Enerpac Tool Group Corp (EPAC) 2005 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.

Certain of the following 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 in 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 prices 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.

We are conducting an e-meeting to coincide with the audio conference. If you would like to video the presentation online, please logon to themeetingson.webex.com and enter meeting number 719275058. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. If you have a question, please press the 1, followed by the 4 on your telephone. As a reminder, this conference is being recorded Thursday, March 17th, 2005. It is now my pleasure to turn the conference over to Robert Arzbaecher, President and Chief Executive Officer Actuant Corporation. Please go ahead, sir.

Thank you, operator, and good morning. Happy St. Patrick's day to you all. Today we're going to update you on what has been the busiest quarter in Actuant's 5-year history. The quarter started with an announcement of the KCI acquisition, followed by an equity offering, debt recapitalization, the Sperry acquisition, and that was all before Christmas. In January we began the integration process of KCI, found time to adopt the new accounting standards for convertible debt instruments, and brought Enerpac into the acquisition fold with the Hedley Purvis acquisition.

Andy and I are going to walk you through all the details of this, but let me hit some highlights. Sales were up 34 percent and earnings per share $0.54 a share, up 42 percent. EBITDA margins improved 80 basis points, primarily on the favorable impact of the acquisition mix. Acquisition integration, particularly the KCI integration, has proceeded on plan with end user markets performing at or above our expectations. Importantly, the management team of the various acquisitions are playing important roles in Actuant's new leadership teams with no unusual defections or problems. Our cash flow for the quarter was strong, with free cash flow of 14 million for the quarter. Debt leverage remains comfortable at 2.4 times trailing EBITDA.

In summary, a good quarter in what's turning out to be another record year for Actuant. With that, I'll turn it over to Andy to go through the financials.

Thanks, Bob. Good morning, everyone. Actuant ended up a good quarter, as you can see from this slide. Sales, margins, and EPS all grew. These were all record second quarter results. Sales increased 34 percent over last year to approximately $235 million. This included results from the 3 acquisitions during the quarter. We were also helped by the weaker dollar versus the euro, as well as core sales growth.

We break down the 34 percent growth. We saw 3 percent core sales growth, 3 percent from currency, and 28 percent being the 1-time impact from acquisitions. Our operating profit grew 38 percent, which is slightly better than sales, meaning we had higher margins this quarter. Our operating profit margin increased 40 basis points from a year-ago to 11.9 percent. I'll provide a little bit more color on that later in the call. Our financing costs are about even with last year, reflecting lower borrowing costs this year because we didn't have any 13 percent bonds outstanding, offset by the higher debt levels this year because of the acquisition. We factor in the increased sales and the higher margins, our second quarter diluted EPS was $0.54 a share, which is a 42 percent improvement over $0.38 for the second quarter of last year. It's worth noting that last year's $0.38 excludes the non-cash debt extinguishment charge we recorded last year when we replaced the senior credit facility.

Before getting into further details on this quarter's results, I also wanted to point out that we adopted EITF 04-08 this quarter. This is a new rule that governs the accounting for contingently convertible debt instruments such as our 2 percent convertible bonds. We issued a press release on this -- on the impact of this new accounting rule at the end of January to restate last year's results, and we just wanted to point it out here to remind you of the change. The impact of this new rule is only on diluted EPS, it does not have any impact on our actual net income or on our cash flow. Another point on the new Co-Co accounting rule, it requires a retroactive statement of prior quarters to the extent that the bonds were actually outstanding.

In our case, we had to go back and restate last year and the first quarter of this year. Regardless of the accounting changes, the second quarter continue a string of 15 consecutive quarters of year-over-year growth in EPS excluding special charges. If you look at this chart, you can see our second quarter is traditionally the lowest of the year, due to the winter season effects in construction, plant shut downs around the holidays, and fewer business days in December and February. That explains why our margins in the second quarter and our EPS in the second quarter are lower seasonally than other quarters. When we look at KCI's historical results the same trend holds true as well.

I wanted to take the opportunity now to discuss the impact of KCI on our second quarter. We closed the acquisition on December 27, 2004, meaning we got the benefit for its sales for the last few weeks -- last few days of December, as well as the full month of January and February. We have previously informed you that we expect that the acquisition to add $0.40 a share to our EPS during the first 12 months under our ownership. But we did not provide specific guidance as to what it meant in the second quarter or in the current fiscal year. We also mentioned that the $0.40 accretion figure was before the impact of the new Co-Co accounting rule, which means that the accretion guidance post Co-Co rule now is $0.36 a share for the first 12 months. If we take 2 months of that $0.36 annual run rate, it's $0.06 of EPS contribution, if you make the assumption that earnings are level-loaded throughout the year.

However, the earnings accretion is back-end-loaded at KCI, given the seasonally weak winter for KCI, similar to us, as well as the fact that KCI's corporate office was still open and it had costs during the quarter, and the fact that we had purchased accounting-related charges running through the quarter and I'll have a little bit more next quarter relating to inventory valuation. With all of that said, KCI's results were definitely accretive to our earnings for the quarter, and were probably a little bit better than our expectations for the first 2 months. But we're not going to be separately providing you with an EPS figure or an accretion figure from this deal, as has been our practice all along.

Our core sales for the quarter were up 3 percent year-over-year, after factoring out the 1-time impact of acquisitions. Some of our businesses continue to enjoy very strong year-over-year sales growth, such as Enerpac, while others are battling tougher comps or lost market share, such as that which we discussed from last June's earnings call. Now the biggest swing sequentially came from RV and automotive convertible top, both of which we expected to slow down during the quarter, but not to the extent that they did. RV was down 34 percent year-over-year in the second quarter, versus a 17 percent decline in the first quarter, while automotive sales growth slowed to 2 percent year-over-year in the second quarter, compared to 40 percent in the first quarter. Both of these markets are included in our engineers solution segment, which reported flat core sales year-over-year. We like both of these markets long-term, but expect them to be negative for the balance of the year. Bob will be providing a little bit more color on these later on the call.

Generally speaking, when you look at our business, our later-cycle markets or businesses such as industrial tools and commercial-construction-related businesses reported nice sales gains over last year. Our European businesses, with a few exceptions, did not improve -- or did not show improvement sequentially, and appeared to have lost some of the momentum that we had seen at the beginning of last quarter. Consumer confidence across Europe dropped during this quarter, in Germany in particular, reported record unemployment levels north of 12 percent for the year, and revised its GDP forecast to under 1 percent for 2005, which is much worse than last year, and significantly less than the forecasted U.S. gross domestic product. With about 40 percent of our sales in Europe, this definitely has an impact on Actuant and especially in our tools and supply segment, given its significant exposure to Europe, and Germany, in particular, in electrical products. However, Enerpac, which is the largest tools and supplies business, continues to report strong growth in North America and in Asia.

On another positive note, our do-it-yourself electrical businesses, both in the U.S. and in Europe are preparing for a few large resets of customers that will be impacting the second half of this year and should provide earnings growth in future years. Lastly, a number of the newly acquired businesses that are performing very well and are reporting year-over-year sales growth, including the biggest KCI unit, Kipp (ph), Acme Electric, Marinco, and Elliott. In summary we saw and are continuing to see a lot of puts and takes from our units in terms of sales. Some markets are doing well, others are not. This continues to be a trademark of Actuant's end market diversity though. We had a few weak markets, yet still delivered our consolidated financial targets.

Shifting now to profit, the 34 percent second quarter sales growth lead to a 38 percent increase in our operating profit. Like the last few quarters, our year-over-year margins improved during the quarter. Our operating profit margins increased 40 basis points from 11.5 percent last year to 11.9 percent this year. Acquisitions did impact comparability in both segments. Acquisition mix hurt margins in tools and supplies, while it helped margins in engineered solutions. Given the second quarter seasonality, the partial inclusion of the acquisitions in the second quarter, and the impact of purchase accounting charges for inventory level this quarter, and duplicate corporate expenses were past quarter, the second quarter margins sure had a fair amount of noise in them. Therefore you shouldn't draw a lot of conclusions based -- or profitability trends based on them.

Shifting away now from earnings to cash flow, our second quarter cash flow, as Bob mentioned, was pretty good, despite the increase in debt. Given the 3 acquisitions, our equity offering, the call of key component 10.5 percent bonds, and new debt financing, it was a pretty busy quarter to say the least for our Treasury Department. We started out the quarter with 205 million of debt and ended with 200 million more, or $405 million of debt at the end of February. Specifically, we used $278 million of cash during the quarter to purchase Key Components, Sperry, and Hedley Purvis, as well as some minor working capital adjustments and earn outs in prior deals. This was funded primarily from the issuance of 250 million of new term loans under our amended credit facility. The term loans have a tenure of 5 years and bear interest at an initial rate of LIBOR plus 125 basis points.

As Bob indicated in his opening comments, we access the capital markets in late December and sold about 2.9 million shares of new stock, generating net proceeds of $134 million. The new stock was issued at a price of $49.50 a share. We used about $85 million of the proceeds from that offering to retire KCI's $80 million of high-yield bonds that we assumed in the acquisition, as well as the call premium and some accrued interest on those bonds. The balance of the equity offering proceeds are about $50 million, was used to reduce revolver debt. Later in the quarter we expanded our AR securitization facility and sold off an incremental $19 million of receivables, principally from KCI, which was reduced -- used to reduce debt for the quarter, and then finally on top of this, we generated, as Bob mentioned at the onset, $14 million of free cash flow during the quarter. Now, the impact of all this was a $200 million increase.

This slide summarizes our debt picture at the end of the quarter compared to the beginning of the year. Our quarter end debt consisted of 150 million of convertible bonds, 250 million of new term loans, and about $5 million of other debt. Our debt to EBITDA leverage at quarter end pro forma for full year benefit of the acquisition was about 2.4 turns, which puts us comfortably in the middle of our long-term, 2 to 3 times debt to EBITDA leverage zone. Based on our present business portfolio, and assuming no acquisitions or divestitures, I'm forecasting our year-end debt to be in the range -- net debt to be in the range of 350 to $355 million. The liquidity picture as well at Actuant is excellent. We had 246 million available under our $250 million revolver at the end of the quarter, which provides us with plenty of availability to execute our growth model going forward. On that, I'll turn to back to Bob.

Thank you, Andy. Before talking about acquisition integration and our earnings guidance, I wanted to comment on two-end user markets that Andy mentioned in his remarks. The first is RV. We expected going into the second quarter a tough comparable, and it certainly didn't disappoint. Down 34 percent was a combination of weak wholesale shipments by RV OEMs, lower production levels at RV OEMs reduced -- that were used to reduce their own inventory and market share losses we disclosed to you in the third quarter of last year. As have happened in past RV cycles, the rest of Actuant powered through and offset this RV shortfall. We remain enthusiastic about the RV market long-term, the demographics of the baby boomers that really drive this market and technology advancements and actuation systems that Power Gear brings to the RV industry.

The second is convertible tops. We told you going into this year that it was going to be a relatively flat year, given the lack of new programs being introduced by OEMs in model year 2005. While the year started out strong in the first quarter, we saw a slowdown -- a significant slowdown in the second quarter. I was able to attend the Geneva Auto Show 2 weeks ago in Europe and met with many of our customers. Nothing's dampened my enthusiasm for convertibles and Power-Packer's position in this marketplace. We have a number of committed new models that will be introduced in 2006 and 2007. And many new models -- and many new opportunities for additional business on top of that. The fact that a number of our existing models are slow in production in this quarter is a short-term phenomenon in an otherwise exciting growth market. Again, the rest of Actuant offset this sales shortfall.

Now moving on to the acquisition integration. We had a great quarter in terms of performance and integration in our recently acquired acquisitions, namely Yvel, Sperry, KCI, and Hedley Purvis. First, no surprises on the revenue line. In particular, the KCI businesses had good year-over-year results, due to the strong North American industrial economy. The closure of the KCI corporate is largely complete with all the treasury, finance, and HR-related items moved to Milwaukee. All of the KCI business units are on Hyperion, our financial reporting system, and all the KCI business unit leaders are reporting to Mark Goldstein and Bill Blackmore, Actuant's 2 segment leaders. As we discussed with you when we purchased KCI, the first year cost synergies were largely corporate-expense-related, and we're on track to deliver these improvements. We had great communication meetings and management meetings with all the major KCI locations in the first 90 days. Employees of KCI are truly excited to be part of Actuant family, and as you probably saw by this week's leadership announcement, so are the key managers.

We implemented a number of the lead toolbox initiatives at all the KCI units. Management by Fact, or MBF, Global Sourcing, Kaizen, Kanban events, have all been introduced at various facilities. We continue to believe that these initiatives will improve margins and working capital over the next year or year-and-half. We've begun to look at some of the sales synergies we think we can gain in Europe from KCI. This is the primarily the Gits, Elliott, and Marinco business units. While there's a -- while this is a longer-term initiative, we continue to believe the top line growth will be realized from this European initiative.

The Sperry acquisition was positive, we received at both big box retailers, namely Home Depot and Lowes. We added SKUs at both locations, just on the announcement of the deal. Sperry is turning out to be a perfect bolt-on acquisition. Its products are highly complimentary to GB's retail profile, and we will be able to quickly leverage our warehousing and logistics competencies. In addition, Sperry has a number of new products that we're going to be able to market in both the retail and professional channels.

The Hedley Purvis acquisition, even though it's only been 45 days has already demonstrated sales wins of Enerpac products and Hedley customers, and Hedley bolting products with Enerpac customers. The thesis of bolting being a natural extension of Enerpac serve market is proving out as we expected. You should expect to hear more about the bolting market for Enerpac. This is close to a $1 billion worldwide industrial market, where in the past Enerpac only participated in a small sub-segment of that. We've had initiatives underway to internally develop our own torque wrench and pump platforms, use the Hedley Purvis acquisition to expand our capabilities on the service side of the bolting market. We've got an aggressive training program going on right now with both our internal salespeople and distributors. And, again, the possibility of future acquisitions in complimentary areas of the bolting market.

So to summarize all our acquisition efforts, as I've said to you many times, integration process is the key to acquisition success. Our acquisition activity this quarter certainly tested the Actuant management team, but we're on track for all of our financial targets related to these acquisitions. Just a quick comment on future acquisitions. 3 months ago I told you we wanted to take a bit of breather after a very busy period of activity. While we still have an active pipeline for the Enerpac business, we are taking that breather on the other businesses. The Enerpac organization was not impacted by KCI, and thus the management capacity to do more than Hedley Purvis is certainly real. While we're still looking at some acquisitions in the other businesses, I would prefer to get another 3 months down the road on the KCI acquisition. Thus probably not much activity to create any meaningful impact for the remainder of fiscal '05, but expect some acquisitions that would contribute to fiscal '06.

Before moving on to my guidance for the year, I want to make a brief comment on this week's announcement of our expanded leadership team. I spent a lot of time thinking and reviewing the top leadership of Actuant. Given our diversified business model, and the growth in our size and complexity recently, we really needed to expand this team. On this slide, you'll see familiar names, like Kobylinski, Staple, Bowman and Wieczorek. But we've also added additional business leaders, including 4 from the newly acquired KCI. All of these business leaders report to myself or our 2 business segment leaders, Bill Blackmore and Mark Goldstein. As Actuant gets bigger, Mark and Bill's role looks more and more like Chief Operating Officers. I really think we have a great management team in place at Actuant to take us to the next level. And I want to congratulate all the new members on their contributions to Actuant and its shareholders.

Now moving into earnings guidance. As we described in this morning's press release, we've revised our fiscal 2005 guidance to $2.40 to $2.50 per diluted share on sales of 960 to 970 million of revenue. This guidance takes into account all activity that happened during the quarter, the Co-Co accounting, the Hedley and KCI acquisitions, new debt, additional shares from the equity offering, and our current view of Actuant's end user markets. Give you a few comments on this guidance. We've assumed the euro currency rate in this guidance of about 1.30, slightly more conservative than today's rate. We're assuming the RV market will recover from the second quarter running rate, but still will be double-digit negative for the third and fourth quarter when compared to the prior year. Our expectation is that total RV sales for fiscal '05 will be in the 85 to $90 million range, which is about 10 percent less than the 95 million we communicated to you going into the year. Core sales growth, excluding the RV shortfall, we're expected to be about 2 to 3 percent, with North American being stronger and Europe being weaker.

We're expecting operating margins to improve 100 to 200 basis points from the second quarter rate of 11.9 percent. This represents normal second half increases we get based on volume, and the full-year -- full-quarter effect of the KCI acquisition. This equates to full-year operating profit for 2005 of 13.1 to 13.9, up 70 to 100 basis points from a year-ago. We're expecting a tax rate of 34 percent, interest expense of around 5 million a quarter. And when you put all this together, we're targeting a year-end debt level of 350 to 355. This excludes any further M&A activity.

In summary, diluted EPS of 2.40 to 2.50 a share represents 30 to 35 percent growth over 2004. This would represent our fourth consecutive year of meeting or exceeding our 15 to 20 percent annual EPS target. When you look specifically at the third quarter, we're expecting sales of 265 to 270 million and EPS of $0.61 to $0.66 a share. This results in 15 to 25 percent growth over the prior year, again, adjusted for the Co-Co accounting change. Operator, I would like to now turn it back over to you to take our participant questions.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the 1, followed by the 4 on your telephone. You will hear a 3-tone prompt to acknowledge your request. If you wish to withdraw your registration, please press the 1, followed by the 3. If you're using a speaker phone, please lift your handset before entering your request. And our first question comes from the line of Deane Dray at Goldman Sachs. Please proceed with your question.

Thank you. Good morning. 2 questions. The first would be regarding the KCI integration and the assumed accretion. So far all the discussions have been focused around the cost synergies. And I think you've alluded to a couple of spots where there would be some meaningful revenue synergies in taking KCI products into Europe. So, at this stage, I know it's early, what would be the magnitude of that contribution? And is any of that -- what would be the earliest point we'd start seeing that in the earnings? And then I have a follow-up question, please.

Okay. Deane, it's very difficult to know the timing of those launches. Obviously, KCI, there are competitors of the KCI relative products in the European market. They're a little different business-by-business. Let me try to hit the 3 that I talked about on the call and just give you some feeling. Electrical is probably the one that will come the fastest. Now my guess is you're talking kind of mid-'06 to see anything that we could even report as a sales implement effect. We already have a little bit of Ancor there today. We have a warehouse system within the Enerpac, or Kopp business that we can easily add warehousing and the logistics effort that would be required. So, Marinco and Ancor combined is probably our -- our easiest targeted area to go after.

The second would be the Gits business, which is the wastegate actuators and the emissions control actuators. We've had people from Gits already over to Europe. We're already starting that process of getting meetings set up with customers to go through that. But you really have to recognize that these guys are working on '07 and '08 engine programs. And, while we might be able to announce that we've won some or we've secured some business, you're not going to see that revenue until 2007 or 2008. The last 1 would be the 1 I'm probably the less up-to-date on would be the flexible shafts. We're excited about that opportunity, but that's a more difficult 1 to try to quantify. All I can tell you is we've got more work to do before I would know when the timing is.

Okay. And then just a follow-up question is -- To make sure we're understanding of your definition of core sales growth, because it was different in the press release. There's a line that says core growth as defined as year-over-year sales growth in both existing and acquired businesses. So are we to interpret that you are now including the KCI contribution year-over-year in your core growth and how should we be thinking about that?

That's correct, Deane. It's really not a change in what we've done over the last several years. I think that what's probably different is the fact that we defined what core growth was. This is the way we've done the calculation. It's meaningful, I think, this quarter just because of the size of the deals . As Andy's remarks said, our core growth was 3 percent, excluding currency. And that does take into account both existing businesses and acquisitions. We really think that's the best way to look at it because it's giving you the trends of our end user markets and those end user markets and the sales to them have increased 50 percent over the prior year. So if you didn't include some look at that, you wouldn't even see 50 percent of our -- of our sales, what the trends are.

To specifically answer your question on what the core growth is on base businesses, which I think you mean, are businesses we've owned over a year, I'll give you the answer. But I want you to recognize it's a little muddy, because of acquisitions where we have sales synergies with the base business. This would be like Dresco, Yvel, Marinco, Sperry, and Hedley. When you receive additional business, it's because of a join effort, who do you give credit to that? So I'm going to give you some numbers, but recognize there's issues associated with trying to figure out how to split that growth. But if you take that in mind and exclude RV, the sales increase about 3 percent on the base business, similar to what you saw reported for the consolidated business. If you include RV in that base, the base Actuant business, meaning businesses you've owned over a year, we're down 2 to 3 percent. But I don't think that should be a surprise given RV was down 35 and represented 16 percent of the total of that base business. Did that answer your question?

It did. And just, in terms of going forward, if -- I know KCI contributed, what, 30 percent to the top line and it's meaningful in terms of how we want to think about core growth. But as you do bolt-on acquisitions, I'll just remind you that the spirit of what is considered core growth and what is considered acquisition growth is we would not want to see any acquisition revenues in a core growth number until you've anniversaried 12 full months to the day. That is the common practice within the rest of the sector. So, how should we be thinking about -- will you -- otherwise we'll have to ask this question each quarter and say, okay, strip that out, same-store basis. So what should be the expectations there?

Let us get back to you, Deane. I mean, I -- while I hear what you're saying there, I think we have people saying just the opposite also. In fact, our segment footnote basically asks you to pro forma the acquisitions back 2 years, which is what you'll see in the 10-Q. So, can we get back to you on that? I guess what I'll promise is I want to have transparency so you can see what you need to see, but let me try to pulse other people before I commit to that.

Thank you.

Our next question comes from the line of Wendy Caplan, Wachovia Securities. Please proceed with your question.

Thank you. Good morning.

Good morning, Wendy.

A couple of things. First at the tools and supplies segment, you mentioned that the mix of acquisitions had hurt results. Can you pull that out for us, out of the 14.4 percent? Some indication of what -- how -- what that margin would have been excluding acquisitions, and some of the noise around those acquisitions? And you know you didn't -- you talked a bit, Bob, about Germany and how it was a difficult market, but my guess going into this call was that Kopp was a poorer-than-expected performer. And I was wondering if you could give us some insight into that as well.

Why don't I take the first crack at that, Wendy, and then Andy can chime in behind me. You know, it's never been our practice to break out margins, post and pre-acquisition by business, so I don't want to do that, but let me give you some generalities of the markets. The industrial tool side of the business continued to perform well. Good leverage from the sales point of view. Probably no surprise to you that we've done quite well in that business. On the DIY electrical side of the business, which would include both Kopp and Gardner Bender, a little more margin compression there. You are onto the fact that Germany was very weak for us this quarter, and that we have a fair amount of fixed costs in that business, and that, you know, that did impact the margins as you went through that. So DIY side a little bit down. We're also getting ready for some resets as Andy referred to. And that tends to impact your margins slightly negative. And we've got to -- we've got to take into account the reset cost going into future quarters. And that will continue to impact the margins in the third quarter, maybe a little bit in the fourth.

Professional electrical, improving. That, we inherited quite a bit of business from the Acme Electric business. Acme does have a fair amount of raw material price pressure there. Their margins have been a little -- when you look at that business year-over-year have been down, and we put in a number of MBF efforts to try to improve that. And then the last would be speciality electrical. That'd be the last piece that goes into tools and supplies. And those margins are doing well. Again, that business has been recovering on North American economy and just good market share gains by the Marinco locations. And they've been getting leverage of that through the operating profit.

The thing I'd add -- add to that, Wendy, if you look at EBITDA margins, within the tools and supplies segment, our margins were down about 40 basis points if you pull out the acquisitions. And tools and supplies acquisitions mix hurt us, as opposed to helping us the way it did in the other side. EBITDA margins were essentially flat year-over-year in tools. So when you add Enerpac doing well in electrical was a little bit lower than a year ago, but the 2 of them net out. But it's not far off from -- I shouldn't say not far off, it was dead on last year. Dead on last year.

Okay. And -- ?

Did you have any further question on that?

Yes, I just had 1 other. You were talking about a bit about -- oh, I did want to ask about Kopp, if you could give us an update on that. And then, finally, a question on the later cycle businesses that you talked about. Can you -- you mentioned industrial tool, obviously, commercial construction. Can you just give us a little more color on those 2 later cycle end markets?

First on Kopp, and I am going to tell you, I can't talk about Kopp. I can talk about Europe electrical. Because you have Dresco in there. The businesses are run together. And there's just no way for me to continue to break that out in any meaningful fashion. The quarter was pretty disappointing to us. It started with very sluggish retail growth in DIY channel. The DIY reports similar to the U.S. You've got same-store sales. They call it a little different term in over in Europe. But it's a measure of year-over-year sales in the same store. And it's negative. And they've got the same inflation. I mean, when you compare that to Depot and Lowes, you're in the 4 to 6 percent positive range. In Europe, those numbers are negative. And that does include some inflation for raw material prices.

So, it's a significantly slower market over there. Germany, you know, I was over for the Detroit -- or for the Geneva show. They lowered the GDP estimate in a third of what they were forecasting before from 1.5 percent to 0.5. You had record unemployment numbers. It's just been a tough go. I think that market is feeling that kind of consumer confidence issues in Germany. And that's where most of our sales are. To try to boil that around where we're trying to go, I think we've been telling you guys we want to get Europe electrical margins to double digits. That's hard to do when you're not getting the sales line where we want it. We're probably not going to make that target for the year. But I think that's all been factored into our revised guidance of 2.40 to 2.50.

Going to your late cycle business question, they are performing well. I think I've told people in the past that our industrial tools, primarily, basically, Enerpac, goes into recessions early and comes out late. We saw that in this cycle. Enerpac didn't even go positive until the fourth year -- the fourth calendar quarter last year. But then has been steadily improving since that point. And that has continued. I think the other business you can put in that same category is Acme Electric. Acme is the transformer business. Goes into a lot of commercial construction, and tends to have the same tendencies as Enerpac. And the 2 were almost a mirror image. You've got low double-digit kind of neighborhood growth rates.

Similar to what we saw last quarter.

And that low-double-digit's North America. Enerpac didn't do that globally due to some of the pressures we talked about in Europe.

Thank you, very much.

Okay, Wendy.

Ladies and gentlemen, as a reminder, to register for a question, press the 1, followed by the 4. And our next question comes from the line of Scott Graham at Bear Stearns. Please proceed with your question.

Yes, good morning. I have 2 questions. Could you give us an idea of the amount of expenses, if any, purchase accounting, that ran through the current quarter and those that you expect to run through next quarter?

Okay.

And a follow-up.

We had about a million dollars of charges go through this quarter on a pre-tax basis. I would expect roughly a similar number next quarter as well.

That's just inventory, right, not additional -- ?

Right. That is strictly the inventory valuation issue, which you have to amortize that right up over the first cycle, essentially, the first turn of inventory. That would not take into account the step up in fixed assets and amortization of intangibles that you've got to put on the balance sheet versus what historically was on the balance sheet. But the million is kind of the -- the million-a-quarter this quarter, and next quarter is kind of the difference from the run rate you would see on a longer-term basis.

Okay. And that'll do it for the year?

For the acquisition, yes. For what we've got right now, yes.

Now, including these charges or excluding, however you want to lay it out, Andy, your $0.36 of accretion estimate, based on where you sit today, give us your confidence level on that estimate, is it higher? Can that number go higher in the upcoming quarters? Or is that a pretty square estimate right now?

I feel very good about $0.36 number. I mean, I had factored into that number the costs that we just talked about, the kind of the 1-time or initial charges that come through for the first couple of quarters. That was baked in. And I also had baked in a $3 or $4 million annual uplift in amortization and depreciation expense, which you also have to factor in going forward. That is factored into those. But, all that being said, I feel very good. I mean, the corporate expense is pretty much gone at the end of March. I mean, there were 9 employees, we'll be down to 2 after March. The office will be physically closed. I mean, that alone we had estimated was a $3 million number. Obviously, we had some of that factored in our first year. But I feel very good about -- very good about that number.

I think, Scott, just to add a couple of comments to that. 1 is I think we said in our remarks, we're not going to keep trying to quantify the impact on the EPS of KCI. But that it's ahead of schedule for 2 months. And I think we remain very positive about that. The other thing I would tell you is of the accretion you're talking about, not that much came from really changes in the base KCI business. We had about $4 to $5 million of cost synergies, most of that relating to the corporate office. And as Andy said, that's in pretty good shape. So we ran into that with shareholders on a number of meetings in the last month where people are somehow feel like the 36 is a big hurdle. It really -- it's really only dependent on us delivering the prior year EBITDA, plus these cost synergies we talked about. And we're in pretty good shape on that. I mean, given the North American economy, we're in pretty good shape on that.

Okay. Thank you.

And our next question comes from the line of Scott Macke at Robert W. Baird. Please proceed with your question.

Good morning.

Good morning, Scott.

Quick question. Appreciated the breakout on core growth between the new and existing business. Was curious if we could get that by segment?

No. Not -- no.

Not going to have [indiscernible].

All right. Can we get currency by segment?

Sure.

Currency is pretty consistent across segments. It's 4 percent in tools, 3 percent in engineered solutions.

Okay. And I think we got the growth outlook down for RV, down double-digits in both quarters. I'm not sure I caught the auto outlook in third quarter and fourth quarter?

It's going to be a little bit negative. I mean, we told people for the year it's going to be 3 to 5 percent up. And we're up 40 in the first 2 in the second. Well, you got to go negative to get 3 to 5 up. Most of that is not -- it's really due to the fact you had pipeline fills last year. It's not necessarily due to any slowdown in the actual production rate. It's got to do with the comparables of the prior year. It was a pretty slow market for us in convertibles. I think it was a pretty slow market for auto in general. But I think it was a pretty slow market for the quarter in the convertibles. But I tell you, from the Geneva show, I see no -- I really think that's a short-term phenomenon.

Okay. And when we talk about that 3 to 5 percent up for the year, does that include the truck business as well?

No, that's just auto.

Just auto.

That's just auto. What's the outlook for the truck business? And how is that truck business in the second quarter?

Truck is -- truck's going to be up. It's a little bit of a combination. The Gits business had a very big line fill last year, so it'll be down a touch in the back half. And our Power-Packer business will be up. A combination of China truck, which is probably going to be a million bucks of revenue, plus Europe expansion. The truck market in Europe is actually still pretty doing healthy.

Okay. Thank you. I'll hop back in queue.

Okay.

And our next question comes from the line of Dana Walker at Kalmar Investments. Please proceed with your question.

Thank you, good morning.

Good morning, Dana.

As you look at what you're facing in Europe in DIY, how do you feel about your structural cost levels and the initiatives necessary to support the type of return on sales that you think you need to be in that business in the first place?

Okay. It's a good question. I think today we've done a lot of work to reduce the cost structure in Germany. We've gone from over 1,000 people to about 9 -- about 1200 people to about 900 people. But given the realities, we still have to move production to lower cost countries --

China.

-- and try to take, really, China, a little bit Czechoslovakia too, which we have a factory. And then try to lower that cost structure in Germany. We've done a lot there, Dana. I mean, we did the sale lease back, which took 15 million out. The people that we've already talked about came out. We took about 5 million of working capital out. From a return on investment, it's literally 100 percent. We have nothing invested in what we had in the Kopp business from a return point of view. From a return on sales, which was your question, it is substandard. And we would like to bring that up. I think -- I think our view to try to get to double digits has been pushed out just trying to get to that point. Did that answer your question?

It sure does. Can you also address how things are going in the trenches? You've been very successful in winning new convertible top platforms. You were freely acknowledging that you lost some share in RV. What's happening in the business development trenches of both of those business as it may affect you over the next couple of years?

RV and convertibles?

Yes.

Well, convertibles -- it's been a positive story. I mean, 1 of the things that I really was excited about when I came home from Geneva, if you recollect, a year ago Power-Packer was in a -- was in a quite of a different situation. Our margins were being under pressure, we were launching 6 models through the system, and there was a lot of consternation trying to get that done. What I heard from customers and what I saw from our Power-Packer organization, is that's all behind us. Andre Deschamps, who runs this business, has really done a nice job of turning around and getting some of the efficiencies and getting some standardization in the product. And that is -- that is coming out in customers' voices also. There's a number of new models that were -- that we've got coming out that are exciting programs, retractable hardtops and convertibles. It's '06 and it's '07 are the big years, with probably '07 being a little bigger than '06. But it's a lot of exciting things there. On top of that, we've got the latching joint venture which we started a year ago and that is -- 2 years ago -- and that is starting to have some meaningful orders and quotation or requests for quotes. And I'm very excited about that piece of the market. Because it really integrates into the convertible. It's a natural extension.

And then, lastly, we're doing a little bit with the lift gate actuation. We won a Volvo station wagon. Got a number of inquiries on sports utility vehicles. So, I boil all that together, I look at our competitive situation versus a year-ago, I really feel pretty positive. I think it's going to be, kind of, the second phase of our auto growth strategy. The RV, very dynamic. It's always been a dynamic market. What I can tell you is we came out of Louisville with some exciting new launches, and those products are going through the system this spring, this summer time frame. I think the RV slowdown has probably disappointed us a little bit on how much incremental that's going to be. But I feel like the situation's more balanced than it was a year-ago in our competitive situation with our competitors.

Final question. Long time shareholders have been waiting for you to prosecute the Enerpac consolidation strategy for some time. You've taken a step in that direction. Can you talk about how that feels in the very short-term and whether the distribution leverage potential looks like it's as open-ended I as you once thought, and how excited or less excited that makes you in doing more?

Part of my Europe trip last week was to visit the Enerpac location in Holland and, kind of, talk about the first 45 days of the Hedley Purvis acquisition. And while I was there, there were about 25 people being trained on the Hedley product by Hedley people. These were distributors or territory managers from the Enerpac system. While I was there, the head of Hedley Purvis, Mike Rudd, was down in Australia procuring a piece of business that he had a relationship with a customer on that wanted to move to Enerpac from a competitive product because he had a relationship with Mike. At the same time, a similar thing was going on in Europe going the other way. Where there was an Enerpac customer who wanted to use Hedley product. So, all of my natural thesis about using the Enerpac brand name and distribution system in the first 45 days, are playing out. I'm extremely excited about it. I'm also trying to caution myself that this is the first 45 days, and also probably 2 opportunities that were easily identified by people as things to go chasing.

But, as I said in my prepared remarks, I think, I'm a big believer in bolt-on acquisitions, pardon the pun, for Enerpac. And using that -- and it's not just bolting. There are other things we can add behind that, construction initiatives, pullers, all kinds of other ideas that can go through that channel. So, Dana, I think the nice thing about this quarter was that day finally arrived. We did an acquisition and Enerpac is off to a good start.

Thank you.

And our next question comes from the line of Charlie Brady at Hibernia Southcoast Capital. Please proceed with your question.

Hi. Thanks, guys. In the past when you've talked the euro-dollar exchange rate embedded in your guidance, which, I guess, now is a dollar -- 1.30 -- you've given some sort of breakout as to what the impact is on sales and/or margins and EPS on certain movement in the euro. Given that we've added a few companies in here, and the companies make us a little bit different, has that changed much at all?

It really hasn't, Charlie. I mean, the rule of thumb I've always used was just 1 point, going from 1.30 to 1.35 would add, annually, about $2.5 million of translated sales or sales through translation. Looking at our mix in Europe, our sales mix and profitability mix, that's maybe $250,000 of operating profit, which is about -- about a half a cent of EPS on an annual basis. So it would take a pretty good move to impact EPS.

Okay. And the second point is relating to Gits. The opportunity to take at that business and drive it through the European truck market, and in particular with Volvo, and given what the Euro truck market and the truck numbers coming out of Volvo have been looking pretty healthy recently, how is that process moving? Have you made headway in getting, sort of, the Gits into the Europe -- into the European truck market?

As I said to Deane's comments, the answer is yes, we've strategized it. Daryl Lilly, who runs Gits was over in Europe sending some time with Ian Schmidt (ph) who's our truck leader. But that is not something that you just turn on. I mean they are --

Probably a year.

The engine programs are out there. Now, what's nice is we have technology that a lot of the Europeans haven't seen. And that is getting good meetings, and that will get you in the door. Whether they choose to go this route, whether Gits is superior to different types of wastegate actuation or however they're dealing with emission in Europe, we just can't give you that feel yet.

Okay.

Most of the business as we're looking at these opportunities to grow geographically, they tend to fall into the engineered solutions just by nature that they're OEM in nature, platform-related the gestation period is just naturally longer. in term, we are not looking for any quick hits here.

But there are important things that we add to the equation. Daimler is coming out with a world engine. And Gits was dealing with that from the U.S. to trade diesel point of view. Now you've got some European ability to deal with the people in Stuttgart if that's the way that thing goes. So it's not just incremental revenue, it's just being able to be able to support customers on a global base. And now Gits has got bodies on the ground through the Power-Packer organization to make that happen.

Thank you.

Ladies and gentlemen, if you would like to register for a question, please press the 1 followed by the 4. We have a follow-up question from the line of Scott Macke at Robert W. Baird. Please proceed with your question.

Hello, again. Hey, just a clarification. I missed something towards the end of the prepared remarks. I thought I caught something about core growth being 2 to 3 percent, North America being a little stronger, Europe being a little weaker. Was that a core growth forecast consolidated for the remainder of fiscal year '05?

Yes, it was. It was a 2 to 3 percent. It excluded RV. Okay? But it was a 2 to 3 percent of everything else. And to go back to Deane's definition, the way we did that calculation, and I can't give you a revised number, it includes everything we own right now. It's not -- it's not just same-store sales. Although, my guess is it doesn't shift a whole lot from what we said before. The same store and the base business was about the same, 3 percent.

Okay. Thank you.

I wanted to back up on Scott Macke's question on the impact on -- or actually Charlie.

It was Charlie.

Charlie, I'm sorry. The question on currency. I've been told here I said the wrong numbers. A 1 point move from euro to 1.30 to 1.31 would equate to 2.5 million of sales. I was told I said 1.30 to 1.35 is a 1 point move. 1.30 to 1.31 is $2.5 million in volume.

Mr. Arzbaecher, there are no further questions. At this time, I'll turn the conference back to you.

Well, thank you, very much. It was a great quarter, and it's turning into be a great year. We appreciate your participation on the call. As I think you can probably tell from my tone, I'm pretty happy where Actuant is now. I mean, we've got a few markets that are weak, we got other markets that are strong. But I really like the current status of the business and the status of acquisitions. We're half way through '05 with record results and we intend to maintain that momentum throughout the year. We appreciate your ongoing interest in Actuant. Look forward to talking to you next quarter. Thank you, and goodbye.

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