Enerpac Tool Group Corp (EPAC) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Actuant Corporation second quarter earnings results conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. [Caller Instructions].

As a reminder, this conference is being recorded Wednesday, March 17, 2004. We are conducting an e-meeting to coincide with the audio conference.

If you would like to review the presentation on line please log on to www.emeetings.com and go to log on as a participant and enter number 718-63-6185. Once again, go to www.emeetings.com and enter 718-63-6185.

Your speakers for today are Robert Arzbaecher, President and Chief Executive Officer; and Andy Lampereur, VP and Chief Executive Officer.

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.

Actual results are also subject to general economic conditions; variation in demand from customers; the impact of economy; terrorist attacks, and other geo-political 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 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 turn the conference over to Robert Arzbaecher. Please go ahead, sir.

Thank you, Cliff, and good morning.

We are very pleased with our second quarter performance, internal sales growth, a recovering northern American economy, strong cash-flow, and successful acquisitions, all playing an important roll in our 41% EPS growth, excluding one time items. Andy is going to walk you through the numbers for the quarter, and I will come back and discuss a number of topics with you before opening the call to your questions.

Now I'll turn it over to Andy.

Thanks, Bob. Good morning, everyone.

I'll first cover our second quarter results and then provide a few details on our new credit facility and our convertible bond.

Sales for the quarter increased 24% to $176 million, from $142 million last year due to currency, acquisitions, and core growth in our engineered solutions segment. On a constant dollar basis, or core basis, and ignoring the one-time pop in sales due to acquisitions, our core sales were up 6%, compared to 1% core growth in the first quarter. This is the strongest core growth quarter we've seen since the spin-off dating back to 2000.

Sales in our North American businesses improved markedly during the quarter, most notably Enerpac and RV. Operating profit for the quarter grew in excess of sales, and increased 26% for the quarter above last year, to $20.2 million.

Despite weaker engineered solutions margins, which we'll address later on the call, our overall operating profit margin increased 20 basis points, to 11.5% compared to the prior year. This is down sequentially from the first quarter, but that's normal in our businesses given the second quarter dip with holiday shutdowns and lower manufacturing absorption.

Our financing costs for the quarter declined 29%, to $1.4 million year-over-year on account of lower rates on our debt reflecting fewer 13% bonds outstanding this quarter than a year ago.

Our diluted EPS for the second quarter was 35 cents a share, which included a 6 cent per share charge to write off the remaining debt issuance cost on our former senior credit facility, which originated back at the spin-off. Last year diluted EPS was 29 cents a share, therefore, if you exclude this quarter that extinguishment charge, diluted EPS increased from 29 cents to 41 cents, a 41% improvement.

The second quarter was the 11th straight quarter of year-over-year EPS growth, excluding special items. I know you all have seen this slide before, but it's something that we really focus on at Actuant. We're working hard to generate consistent EPS growth.

We think the Kwikee and Dresco acquisitions, as well as interest savings from the first quarter bond buy back, as well as improving economic conditions will help us continue this momentum throughout the balance of fiscal 2004. Although our policy is not to comment on the results of individual acquisitions, I can say that both Kwikee and Dresco acquisitions were accretive to EPS during the second quarter. Additionally our existing businesses in total, grew sales and profits during the quarter so most things were heading in the right direct.

I'm now going to explain second quarter operating results in a little bit more detail. Sales for the quarter were up $34 million, or 24% above last year. About $11 million of that was the impact of the weaker dollar with the average Euro to dollar exchange rate at 1.25 in the second quarter of this year versus 1.05 a year ago. The one time impact of the Kwikee and Dresco acquisitions collectively was about $12 million, leaving about $11 million of core growth.

Tools and supply sales for the quarter were up 14 percent, all of which was currency and the impact of Dresco. Excluding these two factors, our sales were flat with the second quarter of last year. This compares to a 3% core sales decline last quarter, so sequentially we continued to see improvement in the sector.

Enerpac and Gardner Bender retail showed growth in the second quarter versus last year, but Kopp was down due to line fills a year ago and challenging economic conditions in Germany. Geographically, Enerpac was up high single digits in North America, but down a similar amount in Europe due in part to the shipments under last year's Millau Viaduct order.

In our engineered solutions segment, sales were up 41% over last year driven by strong core growth in the RV, European truck, and automotive markets. Currency in the Kwikee acquisition also favorably impacted the comparison. On a core basis, however, engineered solutions were still up a strong 18%.

We saw a 35% increase in core auto shipments with a continued ramp up of production and launchings of new convertible tops. And a 17% increase in shipments to RV OEMs, principally, again, in the motor home market.

As this slide shows, our operating profit increased in both segments, and in total, for Actuant from $16 million last year to $20.2 million this year. Our margins improved in the majority of our business units as well, which pushed our overall total operating profit up 20 basis points year-over-year, to 11.5% for the quarter. We saw a nice margin expansion in Enerpac and Power Gear during the quarter, versus the prior year. Both of those were driven by leveraging fixed costs, material cost reductions, and prior year headcount reduction.

Similar to the first quarter, our corporate expenses were up over last year and reduced our overall consolidated profit margins. We incurred higher legal, acquisition, bonus, tax, insurance, internal audit and, yes, Sarbanes-Oxley expenses this quarter compared to last year. Our corporate expenses this year will be in the $9 to $10 million range, based on our estimates.

Although margin news was good in most units, that certainly was not the case in our automotive business, which had a poor quarter from a profit standpoint. The causes for the margin erosion are the same as the prior quarter. The start up of both the new U.S. plant here in Glendale, and German JV, and a launch of several new convertible top platforms in the short time frame, as well as all the inefficiencies related to all of these. Bob is going to provide a little bit more color and commentary on this later in the call.

Obviously, we weren't happy with automotive margins during the quarter. We expect to see improvement in the third quarter. We view the auto margins as about the only disappointment during the quarter, but the good news is we were able to more than offset this on a consolidated basis, and delivered very strong earnings growth overall.

Turning now cash-flow. We had a good debt reduction quarter. From a cash-flow standpoint there was a lot of activity, but I boiled everything down during the quarter into this slide to draw some focus on key drivers.

We used $32 million of cash for the Dresco acquisition at the end of December. That was funded primarily out of the remaining cash from November's convertible bond issuance that we had previously earmarked for the deal. As we discussed in December of last quarters earnings call, we also completed the Kopp sale lease-back in December. We used about $15 million in proceeds from the sale lease-back to reduce debt.

Finally we generated about $10 million from fee cash-flow during the second quarter which you can see on this slide. Working capital for the quarter was a modest source of cash and contrast to the $10 million usage due to season builds last quarter. We expect working capital to be a source of cash for the balance of the year as we move to the traditionally slower late spring and summer months for the Kopp business, which drew off the majority of the working capital usage in the first quarter.

Internally, we use working capital as a percentage of sales as our main financial metric to track working capital and efficiencies. Overall we're heading in the right direction. Similar to last year, we saw modest year-over-year improvement in this metric.

Our capital expenditures for the quarter were $3 million. For the year-to-date, we're about $6 million. That compares to depreciation and amortization of $4.2 million in the first quarter, and $8 million on a year-to-date basis.

As disclosed in an earlier press release, we replaced our senior credit facility during February and entered into a new five-year, $250 million all-revolver facility. To us, this was a logical step as the old credit facility no longer matched our present credit profile or our need for acquisition capital. We were able to obtain a larger facility with fewer covenants, one that was not backed by Actuant's assets, all on better terms than our old facility. Initially we're paying about 50 basis points less on our new facility, or LIBOR plus 150, so it's about 2.6% today.

The new facility also allows us to issue nonrated commercial paper, which we have started doing since the end of the second quarter. The new facility provides us with ample liquidity to support our future growth plans. We are well positioned from a capital standpoint over the next three to five years, as the accompanying debt amortization slide shows, over 2004 to 2006 our cumulative required principal payments on debt is less than $10 million.

Total debt at the end of February was $231 million compared, to $254 million at the beginning of the quarter and $194 million a year ago. The chart shows the effective recapitalization of the Company in the first six months of this year. You can see that we added new 2% convertible bonds, and we used the proceeds to retire about half of our 13% bonds. So we've got a very good sub debt basis.

Our senior debt has been reduced as well, and now costs us less to borrow. With just $12 million drawn under this new $250 million facility, we have over $230 million of unused capacity on this facility. Our leverage today remains in the low 2s, well within our stated 2 to 3 times leverage comfort zone.

Now before turning it back to Bob, I wanted to quickly remind you of the potential future EPS dilution caused by these 2% convertible bonds. Actuant's bonds, like of the many of the convertible bonds that have been issued in the last year, have a 20% contingent conversion feature, which means that the bondholders can't convert the bonds into shares of stock, with a few exceptions, unless the stock price is 20% above the stated $39 conversion price. Put another way, the stock has to be at $48 a share.

For EPS calculation purposes, the potential new shares don't enter the EPS calculation until the stock price is above the $48 contingent conversion price. At that time, we'll have to add about 3.75 million new shares to the shares outstanding number, and we'll adjust our reported net income to a pro forma basis to exclude the interest expense on the convertible bond.

Even though the bonds have technically been in the money from a bondholders standpoint during the quarter, the bondholders can't force conversion of them until they're above $48 for a period of time.

The point of going through all this detail again this quarter is straightforward. All of our EPS guidance that we have provided historically and we're providing today assumes that no conversion has taken place and therefore no dilution. Clearly, we do expect the stock to exceed $48 at some point in the future. However, it's impossible for to us predict when that will occur and, therefore, when the extra shares will enter the EPS calculation. We just wanted to be sure everyone understands the mechanics and the existence of this dilutive item.

With that, I'm going to turn it back to Bob.

Thank you, Andy.

As I mentioned earlier, we really feel great about our results this quarter. I think it shows the kind of upside leverage that Actuant's earnings have with only 25 million shares outstanding, it doesn't take much operating profit in an absolute dollar sense to create meaningful EPS growth.

Clearly our recovering North American economy helped, particularly in the Enerpac and RV businesses where we saw strong improvement. For those of you who I've met over the last four years, one of my usual savings is, given our diversity at Actuant, never is everything going right at the same time, but conversely never is everything going wrong at the same time either. This was a good quarter for a perfect example of that.

Within engineered solutions, we're very happy with the RV business, but we continue to have unsatisfactory margins in our automotive segment. But the rest of Actuant was easily strong enough to overcome this shortfall. The automotive margin deterioration is frustrating for us, but should not be a big surprise to you. We have struggled with automotive margins over the last two years. Start up on new platforms, a new plant in the U.S., a new JV in Germany, and efficiencies and production issues have all contributed to the poor quarter in automotive.

There are a few pieces of good news associated with automotive. First is that we've hired a new automotive leader, Andre Decamps [ph], who reports to Bill Blackmore, has been on board since January 1st, and resides in Europe. Convertible top automation continues to grow. We continue to believe this is a segment that's going to have above average revenue growth for the rest of the decade. Certainly the Geneva show that we just attended, which despite a number of our new cars was another good barometer of this.

In summary, these issues are getting plenty of attention in Actuant, and I have lots of confidence that as we move forward, we're going to begin to show you quarter over quarter improvement in the automotive margins.

Aside from the 41% earnings growth that happened in the second quarter, we -- Actuant also hit two other milestones. First, we moved to a positive equity balance on our balance sheet during the quarter. This is largely symbolic at this point, since most investors understand that it was the spin-off in 2000 that created the negative equity in the first place. But it's nice to have this one behind us, and now investors can actually compute a return on equity calculation which, by the way, will be incredibly high over the next few years until our equity builds up.

The second is that we crossed over the billion dollars market cap for the first time. This is an important accomplishment for Actuant, seeing that we had a market cap of about $125 million at the spin-off. We worked hard to improve our stock trading liquidity over the last few years. This obviously starts with delivering consistent and predictable earnings and cash-flow on a quarter over quarter basis. But we also helped it along with the secondary stock offering to deleverage in 2002 and a convertible bond offering that Andy talked about in 2003.

Given insiders own 13% of the Actuant stock, it feels good to everyone at Actuant to see that our hard work has resulted in stock appreciation.

Moving to acquisitions, our activity continues to be at a high pace. Completion of the Dresco and Kwikee deals in the last six months are some proof of that. I would like to provide you a little background on the Dresco acquisition, which we acquired in late December of 2003. After we acquired Kopp in 2000, we realized there were many untapped European DIY markets that we hadn't touched, notably, France, the U.K. and Benelux. Dresco is the leading provider, DIY supplier, for the electrical products in the Benelux markets in Europe, notably Holland and Belgium. We closed on this acquisition in late December, so when he two months results in our second quarter.

So far so good. The Dresco has exceeded our sales and profitability targets that we established at the time of the acquisition and was immediately accretive to our earnings. Dresco's major products as shown on this slide, are the electrical consumables for the DIY market in Europe, similar to Kopp and Gardner Bender. It also offers some bike accessory product line and recently launched a plumbing product line for the do-it-yourselfer.

We liked the synergy opportunities that come with this deal. We expect to be able to leverage purchasing volumes, like on products such as wire, cable, and switches, as well as share products across the markets over the next few years. Bruce Spool [ph] and his team has been driving integration activity on this deal and we are encouraged by the early results.

Now I'd like to give you a little update on our current acquisition activity. We have numerous opportunities that we are investigating and working on. Clearly not all of these will close, and it's unlikely there will be much more financial impact for the remainder of 2004, given where we are in the year.

Some of the highlights that are -- for this activity is that we're looking at companies in Europe, China, and the U.S., with deal sizes ranging from one half million to 40 million, with one larger transaction that's in excess of 100 million. Most of these are bolt on transactions that fit our core markets of industrial tools, electrical tools and supplies, and actuation systems.

One acquisition candidate that we're currently looking at and evaluating operates in an adjacent market to our existing channels. When we look at deals in adjacent markets we are looking for things with leading brand names, strong cash-flow position, niche markets, and strong management.

Our leverage criteria is exactly the same as that we communicated to you in the past. We would like to remain in the two to three times debt to EBITDA leverage range and use our new senior debt facility to fund the transactions. If a deal moved us higher than the three times debt to EBITDA for longer than a quarter or two, we would probably use equity, another convertible debt offering, or some combination of both.

The pacing item for acquisitions continues to be our management team's to be able to digest and integrate acquisitions. We have done a lot of work in the last two years to build up Actuant management team, and are in much better shape to handle these larger transactions than we were a year ago.

We're remaining disciplined on acquisitions. We're focusing on return on invested capital, specifically our CMM metric as the key measurement tool.

In addition to acquisitions, we are beginning to identify and invest in some internal product development. New products for either existing markets or adjacent markets. We're working hard to try to maintain the balance between internal growth and acquisition growth.

That will leaves us guidance. As I indicated in our press release, we raised our full year EPS guidance for 2004 by about 5%, to 175 to 185, excluding debt extinguishment charges. This is on sales volume of about 700 million plus or minus 5 million. At this range, our full year EPS would be up 24 to 31% from the prior year, significantly higher than the long-term target of 15 to 20%.

Looking at the third quarter, we're expecting EPS of 48 to 53 cents a share on sales of 180 to 185 million. At the midpoint of this range, EPS would be up 28% over the prior year's 39 cents a share.

Some comments on this guidance is that it assumes that the year-old dollar exchange rate stays steady at about 122, 1.22. The weaker dollar has been a big plus for Actuant throughout this year with 46% of our sales coming from Europe, and we're not assuming any change, really, on the currency rate.

Our guidance assumes that we can contain the raw material price increases that we are seeing right now, principally in steel, copper, and petroleum based plastics. We've reacted quickly to the manage this situation, and many of our businesses were implementing price increases or surcharges. But these items never quite match up with the increases you play to your supplier base, and we believe we've got that contained and within our forecast.

We're assuming a continuation of the current economic recovery, slow but steady, and not disrupted by any kind of terrorist attack or geo-political issues. And lastly, our guidance assumes only the acquisitions that we've completed so far this year.

Provided we meet this guidance for 2004, and I have a lot of confidence we will, Actuant will have delivered or exceeded the three years -- for three years straight, our 15 to 20% long-term earnings growth potential.

Now I would like to turn the conference call back over to Cliff, the operator, for your questions.

Thank you. [Caller Instructions].

One moment, please, for the first question. Our first question comes from Wendy Caplan of Wachovia Securities.

Good morning.

Good morning, Wendy.

A couple questions. Your discussion about commodity costs, particularly steel and some of the plastics. Can you talk about how much of that is being passed through at this point, and are you having any issues relative to availability of materials?

We're having no issues with availability as we speak. We don't think that the steel and price commodity increases have impacted us in the second quarter that much.

We have a lot of vendors on con bonds, so they had already purchased the steel so obviously our first point was, we can't accept it until you burn through the con bonds. So it hasn't hit us yet, Wendy.

It varies business to business. Some businesses we have more success and more pricing leverage than others. But we are not expecting, we haven't seen any impact yet and we're expecting some modest impact in the second half which has been accounted for in our forecast.

Okay. And you talked some about auto and the issues and your expectation for improvement; that it's, quote, getting a lot of attention.

Can you speak specifically about how much of the improved sequential -- sequential improvement is expected to come from the simple maturing of the platforms, versus being more active in terms of making changes? And what specific kinds of improvement measures you expect to take over the next three to six months?

I'm not sure I can quantify it in those terms that you said, but let me cover a couple things.

The first is, you're is absolutely right, the first and foremost piece of the improvement is just the fact that the program's maturing. You start delivering units. PT Cruiser's a good example. I think we're up to 2 or 3,000 systems on that program. After you start getting into a little higher numbers, things get better. You just get used to production.

A lot of times on these start ups, they're moving the spots where they clip certain of our hoses, et cetera. You got to get through a certain number of units before you get that improvement. So that's probably the first and foremost one that gives us some confidence because we are maturing on these programs.

The second is sourcing. We put a big effort in the last two months on sourcing additional and finding sourcing savings within our supplier base. Obviously as volumes go up, it is an excellent time to negotiate with suppliers given that they're getting an incremental volume. We're getting the benefit of moving some of that to the United States, and some programs have been moving between Europe and the U.S. So we're starting to see some benefits from that.

And the third is just that Andre and the team over there are starting to really core -- bore in on efficiencies in the actual production cell. We've got a lot of daily metrics that exist now that didn't exist awhile ago. So we've got an earlier warning sign when things are -- efficiencies are giving us trouble.

It's the combination of all three of those that give me confidence that we see the margin improvement.

Okay. And just to understand that further, are we losing money in that that area now and how did we do sequentially versus the first quarter?

We're not losing money in the area. We don't, I don't want to get into the habit of giving our product line profitability, but we did not lose money. We were down sequentially probably, what do you think, Andy, a couple hundred basis points? 300 basis points from the first quarter.

Okay. And one last question, your inventories went up this quarter. I assume that's Dresco, is that correct?

Primary item would be Dresco, that's right.

Thanks very much.

Our next question comes from the line of Deane Dray of Goldman Sachs. Please proceed with your question.

Hi, it's Mike Burke on behalf of Deane Dray. Bob, one of the businesses you highlighted was Enerpac. Could you provide any color -- are you seeing any improvement on your businesses that are more tied to capital spending at this point?

The business businesses within Enerpac that is tied more to the capital spending is work holding. Andy, just bear with me for a second here, we're going to pull out a number for you. Work holding was up about 6% globally in the second quarter and was up a little more than that in the U.S. and then down a little less than that in Europe. So we are seeing some improvement in the work holding and product line, which is very much tied to production and capital spending.

And next question, in terms of your third quarter guidance and full year, you did 1% organic growth in the first quarter, 6% in the second. What are you assuming for the balance of the year? Are you assuming a slow down or stays at this current level?

I think we're assuming that we're going to stay at this current level. Automotive had a very strong quarter, RV had a very strong quarter. Those two might taper just a little bit.

But I would tell you that Gardener Bender probably goes the other way a little stronger and Enerpac will follow traditional GDP growth rates and I think will probably be in a similar neighborhood as to where it is right now in the quarter.

Final question --

Probably the same 5 to 6% internal growth rate.

Okay. And one final question would be back to the margins. Given the fact that auto has persisted to be weak, does this change at all, some of the targets you guys have talked about previously in terms of two or three years out getting back to maybe the 16% EBIT margin level overall?

No, I don't think it changes it. I don't think the auto issues are long-term and systemic. I think it has always been something that along has one of the lower margins versus other businesses. I don't think it changes that. I think we're still comfortable we can get there.

Thank you.

Our next question comes from the line of Scott Graham of Bear Stearns.

Good morning, Scott.

Hey, could you give us the FX and the acquisition impact by segment? On the sales?

Yes, we certainly can. Currency was about 8% in both segments. Acquisitions collectively were about 9%. Tools and supplies is about 6, and engineered solutions about 15%.

Okay. And if you can help me, last quarter there was no application impact on tools and supplies, and last quarter there was about a $6 million positive for engineered solutions from Kwikee, right?

Correct.

Okay. Could you also talk a little bit more about the raw materials side? To the extent, are you able to tell us maybe what you expect your year-over-year materials to bill to increase by that 2004? Can you go that level of detail?

I think probably a better way to do it would be to tell you what I think in 2005. Because as I said earlier, I don't think 2004 is going to impact us that much because of the con bonds and because of where we're at in our fiscal year. So, let me try to maybe quantify it a little more.

Our guess is that we probably got 5 to $10 million of total price increase coming from the combination of tools and supplies and engineered solutions. Our guess is that most of that, you'll be able to pass on in the channels.

We're not alone in seeing this. You saw some press releases recently in the RV market saying that the OEMs are raising prices. They're obviously recognizing the fact that steel's a big piece of the frame and accordingly slide out. The DIY market'll probably be tougher just because of the nature of the Depots and the Loweses but, again, they have to realize that when raw materials go up, it is what it is.

Automotive and some of the engineered solutions we actually have some material escalators in some contracts. Others you just go for more of a surcharge environment.

The RV market and Gardener Bender and Enerpac will probably be ones that you would see the impact on the most. RV clearly. A lot of steel in the leveling and slide outs.

With Gardener Bender we are looking at copper more with the wire. We do a fair amount of cable and wire globally and Gardener Bender and Kopp and Dresco as well, even more so in Europe. And Enerpac, steel there as well, although we haven't felt it quite as much there as elsewhere.

If you take that and you say, I don't know, 70 to 75% of it you pass on to your, we have to go get the other 3 million out of our MBF cost down exercises, we've got to squeeze the organization. We've done that successfully. And I have a lot of confidence that Mark and Bill will go get the rest of that money.

So that's how I view it, Scott. I don't view it as something you should model a margin deterioration next year for. I think we will make it up. It's a realistic effort you got to do.

That's fine. I think you'll have operating leverage on your side next year as well.

Can you go a little bit into more depth, Bob, by the way, thank you very much for that answer, that was very good. Go to more depth, Bob, if you would on where the new product spending is going directionally. Maybe give us some examples of perhaps some of the things that you're working on?

Yeah, I think where I start is I would like and we try to start an initiative to spend somewhere around $5 million for next year on products that are brand new that are not replacing existing products, or that are going into new markets.

Now that's an analysis and a challenge that Goldstein and Blackmore are working with with their teams. I wouldn't tell you today we have specific projects as this initiative just got started in the last 90 days. So I can't tell you where they're going to spend that money, or whether they will spend that money. But that's the kind of range that we are looking to spend in excess what have we already spent today in R&D. And I view that to be more --

Two or three years out?

Yeah, but more kind of independent R&D. I don't want to say we're doing skunksworks [ph], because we will be doing it to solve customer issues, and not trying to think-tank it, but I think it's products that will be incremental revenue from what we've had in the past.

And again I wouldn't model a big deterioration in margins for that. I think we will pay for that for taking costs elsewhere, out of our MBF and cost down.

Sounds good. Hey, thanks a lot.

Our next question comes from the line of Charlie Brady of Hibernia Southcoast.

Hi. Thanks. Good morning, guys. Could you guys just talk a little bit on the PT Cruiser production schedule, are you at a normalized run rate, or how close are you to a normal production run rate on that?

Okay. Bear with me a second. I don't have it on the top of my head.

We just started shipping under that contract in the October time frame. On it, we shipped 11,000 units this past quarter compared to.

That would be about full production.

That's about right.

Okay. Because in the Q1 you were close but not there, so now you're sort of at that point now?

Yeah, I would say that's right.

Okay.

Judging from the cars in the parking lot out here, we are -- it's definitely starting to improve.

In the U.S. just to give you another data point, our units shipped in the first quarter were 5,000 units compared to 1,000 units in the fourth quarter, we were up to 16,000 units this quarter, so it again points to the ramp that we're seeing. Obviously, you've got a ton of new employees coming in to do this so efficiencies are not too hot.

That 16,000, that's just PT Cruiser?

And the SSR.

Okay, and the SSR included in there, okay, right.

On the power packer programs you talked last quarter about a little bit of sort of stop and go in some of those programs, and that was having a -- little bit of a headache in having to redeploy people when they stopped. Have those programs gotten a little bit bigger and a little more steady, or is it still sort of stop and go stuff on the RV side?

On RV or automotive?

RV, I'm sorry I misspoke when I said power packer.

I think the last call I was probably talking about automotive if I was talking about stop and go. Although we do see some piece of the RV kind of stop as they go to the model year around the show, but I don't think it's had that much impact on us.

For automotive, it is settling down. It's kind of along the lines where Wendy asked earlier, where these thing are starting to get in more production, just having in excess of 10,000 on the PTs is a good example of one that's got into production.

So we do feel like it's starting to level off. There's always some programs that are phasing out, and some that are ramping up. You don't get a huge amount of lead time from some of these auto guys. I think the data that comes from the dealers and distributors leads to, sometimes, stops and starts, but we're get to go a point where they will start offsetting each other because you've got enough volume going through the factories.

Any update on the timing of this third 50,000 unit program that's supposed to come out this spring?

No, it's probably in the next three to six months so no new update. We know who the OEM is. We did the design on the original product, but so did our competition. And we feel pretty good about it.

This is a replacement product, is that correct, but you didn't do the first product?

That's right.

Okay. Just switching gears hear a little bit, can you give us an update on China? What sourcing, particularly for Gardner Bender, and just in general sourcing out of China, has that picked up at all, I know it's a small base, but just the overall sales coming out of China, out of Q2?

Yeah, it's an issue for us, I was actually myself over there about three weeks ago. Last year we did a total of about 26, 27 million in sourced product from China, 22 -- yeah, this is all at cost, 22 of that or so was GB and the rest was other businesses.

I think the GB number will probably go to 25. The real initiative is take the five from the other businesses to a much bigger number. We are starting to get pretty good traction in Power Packer and -- I'm sorry, Power Gear and a little bit of traction in Power Packer. So that's been helpful. We've been moving some of the motors and pumps systems from Power Gear over there.

Enerpac has been ramping up. We now do a number of our products, not complete because we do tend to still assemble here in the U.S. but we'll get a lot of the componentry out of there.

I would venture to say that the 5 million we did in others could go to 15. Certainly on a running rate basis by the end of this year.

Calendar or fiscal?

Fiscal.

Great. Thanks very much, guys.

Our next question comes from the line of Rob McCarthy of R. W. Baird.

Good morning, Rob.

Good morning, gentlemen. Most of my questions already were addressed. I have a couple of minor things.

First, you said that comp was down in the quarter. Was that before the positive impact of currency translation?

They were down on a core basis, Rob.

They were up including currency, they were down excluding currency.

Right. I just wanted to get that clarified.

The RV business, very strong growth in the quarter. I could have imagined bigger. My bet is that you've built some substantial backlog in that business?

No, I think we are delivering on time and they don't give you much backlog raise. I think the piece that has been softer for us has been the travel trailer more than the motor home.

I think we're -- I think we're not going to cover off the ball in the motor home side, but the travel trailer has been the area that we've had trouble in the past with competitors and that's the area that's probably been a little weaker for us.

I'm trying to understand what you're telling me. Does that mean that pricing is more difficult in that market?

Absolutely.

Pricing is more difficult. Market share. We probably lost a little bit of market share in that area. It's always been an area that has not been terrific for us, but it's weaker now than it was a year ago.

Right, right, okay. Andy, you said truck was up in the quarter. Do you have a number for that?

Yeah, globally we're up about 7 -- 7 or 8%.

Okay. Did I understand you to say that you're either evaluating or already have moved some assembly of automotive products to the U.S. that are not for -- that are not PT and SSR?

Let me handle this, Andy. We have a couple of customers, and as you would imagine, as the Euro dollar exchange is affected, we've got the Volkswagen Beetle, for example, where a lot of that product is sold in the U.S. but it's manufactured today in Europe.

The customer is looking to move the roof system here, and correspondingly, if they move the roof system they want to move the hydraulics, also. Beetle is an example of one. XLR is an example of one.

In addition to those, you've got also just componentry material that, because we're starting to ramp up in the U.S., we could conversely ship that back to Europe. And it's a make versus buy -- it's a purchase here or purchase in Europe decision. It's very easy to do the mathematics of it, and we're evaluating all that stuff as we speak.

Okay. Did I also understand you to say that you expect that you can pass most of your cost increases in the automotive business through to your customers?

That's correct.

Okay. So then the last thing I was going to ask you about is what -- if there's anything you can tell us about what you're seeing in terms of cost on sourced product in China? Has there been some raw material cost pressure on pricing of that product?

Yeah it's -- I think certainly steel is a global phenomena. It's not a U.S. phenomena. We don't -- I wouldn't say we've seen as much in plastic, but certainly steel is a global phenomena.

That is, we're seeing the same thing. So Asian vendors are trying to raise prices just like everyone else.

Like everybody else is. Okay, but the same dynamic -- it hasn't really worked its way through the supply chain that much yet. So whatever incremental impact it'll have on this year's numbers it's going to be concentrated in the next two quarters?

That's correct.

Got it. Thank you.

Ladies and gentlemen, as a reminder, [Caller Instructions].

Our next question comes from the line of Bob Schenosky of Jeffries.

Good morning.

Good morning, Bob.

Two quick ones. First thanks for the numbers in terms of FX on revenues. But can you also offer the impact on the operating profits?

Not easily.

Most can't, but is it diminimus, is it of any substance, because that will help us through the margin.

Typically if you look at our European businesses, the margins, they are less than they are in the States, so the fall through would be, I'd probably use 10% as a rough cut fall through on operating profit.

Okay. Great. Thanks.

That's due to the fact that it was a year ago we had 100 million of revenue from the Kopp business, which everybody knows is a lower margin working its way to double digits.

Right. I just want to be clear in terms of where you margins might go going forward once we get currency back out.

Just second, relative to China, you talked about an acquisition, it seems that the class eight market, which we talked about before, might be just one of the available excellent opportunities that exist. Can you talk about how China may fit other than just simply the increased sourcing?

Okay. Well, today our China business is almost entirely Enerpac and it's construction and a little bit work holding and then industrial tools. That's been the lion's share of the business.

Where -- recently we're starting to look very heavily at the class A truck market. I think I've talked about that in the past. The Chinese are trying to get to 200,000 class A trucks per year within the next two years. They're doing only about 5,000 today. So it's a monstrous effort that the truck companies are there. My last trip I got to meet with FAW, the largest truck people in the world. And there are big initiatives out with them and then other truck companies as well.

So, yeah, that is part of our focused effort for growth. I'm not sure acquisitions are as important in that space. We've got the product. We'd have to build a production cell within our existing organization, start getting the sourcing cranked up.

Possibly you do a JV in that area to help you enter the market with certain customers. That's pretty typical behavior over there.

Right.

But the acquisition efforts that we're looking at in China tend to be more of the Enerpac variety.

Okay. Excellent. Thank you.

Our next question comes from the line of Scott Graham of Bear Stearns.

Welcome back, Scott.

Yeah, hi. I'm sorry, one follow-up question if you would. You guys give us great information on engineered solutions, in terms of the each of the segments, sales up or down, XFX.

I'm not sure if I got the same comparable information on the tools and supplies side. I know you talk typically about channels and geographies. Would you be able to tell us specifically what Gardner Bender, Kopp, and Enerpac were down core without acquisitions FX?

Yeah, sure. Enerpac was up low single digits on a core basis. Kopp was down single digits on a core basis, mid single digits, and Gardner Bender retail was up low single digits. Overall Gardner was essentially flat to up a hair when you bake in, some of the OEM and the wholesale markets within it.

Very good. Thank you, guys.

Mr. Arzbaecher, there are no further questions at this time. I will turn the call back to you for any closing remarks.

Excellent, well we got done seven minutes early today, so we're at peak efficiency. We will let everybody get away for their St. Patty's Day afternoon.

We're halfway through the year. We are exceeding our 15 to 20% EPS goal. We're working hard to maintain transparency and consistency of earnings, cash-flow, and end market leadership that our stockholders have come to expect from Actuant.

If you have additional questions about today or the numbers, Andy and I are available for the balance of today.

Thank you very much. Bye-bye.

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