Enerpac Tool Group Corp (EPAC) 2004 Q3 法說會逐字稿

Ladies and gentlemen, we are conducting an e-meeting to coincide with the audio conference. (OPERATOR INSTRUCTIONS) 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, variation and demand from customers, the impact of geopolitical activity on the economy, 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.

Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation third-quarter earnings results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will connect a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Thursday, June 17, 2004. I would now like to turn the conference over to Mr. Robert Arzbaecher, President and Chief Executive Officer, Actuant Corporation.

Thank you, operator, and good morning. As we are going to discuss on this call, the third quarter was strong, strongest on record for Actuant. A robust RV market, huge convertible top shipments, and a recovering North American economy all contributed to great sales performance for Actuant. The results are even more exciting when you look at the earnings and cash flow for the quarter. We saw a recovery in margins from a lull in the second quarter and saw great cash flow conversion from both earnings and working capital.

Andy is going to walk you through the numbers in detail, and then I will come back and give you some other highlights and preliminary earnings guidance for 2005. Non I'll turn it over to Andy.

Thank you, Bob. Good morning everyone. Our third-quarter sales increased 33 percent over last year from 147 million to $196 million. This included 17 percent core growth, by far the strongest we have seen since the spinoff, and it was pervasive across all of our markets. Our operating profit grew 30 percent over last year to about $25.2 million. This was in line with our top-line growth and came from both the tools and supplies and engineer solutions segment. Operating profit margins declined 40 basis points from the prior year, but all of that was due to mix, acquisitions and higher corporate expenses. Sequentially, we also saw improvement in the automotive margins.

As in prior quarters, our financing cost came in lower than the prior year as a result of fewer of our 13 percent notes outstanding. The lower financing cost, the acquisitions, and the core sales growth all helped our bottom line, driving record quarterly EPS. Our diluted EPS excluding special items increased 49 percent for the quarter from 39 cents last year to 58 cents a share this year. This year's adjusted EPS excludes the 9.9 million charge for the 13 percent bond buyback or 28 cents a share, while the prior year excludes a 2 cent a share gain related to litigation with divested business units.

The 13 percent note repurchases we made during the quarter brings our year-to-date repurchases to $81 million. This leaves us with about $29 million of the original $200 million issuance outstanding, and means that our annual interest expense for the issue has declined from about $26 million a year to a current run rate of just $4 million. While we hate to pay any premiums or retire debt, buying back the bonds in an NPD positive transaction as we have done this year beats the alternative waiting until the first call for these bonds in May of 2007. We were happy to get the bonds in and are going to continue to watch the market to see if any future repurchases are available.

Third quarter was the twelve consecutive quarter of year-over-year EPS growth, excluding the special items. We are on track for record fiscal 2004 earnings, and our year-to-date EPS is running 40 percent above the prior year. We know that consistent growth is rewarded by Wall Street, and all of Actuant is focused on it. Before providing more color on this quarter's results, I wanted to quickly review our year-to-date results. Sales were up 23 percent consisting of 8 percent core growth, 9 percent from the acquisitions being Kwikee and Dresco, and 6 percent from foreign currency. Our operating profit is also up 23 percent, despite the automotive margin issues we encountered this year. Overall, our year-to-date operating profit margin is up 10 basis points from last year.

Our financing costs are down 30 percent due to the bond buyback and cheaper borrowings, but that was partially offset by $65 million of borrowings to fund the acquisitions this year. Excluding bond buyback charges and last year's divested business litigation gain or charge, our year-to-date EPS was up 40 percent from last year to $1.40 this year.

Now turning back to the quarter, let's talk about sales. About 17 percent of the 33 percent overall sales growth was core growth. Five percent came from foreign currency rate changes, most notably the stronger euro, and the remaining 11 percent was the impact of the Kwikee and Dresco acquisitions. Going forward, we expect the favorable impact of currency translation to decline as we pretty much lapped (ph) the start of the climb of the euro against the dollar. As you can see in this slide, we saw solid sales growth in both of our segments with tools being up 20 percent and engineered solutions being up 55 percent. On a core basis, tools was up 5 percent, engineered solutions up 35 percent.

We saw year-over-year sales growth in each of our business units with the sole exception of Kopp, which was flat. However, that flat performance was a sequential improvement for Kopp. Enerpac had a nice quarter showing nice sales growth, particularly in North America which is up 15 percent. Our RV sales continue to be very strong and were up 19 percent on a pro forma basis for the Kwikee acquisition. However, to be fair, we had a pretty easy comp in the third quarter of last year because it was down for the entire RV industry as a lot of the OEMs were on 4-day workweeks to reduce inventory in the field.

Given that RV OEM shipments picked up dramatically in June, July, and August of last year, we are going to be looking at a much tougher comp in the current fourth quarter. In addition to these markets, we also saw growth in our North American electrical business, European electrical, truck, Nielsen Sessions, and Milwaukee Cylinder. However, the biggest grower by a mile was our global automotive.

Core sales were up 75 percent as a number of the new convertible platforms that were launched over the last few quarters saw significant increases in production orders from the auto OEMs. This included the Renault Magon (ph), the PT Cruiser, and the Peugeot 307. The Chrysler Crossfire convertible which see you see on this slide was launched into production in the Holland plant this quarter. Based on the wins over the last two years and the help of the weak dollar, we have already achieved our 2001 goal of doubling convertible top revenue in four years, a full year ahead of schedule. Given our current prototype and quoting activity, our expectation is that convertible top sales growth will exceed GDP for the foreseeable future.

Now moving on to OP, the incremental sales converted into operating profit growth, with both tools and supplies and engineered solutions participating in this growth. Tools and supplies operating profit increased 28 percent to $17.5 million on a 20 percent sales gain. This reflects the benefits of cost reductions across all units, prior year restructuring costs, and the impact of incremental volume. Meanwhile, engineered solutions operating profit was up 49 percent on a 55 percent increase in sales. We saw sequential improvement in our automotive margins, which were primarily efficiency and volume related. Our automotive team is also working on sourced material cost reductions and component part standardization in order to keep this margin improvement heading in the right direction.

Sequentially, margins in the segment were up a few hundred basis points for the second quarter. Last quarter we talked about the impact of commodity prices on our business. At that time, we said we have been able to delay price increases from vendors in most cases, so the net impact last quarter was negligible. However, that changed in the third quarter as we saw the clearer impact of steel, copper, aluminum and plastic resin increases on our results. We estimate that the third quarter negative impact of commodity price increases to our operating profit was about $900,000.

Actuant's third-quarter operating profit margin overall decreased 40 basis points year-over-year, while increasing 130 basis points from the second-quarter. Despite the year-over-year reduction, this really wasn't bad given that sales mix adversely impacted margins 30 basis points, as much of the sales growth came from our lower margin businesses, and the margins at Kwikee and Dresco are still below our overall average. Last year, we had about $1 million of restructuring costs running through the segments, while this year our corporate expenses were up significantly as we had higher incentive compensation provisions, higher staffing levels and some severance. Despite the puts and takes, this was our highest operating profit margin of the year.

Turning now to cash, I was personally happier with the cash flow than the record earnings for the quarter. Actuant continues to prove that it's a great cash flow generator, generating $28 million of cash flow in the third quarter, 9 million of which was used for the bond buyback premiums and the remaining 19 million used to reduce debt. Debt declined 231 million down to $212 million, or $19 million, in what has historically not been a great cash flow quarter for us on account of our semi-annual high-yield bond interest payments coming in May.

Total leverage based on our trailing EBITDA including a full 12 months EBITDA for current-year acquisitions was approximately 2.0 times at the end of May compared to 1.9 times EBITDA at the beginning of the year. What this means effectively is that we have absorbed the $65 million in current year acquisitions, as well as the 23 (ph) million of bond buyback premiums during the first nine months of this year, and are almost back to the same leverage ratio as at the beginning of the year.

The cash flow for the quarter illustrated on this slide came from a combination of good EBITDA and modest uses of cash for taxes, interest and CAPEX. Working capital was also a source of cash during the quarter, despite the sales growth. This is because our DSOs improved and we had increased payables to our vendors. Primary working capital management was very good, and we will be sharing some of our metrics with you in a few minutes.

In addition to reducing our leverage, we have also reduced our borrowing caused by shifting to lower cost debt this year. Beyond the interest savings from replacing 13 percent notes with less expensive senior borrowings, we also issued 2 percent convertible bonds this past fall, and more recently started issuing non-rated commercial paper. Our annual financing costs based on our third-quarters results are about $13 million a year. This compares to a run rate of $50 million at the spinoff. In addition, liquidity remains strong as we have 220 million of availability under our senior revolver at the end of May.

Having financial flexibility and access to inexpensive sources of capital for both organic and external growth opportunities is a good thing, something we have all worked hard for a long time over the last four years and something we are going to work hard going forward to protect. On that note, I will turn it back to Bob.

Thank you, Andy. As we have consistently communicated to investors since the formation of Actuant in August of 2000, cash flow is the name of the game for us. Actuant is a great return on invested capital company, meaning we generate attractive cash returns on the assets we deploy. Whether it is decisions on working capital, buying back bonds, capital expenditures or acquisitions, our focus on cash flow is to focus on the cash flow that is generated from whatever the cash flow outflow that we're contemplating.

I hope it's comforting to investors to see that even though we significantly deleveraged the balance sheet sine August of 2000, we haven't lost our cash flow focus, and certainly the third quarter proved this out. During the quarter, there were a number of highlights in the marketplace I wanted to comment on. The first was that we completed the last launch of this Millau viaduct, the large bridge in Southern France. Actually, this customer was in town this week. I got to spend some time with them, and they really are very pleased to with how the product works. This highly visible project was really given Enerpac visibility in the construction infrastructure marketplace.

Next on the tee is what is happening right now. We completed last week the lift of the Olympic Stadium in Athens. The roof itself was lifted with Enerpac product. The second item to talk about was the Dresco and Kwikee acquisitions. Both of these deals were accretive during the quarter, and sales and profitability are ahead of the projections we put together when we bought these businesses. I attribute a fair amount of our success to the Actuant AIM process, which stands for Acquisition Integration Model. This process is a very disciplined approach to integration for the first 100 days post-closing. We started it with the Kopp deal, followed it with Kwikee and Dresco, and it seems to get better on each deal we work.

Lastly, I wanted to talk about the launch of a new 2005 model with Winnebago. This model will be -- we will be providing the slide-out, leveling, and retractable step systems for this motor home. As many of you know, Winnebago was an important customer of Kwikee, and in our belief the combination of Kwikee and Power Gear has allowed us to serve this customer even better. During the quarter we also saw some competitive pressures across a number of Actuant business units. While there have been marketshare wins, there were also a few market share losses. We lost a little marketshare in RV, we lost to some regional shelf space at a retail electrical customer, and we were told that we were not awarded the new Sebring Convertible, which is a 2006 model-year program. While we want to give you transparency of these losses, I hope you'll understand that we don't intend to get into specific customer or competitor detail of these event.

Actuant is a very competitive organization and we really hate to lose. We've redoubled our efforts on sales growth initiatives to grow our marketshare by serving additional customers, expanding geographic coverage, and expanding our product portfolio. I also want to put these losses in context. They were more than offset by higher automotive volumes and strong economic conditions in North America during the third quarter. Those really didn't have much effect on us, but they do reflect our top- line growth forecast for the future, which I'm going to discuss later in the earnings guidance.

Another area that Andy talked about briefly that has gotten a lot of attention is raw material price increases. For us, the key to raw material -- the key raw materials that are impacted are steel, aluminum, copper, and plastic resin. We have aggressively reviewed with all of our businesses the commodity prices and, in most cases, have entered negotiations with both suppliers and customers. The issue is really twofold, getting the increases when you're in competitive situations, and second is the timing of the price increases to suppliers tends to be quicker than the timing increases you get from customers. As Andy indicated earlier, third-quarter results were impacted by 900,000 for the cost of these increases.

When I look at 2005, we think the net impact of cost increases that we can't pass onto customers will be to 2 to 3 million -- sorry, 3 to $4 million. We're working hard to offset this with efficiency gains and with other cost reductions. All of this is factored into our forward guidance.

Our acquisition activity continues at a brisk pace. While we did not close any transactions during the quarter, we have a few small transactions that are moving ahead and could easily close in the next 90 days. Additionally, we are investigating a number of opportunities that are in earlier stages which probably impact 2005. Our strategy continues to be the favor of the small bolt-on transactions, 30 to 50 million in size and sales that fit one of our existing markets of industrial tools, electrical tools or actuation systems.

Dresco and Kwikee I think are great examples of these, and these are the bolt-on acquisitions that represent the majority of our acquisition activity today. Everything we have looked at in acquisitions has been accretive to earnings, which should not really be a surprise to you given the low-interest rate environment we are in. The prices for transactions have been increasing steadily over the last year. We used to say four to six times, was the fair way we valued companies at. That has moved to five to eight times depending on the circumstance. We have maintained discipline and continue to be very selective about pursuing ideas and being careful about what we're willing to pay.

Non I'd like to move into 2004 guidance. With the fiscal 2004 being three-quarters of the way down, we are really in our homestretch. Third-quarter results were above forecast and have caused us to again raise our estimates for this year. Our updated 2004 guidance is for sales of 710 to 715 million, diluted EPS of $1.85 to $1.90, and we are predicting another good cash flow quarter driving our year-end debt down to 195 to 200 million. This excludes any potential acquisition. This equates to a fourth-quarter sales of 170 to 175 million and diluted EPS of 45 to 50 cents. We are predicting lower sequential sales in the fourth quarter, due primarily to the lower projected convertible top build schedules, lower RV sales, and seasonably lower European businesses due to the summer holidays that permeate euro.

This would equate to fourth-quarter sales growth, core growth, of about 3 percent. And assuming if we deliver the fourth-quarter within this range, our full-year 2004 EPS would be 30 to 35 percent up over fiscal 2003, well above our original guidance of $1.55 to $1.70 that we gave you a year ago on this call.

Now I'd like to turn to 2005 guidance. As we have done in the past, we like to endorse the next year on this call so that investors have an understanding of what we think the immediate future looks like. This guidance, because you are predicting the future 15 months from now, ends up being pretty dynamic, and this year is no exception. Our guidance for fiscal 2005 is for a sales range of 725 to 750 million with no future acquisitions included in this guidance. Excluding the full-year effect of Dresco and the changes in the U.S. euro exchange rate, this equates to about 4 percent core sales growth. Given that we were up 8 percent on a year-to-date basis, you might say my forecast is conservative. However, there are a couple things I want you to consider. The RV market has really had a huge last nine months, and certainly our business has been no exception.

Most of the people who follow the RV industry expect that the sales rate of change will moderate in the second half of calendar 2004, as the comparables get harder. We have been in launch mode on six new convertible top platforms this year. Convertible tops, as Andy said, were up 75 percent this quarter and represent on a year-to-date basis 5 percent of Actuant's 8 percent core sales growth. We are targeting next year mid-single digit growth as we wait and prepare for the 2006 model years, which get introduced in the fall and, therefore, don't really affect next year for us. The lost business I discussed earlier probably affects the core sales growth by 1 to 2 percent next year, and lastly, I have some concerns about consumer confidence.

RVs and convertibles are certainly affected by consumer confidence, and I view the current gas prices as something that will lead to inflation and a reduction in consumer confidence because it is affecting their discretionary income. Hopefully, my conservatism on consumer confidence is unwarranted for 2005, but I think this is the right way to plan for that year. Given the sales volume of 725 to 750, we expect EBITDA to grow in mid-single digits to kind of 110 to $114 million area, and interest expense to decline to approximately 10 million, reflecting the benefits of our 13 percent bond buybacks.

We expect the 2005 tax rate to be in the 34 to 35 percent range, with free cash flow in the 55 to $60 million neighborhood. From a currency plan point of view, we believe the Eurodollar conversion rate to be somewhere between 1.5 and 1.2 to the dollar, meaning moderate strengthening versus where we are at right now. Lastly, 2005 guidance does not assume any shares issuable under our conversion. Two percent bonds would be in this calculation. Andy went through that calculation on the last call. The conversion price starts to enter the calculation at $48 a share.

All of this leads to 2005 diluted EPS in the range of 215 to 225, up mid to high teens from the $1.5 to $1.90. This is very much in line with the 15 to 20 percent growth we have been endorsing for the last four years. As I stated at the early part of giving this guidance, commenting on 12 to 15 months out is pretty dynamic. In my opinion, the three things that could affect that guidance are as follows. Raw material price increases. As I stated earlier, I think we have got this pretty well quantified to be 3 to $4 million. However, it is hard -- it's difficult to understand what steel copper and oil are going to affect other cost elements as we go down the road.

Interest rate increases, interest rate increases will not have a great deal of effect to our P&L, due to the fact that most of our debt is fixed (ph). However, significantly higher interest rates would affect the consumer RV dealers and a host of other parties. Acquisitions, as I stated earlier our acquisition funnel is pretty full, and everything we're looking at today is accretive due to the low-interest rate environment. Given our acquisition pipeline, we think there's a reasonable chance that 2005 earnings guidance will be positively affected by acquisitions. But not knowing the size and timing of these acquisitions, it is too early for us to provide you guidance. Clearly, this is an upside item to our 2005 guidance.

Assuming we deliver this earnings range, it would result in our fourth consecutive year of 15 to 20 percent growth in Actuant. If you think about that in terms of the industrial economy we participate in over the last four years, I think you'll agree we're building a consistent track record of providing above-average earnings growth. Operator, now I'd like to turn it back over to you to take the questions from our investors.

(OPERATOR INSTRUCTIONS) Deane Dray, Goldman Sachs.

A couple of questions. The first was just to make sure I understood correctly the comparison on the operating margin from last year; it was 40 basis points lower. You said it was mix, acquisitions and higher corporate expense. And I think you said the mix accounted for 30 basis points of that; was that correct? So how much was acquisitions and what was the higher corporate expense?

Acquisitions were about 10 basis points, Deane. Corporate expenses were up. We had higher provisions in there for incentive comp, about 900 grand year-over-year. We also had some severance in there as well. Those are the two primary items.

So was the mix not 30 of the 40?

Yes, the mix from the operating unit 30 basis points, yes.

So there were other improvements, Deane, at the operations which was a good thing.

If you take all of corporate expenses out year-over-year, our operating margins went up year-over-year.

Okay, good. Second question, on the RV loss in market share, what can you give us a sense? Is this something you have lost on price, you have lost -- is it anything from a technology side, hydraulics versus electrical, competitive relationship? Give us some color there, what might be the factors.

Deane, I don't want to get into a lot of details because it is a dynamic situation. It is a combination of a couple of things that you mentioned. When I look at it, I think our RV team is very focused on how to get that business back. It has to do more with technology and bringing out some products that the customers really want. I don't want to go a whole lot further than that.

When will we hear more about it then?

I think it is a situation where you will see it in the marketplace in new technology. The Louisville show, we will see some new technology. It will probably be the place you'll hear about it the most.

Last question, if you just had to array your businesses, where do you have the most pricing power? Can you quantify at all what sort of price increases you are looking for over the next couple of quarters?

You know, I would tell you Enerpac is probably the best, electrical is in the middle, and engineered solutions would be at the bottom of our pricing power as I look at it today. Price increases are difficult to get anywhere now. I think customers are understanding that these raw material price increases are things that we can't really impact, given that we're mostly an assembler. I would say they range in the area of 1 to 4 percent, but that is a big spectrum, and you have probably got some on the outside of that and some you can't get any price increase.

And your confidence level of getting those?

Most of them have already been done, Deane, the ones that are needed. It's a question of whether they've come into timing yet. Some of those, what the customers say is you've got to turn the inventory once or some other issue that relates to the timing.

Got it. Thank you.

Bob Shenosky, Jefferies.

Actually, it's Monica. I'm on for Bob. Just had a quick question if you can go into a little bit more detail about the regions; can you give us a sense how China did during the quarter?

China was up about 25 percent year-over-year, so we continue to see strong growth out of it. The U.S. was up on an overall basis. All the businesses, we were up in double digits. Europe was up because of the strength of automotive. If you take that out, we were down single digits in Europe.

I think Europe is kind of muddling along. I think the U.S. is still in a strong recovery, although it did start to moderate. As the quarter went along, March started stronger than May ended, but the U.S. seems to be in pretty good shape. I don't see that having a quick turnaround negative. I worry about the consumer confidence that I talked about on the call. Europe is just muddling along. I'm having a hard time seeing what the drivers to getting Germany and Fran economies cranking along in Europe.

Okay, great. One last question, if you can talk about some of the new products maybe in the pipeline, maybe which ones are gaining more traction that you see out there, maybe in the electrical side?

Okay. We have new products really across all three businesses that we have. In Enerpac, we have a number of new pumps and some aluminum cylinders that have been hitting the market and are successful. In Gardner Bender, we have something called the Upper Hand which is a new fish tape that is ergonomically better, and we have a pipeline of things that follow that relating to bending and fishing products. When I go to the automotive, we have been doing a little more in trunk actuation and also in latching. And when I go to RV, we have been doing a lot more with some new technologies relating to leveling and slide-outs. So really across all of the businesses, we have not new products coming. A lot of that is with the mindset that we changed about a year ago as we started delevering the company. We really started to look at some ways to get some more internal growth out of the businesses.

Great, thanks very much.

Wendy Caplan, Wachovia Securities.

When you talked about '05, you used the word conservative a lot. I just looked back and saw that if we were to compare '05 -- if we were to look at '04, you raised your guidance five times, including the most recent one for '04. Should we expect -- I understand the issues that you mentioned that were specific kind of stumbling potentials, but should we expect that kind of pattern this year as well?

Well, I think two things, Wendy. One is there is no question I believe that there is some risk that consumer confidence kind of ruins the parade as you get into the '05 time frame. I could be conservative on that, and again I laid it out and I am making no bones that I necessarily see anything today. It just -- I look at the consumer and say if he is paying another 50 to $100 a month in gas bills, that is less money he can spend in other discretionary income, and it hits right away. So I could be conservative on that.

There is no question we will do acquisitions in 2005. And acquisitions today and a low interest rate environment are accretive. So I would expect that you're going to get some accretion from transactions. Our policy has been when we announce a deal to kind of give some guidance of what that means to the current year earnings. So I think that is an upside item. So I would say those are the two upside things that exist. I will make no bones, it is a conservative forecast, but that is the way I want to go into the year.

Okay, just so we understand that. An Enerpac question, the margin at Enerpac, obviously it's benefiting from volume. But are there other initiative that are moving that margin up, and are we at peak levels yet in that business?

Enerpac is one of our more profitable businesses. I would have thought we were at a peak a couple of years ago, and we have continued to eke out a little bit more. We are starting to reinvest some things into Enerpac in terms of new product development that I think will -- that I would tell you we are pretty well at peak margins in that business. The goal now is to start growing the top line and moving that forward, and I feel pretty good about that.

One last question on acquisitions and divestitures. Specifically on acquisitions, I know there has been some concern on investors part about larger than usual acquisitions, and you didn't mention those in your discussion, Bob. Could you address that in terms of whether -- you did say that your preference was to maintain the kind of bolt-on, small acquisitions that you have been known for, but can you address the issue of larger acquisitions? Can you also talk some about divestitures in terms of existing businesses or product line, specifically at Kopp?

Okay. We have looked in the last six months at a number of acquisitions that fall into two different camps. One is that there are some larger deals, 1 to 300 million in size, and then I have looked at some things that are what I would call adjacent markets to industrial tools, electrical tools, and actuation systems. Let me comment on each of those separately. Bigger deals, there are some properties that would fit our base business of tools and supplies and engineered solutions that are very attractive properties. And while they haven't come up because they tend to be privately owned, we would step up to the plate to a larger transaction if we could make one of those available.

I think you know the usual suspects that we talk about in electric that fit in that private ownership case. There are some other ones in different people's hands, kind of a financial sponsor type hand. Nothing is very far along in that area, and we still have the same commitment, consistent commitment that if we did something that big, we would probably -- we would make sure we stayed in the two to three times debt to EBITDA fairway. Would we do that with a convertible, would we do that with some kind of small tack-on equity offering? I don't know, but we would clearly not relever the company above the three times debt to EBITDA. We've communicated that pretty consistently.

When I look at the adjacent markets, we do believe over time we have to move out in more than just industrial tools, electrical tools, and actuation systems. Particularly in electrical and actuation, the markets we serve today we really dominate, and we will stunt our growth if we are just limited to those kind of actuation markets. So we are looking at some things that are in adjacent markets. When we look at adjacent, we look for leading brands in its markets, we look for above-average industrial growth, we look for points of leverage with our existing distribution channels. And we look for things that have global markets, because we have got global infrastructure today.

Basically, I put all of those around what can we do to create the above- average return on invested capital that drives Actuant. Nothing again in that area is imminent or is very far along, but there have been some things that have come up and we are poking around looking at some of those bigger items.

Moving to divestitures, we still have a few things that we would like to divest. I wouldn't say I would guide you that anything is going to happen in the next 90 days, but we do still have a number of things that we look at, and in that vein, we use the same test. We look at a return on invested capital, what are we getting from the business today versus how could we redeploy that money.

Thank you very much.

Peter Lisnic, R.W. Baird.

Just a quick clarifying question on something you said earlier about -- and that's related to the RV business you lost; you said that technology would be one of the ways of getting that business back. I just want to make sure that you didn't lose that business because of a technology advantage from the competitor. Is that the right assumption?

No, one of the RV things that we lost was going to a different technology relating to leveling systems. We have access to that technology. It was a different use of it than what we have had. We can provide what this customer switched to. So I guess what I am saying is that it is not a technology that we don't have. It is a different application to it than what we have done in the past with that customer.

Okay, fair enough. Then just a couple of questions on the forecast. If I kind of take the elements that you have already given us, meaning the convertible top business up mid-single digits and what looks like a maybe flat or slightly up RV forecast and organic growth of 2 to 6 percent as your number, that means that the rest of the business tools and supplies of Enerpac I guess would be flat or maybe even down, which I guess would be conservative. Is that where your conservative -- I mean I'll say the whole consumer confidence thing, is that where you are being maybe perhaps a little bit too conservative?

I don't really know where you got your numbers. Two to 4 percent is what we think the base growth is if you exclude FX and the full year of the Dresco acquisition. FX is, again, I told you 115 to 120. So if you pull that out of the piece, you end up at 2 to 4 percent growth. I think automotive will be mid-single digits, so that will be at the higher end of that range on about 100 million of the total. Enerpac, I would find it hard to believe Enerpac will not be up next year. RV, again due to the glut that's existed and some of the lost business, flat is probably not a bad assumption. And electrical, I think Home Depot, Lowe’s, the big retailers are doing pretty well on a same-store sales. I would expect those also to be up.

Okay, fair enough. Thank you.

Scott Graham, Bear Stearns.

For some reason, I can't seem to get into this Website with these slides. Andy, if my question is repetitive, please pardon me. Are you giving out the specific sales numbers, core sales numbers for each of the businesses?

Not by business. We did overall but not by business. I mentioned earlier that Enerpac was up midteens on a core basis and auto was up 75, but it did not show up on any of those slides. You didn't miss anything.

Was Gardner Bender U.S. retail up?

Yes, it was.

But Scott, recognize with Dresco and Kwikee and these acquisitions, we are starting to get to a point where we will never get through this call if we give you individual business-by-business detail. So we are starting to go to an electrical global business, and that is the way we want to do it in the forward. I don't have any problem with Andy telling you that Gardner Bender was up; it was. But in the future, just recognize we're going to start eliminating some of that.

That is fine. I want to try to understand a little bit also the guidance for the fourth quarter. Did I hear you say that parts will be down in the fourth-quarter?

Can you repeat that? You cut out.

That convertible top sales will be off.

They will be down sequentially, due to the fact that Europe is in a slowdown mode in the summer and it affects -- they do a lot of retooling in the automotive lines in Europe. It will not be down year-over-year.

Right. And the RV tougher comp, but that should still be up, right?

No, I think we expect RV to be down. The most recent data if you look at RVIA, we are up double-digits and they are forecasting to only be up 7, 8 percent for the year. You do the math of where that has to come. It really is in the second half. And you were in a pretty big ramp-up last year because you were coming out of the back end of the Iraqi thing where it really slowed down the first quarter, and that pent-up demand came roaring through in the fall -- summer and fall last year.

Okay. You talked about the Winnebago business win. Is there anything in that win that could lead to other business with that OEM?

Yes.

Okay. That is all I have for now. Thanks.

(OPERATOR INSTRUCTIONS) Charlie Brady, Hibernia Southcoast.

Could you just talk about sourcing product out of China; how much of that is going on and sort of what the impact is and what's needed going forward? Secondly, as it relates to China, what is going on with trucks in China? There has been a lot of talk about different firms ramping up production and trying to build Class 8 trucks, and obviously there is an infrastructure need there. In the previous call, you talked about trying to get in some of that actuation business. Any update on that?

Sure. The truck business -- let me take the sourcing first. In sourcing, last year we did about $30 million of Chinese sourcing. This year it will be north of 40 million, and actually on a running rate closer to 50 million. We have really ramped up that effort. It used to be mostly a Gardner Bender play. Enerpac came online about a year ago, and engineered solutions is coming online now along with Kopp. So that is an initiative with a company we've spent a lot of effort on at a leadership team level, looking at that. I would expect that to continue to grow from this kind of 50 million running rate at a fairly healthy pace going forward.

You have got to do that in this day and age, because the customers are expecting you on a yearly basis to deliver some kind of cost reduction. And even with the inflationary things that are going on with some of these raw materials, they are still expecting you to do that. I think we are well-positioned there.

Moving to the truck business in China, it is an explosive situation. All of the OEMs on a global basis are chasing the China initiative. Basically, the Chinese government said we want 200,000 Class 8 trucks to be built in China by 2006. That level today, I don't have an exact number, it's somewhere like 15,000. So you are talking about an enormous growth in the number of trucks. There is four or five Chinese truck companies. All of the western fleet is trying to do JVs and hook up with these guys to go forward.

We are involved in a number of different customers creating cab-tilt applications, and today those cab-tilt applications are either manual, hand pump type application, or they are a torsion bar. We have been bringing some of our technology that we really dominate in the Europe market to bear in China. We've won one customer which is a fairly small one, and we are working on two very large truck guys. I would hope 2005, I have something to announce there. It is probably a 10 to $20 million opportunity for us over the next two to three years.

Great, thanks. Back on this Winnebago, the activity, this is clearly a step-up into the penetration of Winnebago, correct? Previously before Kwikee, you didn't really do too much with Winnebago.

We did nothing with Winnebago prior to Kwikee. The model that I'm referring to, Kwikee had one right around the time of the acquisition. But we have been able to help support bringing some new leveling technology and some of the slide-out technology. These were not really Kwikee's core competencies. They had developed product, but we were able to help accelerate that and make that a little bit better. Because of that, we have been blossoming in the relationship with Winnebago.

Okay, my last question and then I'll get back in the queue. I don't want to beat you up on this, Bob, on the consumer confidence concerns, but is your concern as far as higher gas prices and interest rates, are you concerned that that is going to impact RV and convertible top sales? Is that really the source of the concern on that?

Yes, I think it is going to affect consumer spending, which I think affects consumer confidence. I think these two things go together. Most of the research that has been done on RVs tend to say that oil prices themselves do not affect the purchase of a motor home, that they just don't use that much gas a year, and even if it goes up 30 percent a year, it is not that big of a ticket item. It is more to do with interest rates. It is more to do with fuel prices affect food prices which affect inflation, which affect consumer spending. It is that vein that concerns me. It is something that I want to plan conservatively and react to what happens in the marketplace.

Okay, great. Thanks very much.

Michael Hamilton, RBC Dain Rauscher.

A couple of things. One, I think I just missed, did you lay out an '05 CAPEX plan?

We did not.

We did not. I would expect it to be somewhere in the 12 to $14 million range. We are underspending a little bit this year on the service, but part of that is just we are leasing a little bit more than buying. So it is in that kind of range.

Bob, just to frame up your consumer picture, in your thinking is your '05 calling for a recession late year?

I wouldn't say my thinking is advanced enough to just call it a recession. I am saying in the markets we are playing in, 2 to 4 percent which is clearly a slowdown from the 8 percent we're running this year.

Fair enough. Then one, if I could, looking at the glass 10 percent empty here. Given your strength in Enerpac and the revenue related, I would have really anticipated a little bit better operating margin in tools in the quarter. I realize it is kind of hard to comment on that dynamic, but are you running some costs in there that you anticipate are going to get alleviated? Obviously, there is a ramp-up going on here.

No, we were pretty happy with the tools and supplies margins for the quarter. Maybe it is a little bit of the Dresco which is above average -- I'm sorry, below our running rate for the consolidated business. Kopp, again, the summer months are a little bit -- or the spring months are a little bit slower than the second quarter. I would say it is those two. I would not read a lot into Enerpac there.

Also about a half million dollars of commodity price increases. If you take a half million, throw it on top the margin -- on top of the (indiscernible) and recalc it, you will get a couple of clicks up as well.

That makes sense. Could you perhaps give your thoughts on where we are in the learning and ramp curve on convertible actuations?

What do you mean by that, Mike?

Just, obviously, we are rolling out a lot of production in here, we are coming up the learning curve and cost efficiency curve; where you see yourself at this stage there?

I would say we are in the fourth inning of a nine inning game. I would say we were in the first inning or second inning last quarter. We had these six models going through the factory. We had miserable margins last quarter, as you guys know. We made a management change there. I think Andre has really been starting to get his arms around those issues, and I was very pleased that we moved from the first inning to the fourth inning in a quarter. I would say we have got a fair amount of upside as we look in the future to continue to gradually move those margins up. Does that answer what you meant?

Absolutely. I am pulling that we can avoid the rain delay.

Correct. It is raining in Milwaukee today, so you're all over it.

Thanks and congratulations.

Wendy Caplan, Wachovia Securities.

Just one quick question. You mentioned, Bob, in your comments that March began stronger than May ended. Can you just give us some detail on that in terms of how you understood that or where it was specifically?

We had a huge March as it seems like quite a few people did when I listen to a number of the first-quarter reporters talking about March. It really was very strong. It slowed a little as we went into the back half. I am not sure -- when I look at Enerpac, I'm not sure it slowed as much as the fact that things like convertibles were very strong early in the quarter and kind of took more of a moderate level in the back half. I would still tell you that I think the economy is moving along. You know, there are kind of monthly times where you kind of scratch your head, saying that looks a little different, either positive or negative to a straight line. So I think there are still little blips. Particularly as diverse as Actuant is, there is always an explanation that is needed behind it. But clearly we started the quarter stronger than we ended the quarter and definitely impacted my guidance as I'm giving the '05.

Finally, a question on capacity utilization. Can you give us some sense of where you are in your plants?

It is not a measure that we track, so I am going to give you some ballpark numbers rather than anything that is real scientific. I would say Enerpac is at 70 percent capacity with the ability to add it pretty easily because it is really an assembly business. Gardner Bender 60, automotive 80, RV 60, Kopp 30.

Thanks very much.

Charlie Brady, Hibernia Southcoast.

I don't know if you said it before, the corporate expense line going forward, should we expect that to a moderate a little bit in fourth quarter and going into '05?

It is not going to be as much on an annualized basis, what we just saw this quarter. But our corporate expenses clearly have stepped up from where we were at entering the year. We have added some resources up here, 11, 12; somewhere in that for next year is what we would be looking at.

A million a month, right around that.

Can you talk about on the convertible side of the business, convertible tops, when you're looking at these models that come out I guess midyear, can you give us a sense as sort of numbers or how many -- what the potential is for the pipeline on that business?

Yes, there is probably five to ten programs that we have visibility to that are coming that are meaningful '06, '07 programs. Whether they are replacement vehicles or new vehicles, it is a combination of both. It is everywhere. I think the Japanese are starting to catch up, so we're starting to see a little more activity out of that part of the globe also. We have four models that are new programs that are going to be in preproduction during '05, that are '06 model years. I can't give you the specifics of a couple of them due to customer confidentiality, but there are four models that are coming that we will be working on going into production in '06.

So the way you should view auto is we wanted the doubling of revenue when we stated it in '01. We got there a year early due to the volumes that are going through. '05 is a year where it kind of flattens out a little for just reasons that there aren't a lot of launches of convertibles in the '04 model year, meaning things that are getting launched right now that aren't already launched. Then there is this next wave that comes for the '06 model year in the fall of '05.

Okay. On the one project that you guys did not win, was there any particular reason cited, or was it a new competitor entering the market maybe from Asia or --?

No, it was not a new competitor. Most of you guys know that there is not a lot of competitors in that space, and it was not new. We have won 17 -- prior to this quarter, we had won 17 out of 22 models. Our competitor is fighting back a little. They really wanted that program. We wanted that program, so I'm not saying we laid off. We certainly didn't. But I don't think you should read a whole lot into it.

Fair enough.

It was always icing on the cake, the Sebring. We had already met our two times doubling of revenue. It is one we wanted because it is visible with you guys, the investors, but the reality is there is plenty more fish that we have got our hook onto right now.

Good enough. Thanks.

(OPERATOR INSTRUCTIONS) There are no further audio questions at this time. I will turn the conference back over to you.

Thank you very much. We really appreciate your participation on a call. We feel Actuant continues to deliver on its commitments to you and we continue to create above-average shareholder value, which is what you pay us to do. Andy and I will be available all day to follow up with any of your questions. We look forward to talking to you. Bye-bye.

This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.