not a P&L issue, but it is a cash flow issue.

You'll be seeing a lot of that in the second and the third quarter as that restructuring is pretty much completed.

I would also tell you the 45 is for the remainder of the year. It is probably a conservative number. I think your guidance for the year has been 45 to 50.

AR securitization, you guys said is currently 26 million. It was up to 2 million sequentially; is that what you said?

That's correct.

Okay. Thank you very much. The new company's new to me; if I have any follow-on questions I will give you guys a call.

Mike Hamilton, RBC Dain Rauscher.

A couple of questions. One, just on the near-term timing on your interest expense line. I'm assuming on the way everything is falling that interest expense is likely to be a little bit higher in the second quarter that it was in the case in first. Is that in line with your thinking?

Actually I would expect it to be the other way, Mike, because during the quarter we had about 2.5 months worth of interest on the high-yield bonds at 13 percent. We will have three months worth of interest on the others at 2 percent. So, I would expect it to be a little bit less.

Other question. Is there any timing in your thinking on getting a resolution on the IRS review related to APC?

The audit is continuing on with the IRS. We are continuing to work with them. There has really been no development or anything to the point where they have come to us and said this is what our findings are. We are expecting that though in the next 6 to 9 months. I think we are going to have some kind of view on it by the end of this fiscal year. The end of fiscal 2004. But no new developments since the year-end.

Thanks very much.

Charlie Brady, Hibernia Southcoast.

Just two quick questions. Number one, what are the total shares outstanding at the end of quarter? I know you gave the weighted average, but do you have an actual total?

I do. Give me one second.

Go ahead and ask your other question, Charlie.

Relating to be medical business, obviously not a huge piece of the business. I was just kind wondering what your thoughts were on that? How that is looking these days as far as growing it out.

Right now medical is a pretty small piece; it is about 6 million in total. Most of that in Europe, a little bit in the U.S. Business was down a touch for the quarter. Nothing alarming. It probably had more to do with the launch of the Siemens systems a year ago. It was probably pretty high watermark.

Our goal for medical is to try to do some bolt-on acquisitions in that area. We have been looking at that space, looking for things that do actuation there. Nothing to report, nothing that far along, but our goal is more acquisition oriented towards growing the medical business.

The answer to your first question, Charlie, is 23.6 million actual shares outstanding.

Thanks very much, guys.

Dana Walker, Kalmar.

Your RV business assumptions, looking at your revenue plan, if you were to exclude Kwikee, what type of growth assumptions are you making?

A few percent up.

How does that compare to market? And to what degree is that a mix issue versus something underneath the covers?

I guess it's a little bit lower than market overall. The reason for that is the period we are going through right now. We still have -- we are in probably the last quarter right now of the lap over impact of losing some business a year ago, Dana. That impacted this quarter. Going forward we would have to lap that. We will not have that impact going forward. So if you look at where the industry guidance is, we probably are just a smidgen behind it.

I think if you are our modeling, Dana, and trying to understand where the RV is going, you really have to look at motorhome. As I said, we are about 75 percent motorhome. Some of that is just the lost businesses Andy discussed. Some of it is we won more business; we have got more business with Winnebago, we have more business with Damon, more business with Monaco.

And our product, our actuation thing tends to be more of a motorhome product, just because travel trailers don't have leveling. They tend not to buy actuated steps. They tend to have just a manual pull out step. Their slide-outs are usually less and are more competitive. So, our business model is focused on the motorhome. That is a shift from a couple of years ago, but that is just where the product has taken us.

On Q2 for a moment, your assumptions. What of core revenue comparison assumptions are you making? Given that you were up one in Q1 and you were slightly negative in the back half of last year?

I think we're looking at low single digits overall, Dana.

Probably two, Dana, but it's a little hard to split that between currency and internal growth. We just have to wait to get to the end of the quarter to see how that shakes out.

We definitely are not building a runaway improvement here in the economy. That is why we're sticking with our guidance right now.

One final question on your Q2 guidance. It would appear that your EPS was down about 10 percent Q1 to Q2 last year. You are at least building in the prospect that it could be off a little bit more than that this year. Is that conservatism or are there other factors at work?

I think there are other factors I'd quickly comment on. Last year in the second quarter we had a $900,000 currency gain coming through. If you look at the P&L for the second quarter last year, you will see down in other income expense a big income item coming through. Typically we do not forecast those as we go forward. So that is not in our guidance. That is a pretty big nut by itself.

So that is about 3 cents a share.

Yes.

The other piece I would tell you, and I think we said it in the numbers or in the forecast already, we are conservative. I think we have had two years where we have met analyst expectations, but it has been at the lower end of it. This year we're trying to get on the other side of that curve, and make sure that this economic recovery is real.

I talked about November not being the greatest month. It was okay, but it was not an extension of September and October. So I think we're trying to be conservative. You can rest assured we're driving this thing as hard as we can to maximize the sales and the economic growth that seems to be coming. But we just want to make sure we don't disappoint anybody down the road.

Two final questions. One, you have made a more recent acquisition in your Engineered Solutions business. Are you in any way looking towards trying to balance where you're active? So that you are not stressing one or the other side of the organization, given that you would hope to a quire again here shortly?

It's a good question. I don't think we have any magical formula on the split between Engineered Solutions and Tools & Supplies. I would tell you that if you go below those group segments, we are being pretty careful not to tax, say, the Enerpac management team with 10 deals, and the Power Gear management team with no deals.

We're looking at the actual people who run the business, not the Goldsteins and the Blackmores, but the level below those guys. Making sure that when we do acquisitions they get through the first 100 days. That is the critical process that we run. It is called the AIM process, Actuant Integration Model. That 100 days we want them focused only on one deal at a time. So we have been pretty careful about that.

That doesn't mean we can not do a few things in Tools & Supplies. You got a Gus Boel over in Europe, an Ed Staple, and a George Bowman in the U.S. You got three major leaders there that could technically work on three deals all at the same time and not overtax the organization.

The two that you believe you have in your pipeline, are they beauty contests, or do you think that you are negotiating alone with the sellers?

We think we're negotiating alone.

So there is a reasonable shot that you might close both in time, just one in the next reasonable future?

Correct.

Final question is this, related to Kopp. Perhaps you would just update us on your sense for how you are changing the profit profile?

Andy, why don't I start and you can give some color behind. The quarter ended just a touch under 10 percent. We were really shooting to try to get that 10 percent commitment we made, I think to Wendy Caplan, out of the way for the year. We came a touch short of that. But it was a reasonable quarter.

We have approval with the workers council. All of the downsizing that is going to happen is identified, structured, and going to happen in the next 60 days. We have been moving business to Czechoslovakia and to Tunisia, some of the Kopp lower-cost facilities away from the Kall (ph) facility. That has been organized process which you have to make sure you don't slip up. Particularly during the high season where most of our sales are happening, which was this fall. I think Gus did a great job pulling all that off and delivering a real quality quarter. So it is just where we expected it to be at this point, Dana.

I have nothing further to add.

I have nothing further to add as well. Good work.

Jeffrey Brown, Credit Suisse First Boston.

What are the cash out, I guess restructuring or -- I know you accrued for them last year. But what do you think they will be for this year for the Kopp acquisition?

In the first quarter we looked at about 800,000. I think you can expect to see a couple million; a little over 2.5 million; 2 to 2.5 million over each of the next two quarters here. For the full year, we're probably looking at a 7 to $8 million cash out.

That is gross, right? You would get tax benefit for that?

That is pretax, absolutely.

Lastly, that is the table that you have to (inaudible)? When does that go out again? Is that in '04, or '05?

That is really dependent on the resolution of the tax audit with the IRS. When we've got better clarity on that, we will have better clarity on when that payment goes out.

Okay. Thanks a lot.

Mr. Arzbaecher, there are no further questions at this time. I will turn the call back to you. Please continue with your presentation or closing remarks.

Thank you. I think it was a good call. Welcome to some of the new bondholders who are participating. In summary I think we're off to a great start for 2004. I think Actuant's ability to develop a consistent earnings track record, solid cash flow, and end-user market leadership, all these create shareholder value. And I think we're starting to develop a good, consistent track record here.

If you have additional questions about today's release, I unfortunately, because I am in Europe and traveling home, not going to be available. Andy will be in the office for the balance of today. But we are both traveling on Thursday and Friday. So you got to catch him today, or next week will be fine also. I wish everybody a happy holiday season. Try to be safe and look forward to talking to you in March. Thank you.

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